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Small-Balance Loan Market Starts Seeing Impact from Credit Tightening
Friday, October 26, 2007
Commercial Real Estate Direct Staff Report

The origination of small-balance commercial mortgages started to decline in the second quarter, reflecting weak market conditions in both the commercial and residential mortgage sectors.

According to Boxwood Means Inc., a Stamford, Conn., research firm that tracks the market, $34 billion of loans with balances of $5 million or less were originated during the second quarter, the last period for which data is available. That's down slightly from the first quarter. But if you take the total originated during the 12 months ended June 30, and compare it to the same period a year earlier, volumes have fallen by nearly 5 percent to $139 billion. And if you compare that 12 month period to the one ended March 31, the decline has been nearly 10 percent.

"If we take a longer view, we're starting to see erosion" in the market, said Randy Fuchs, a principal and co-founder of Boxwood. The company's data is compiled from public tax rolls and deed transfer records at counties across the country. As a result of the complexities involved in gathering and scrubbing that information, the latest data it has available is for the second quarter.

A sure sign that the troubles in the residential market are touching small commercial properties is the fact that 57 percent of all small-balance loans were originated for refinancing purposes. Historically, loans for property purchases and refinancings were evenly split.

"The seeds of some changes are embedded in these numbers," Fuchs said, predicting that origination declines and the purchase/refi split will be even greater when data for the third and fourth quarters are available. .

Many owners of small-capitalization properties are individuals who might have tapped some of the equity built up in their homes to fund their investments. As their ability to tap that equity has been diminished, because of the tightening of credit, their ability to fund acquisitions has shrunk. Their difficulty in funding acquisitions is compounded by the decline in residential property values, which shrinks the amount of equity they might have in their homes. That's a dynamic that doesn't figure into the softness in the larger-cap property market.

Nonetheless, the small-balance market remains a relatively sizable market. The market for originating such loans remains highly fragmented. Washington Mutual Bank dominates the sector with a 5 percent market share, according to Boxwood. No other lender has more than a 2 percent share of the market. Other top lenders include Wells Fargo Bank, Wachovia Bank, Bank of America and Citigroup. Fuchs said Lehman Brothers, Sovereign Bank and GE Capital have each gained market share.

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