Volume of Small-Balance Mortgages Grew to $30.1Bln in 1st Qtr
Monday, October 24, 2005
By Orest Mandzy, Commercial Real Estate Direct Managing Editor

Lenders originated $30.1 billion of small commercial mortgages - those smaller than $5 million apiece, according to a first-of-its kind study by Boxwood Means Inc.

That marked the fourth consecutive quarter during which lenders originated more than $30 billion of small loans. In the first quarter of 2004, lenders originated $28.2 billion.

Boxwood Means, a Stamford, Conn., research company, teamed with First American Commercial Real Estate Services, a Santa Ana, Calif., title company that has accumulated a massive database on commercial mortgage transactions and properties. Boxwood has been scrubbing the data, developing forecasting tools and analysis. Among the fruits of its labors is what could be the first comprehensive study of small-balance loans.

The company's analysis indicates that the market for small-balance loans is on par with the CMBS market. Yet small-balance loans are only infrequently securitized on their own. That, according to Randy Fuchs, a principal of Boxwood, means the market is full of opportunity. But because of its nature - small loans aren't neatly homogeneous like conduit loans are and underwriting is very customized by lenders - the opportunities will be challenging to exploit.

Some lenders often sprinkle small-balance loans in with their regular conduit fare into CMBS deals. But few have issued deals solely backed by small loans.

Things might be changing though. Cheslock Bakker & Associates of Stamford, Conn., last year formed a venture that would originate small commercial mortgages through a group of residential originators, then sell the loans through securitizations. And there's talk that others, specifically conduit lenders, are kicking the market's tires as the conventional conduit business becomes more and more competitive. Because of the loans' general complexities, loan spreads are usually greater than those offered for the typically larger, commercial mortgages.

Among the most active lenders during the first quarter were Washington Mutual, Bank of America, Wachovia Bank and JPMorgan Chase. However, not one lender garnered greater than a 4 percent share of the market, according to Boxwood Means' research.

The thinking is that players who are able to lend efficiency to the business should profit handsomely, just like the early players in the CMBS market did.

"This market is very inefficient," Fuchs explained. "No lender has real market share. Information costs are high. And loans aren't big enough to justify the costs to figure them out." Still, he noted, "a lot of folks are looking to get into the business," many by marrying technologies developed for the residential and commercial mortgage markets.

Besides conduit lenders, residential lenders are also eyeing the market. Their thinking is that many of their residential borrower clients also own small commercial properties that need to be financed.
Of the volume originated in the first quarter, 29 percent was backed by apartment properties and 27 percent was backed by commercial properties, generally meaning offices.

Boxwood Means says the market for small-loans continues growing at a healthy clip, estimating that the second quarter probably saw up to $34 billion of originations. Meanwhile, average loan size has grown 8 percent to $690,000 during the first quarter.

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

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