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Small-Loan Origination Activity Seen Increasing
Friday, December 01, 2006
Commercial Real Estate Direct Staff Report

Activity in the small-balance commercial lending arena is expected to continue heating up.

Last year, a record $134.4 billion of such loans - defined as having balances of less than $5 million each - were originated, according to Boxwood Means Inc. And the Stamford, Conn., research firm projects that this year will set a new record. That's largely because of solid property fundamentals and improved liquidity. And a survey it recently conducted found lenders similarly bullish: 60 percent said their volumes are "significantly ahead" of last year's.

Boxwood Means, which gets its data from mortgage records filed with counties across the country, found that the lending market remains highly fragmented. Its survey, conducted with Scotsman Guide, a magazine targeting lenders and the loan-broker community, determined that the average annual production of small loans is $380 million per lender. And more than half the lenders questioned had less than $100 million of originations.

That means the industry is populated by "literally thousands" of originators, according to a report on the survey, Market in Transition: 2006 Small-Balance Commercial Mortgage Lenders Survey. The market traditionally has been dominated by local and community banks. But other players, notably residential lenders, are squeezing in.

Most small loans are made against one-of-a-kind properties that often are owner occupied. Indeed, about a quarter of the 3 million properties in Boxwood's database are owner-occupied. That makes the business ideal for residential lenders, which generally have far-flung origination networks and have been seen making inroads in the market. .

"The downdraft in the residential housing market has motivated residential-loan brokers to diversify into small-balance commercial lending," the report noted.

What's more, many small-business loans are underwritten more like residential loans, where they rely on a borrower's credit history, rather than the collateral property's revenue capabilities. In fact, Boxwood found that 82 percent of all originations are recourse to their borrowers.

Boxwood Means characterizes the small-loan market as the "finance frontier, where standards are lacking and market imperfections work to lenders' advantage." Its fragmentation means the market is ripe for consolidation, which could lead to greater efficiencies and lower costs. But that could take time.

The biggest player in the business is Washington Mutual which commands a mere 4 percent market share. And the top-15 lenders in the space account for only 20 percent of the year's production. In contrast, the top three conduit lenders accounted for more than 25 percent of the conduit originations this year through September.

Because small-balance loans are generally not homogenous like conduit loans are, they haven't been securitized at the same rate. But that's changing. For instance, no fewer than four small-balance CMBS deals are in the market. Among the players that have securitized their small-balance originations: CBA Commercial, Bayview Financial, Imperial Capital Bank, LaSalle Bank and Lehman Brothers Small Business Finance.

Boxwood found that 55 percent of lenders it surveyed already originate loans with a securitization exit in mind or plan to do so within the next year. The remainder are mostly portfolio lenders. But it noted that many of those that already originate for securitization end up peppering their loans in larger conduit deals.

A total of $167.6 billion of CMBS was issued last year, when some $330 billion of commercial mortgages were originated.

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