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Small-Balance Loan Originations Stayed Strong Last Year
Tuesday, February 27, 2008
Commercial Real Estate Direct Staff Report

Lenders continued to write small-balance commercial mortgages at a healthy clip last year, despite turmoil in the capital markets.

According to Boxwood Means Inc., a Stamford, Conn., research firm, some $29.1 billion of small-balance loans, defined as having balances of $5 million or less, were originated in the fourth quarter. But that data is preliminary and is likely to grow as the company gathers information from late-reporting counties across the country.

Boxwood Means gathers the bulk of its data directly from county mortgage recording offices, a laborious process that takes several months to complete.

Full-year originations so far total nearly $134 billion, or roughly 4.3 percent less than the $140 billion that was originated in 2006. But it could end up topping last year's volume. In any event, origination volumes for small loans remained healthy, while those for the broader commercial mortgage market fell in both the third and fourth quarters, according to Federal Reserve data analyzed by the Mortgage Bankers Association. And that's largely because of disruptions in the capital markets that made it difficult for lenders that rely on a securitization exit to effectively price their loans.

The thinking had been that the small-balance market would move in lock-step with the broader market. But, according to Randy Fuchs, a principal and co-founder of Boxwood, low interest rates have been very favorable to borrowers, resulting in solid demand.

In addition, "this isn't the securitization market," Fuchs said. "This is how America's businesses finance their businesses."

While some lenders have had a securitization exit strategy in their plans, a large portion of lenders in the market are banks and credit companies. Indeed, two of the latter, GE Capital and Bayview Financial Holdings, saw sharp increases in their market shares.

The softening of property prices has changed the make-up of origination volumes. A total of 66 percent of the loans originated in the fourth quarter were made to refinance existing loans. That's 11 percentage points greater than the same period a year ago. The remaining volume was originated to facilitate the purchase of properties.

"Clearly, acquisition/purchase loan volumes continue to decline as the investment market turns increasingly unclear," Fuchs said.

The top-five lenders in the business are Washington Mutual, with roughly 6 percent of the market and Wells Fargo, Wachovia Bank, Bank of America and Citigroup, each with about 2 percent of the market.

A significant portion of small-balance loans are provided for single-tenant properties that are generally owner-occupied.

Comments? E-mail Orest Mandzy or call him at (215) 504-2860, Ext. 211.

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