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Fannie Small-Balance Program Thrives

It's no great secret that amid the liquidity-challenged Great Recession, the Government Sponsored (and for now, owned) Enterprises Fannie Mae and Freddie Mac have been the lifeblood of multifamily finance. The pair of gigantic home and apartment mortgage purchasers, both now operating under federal government conservatorship, collectively accounted for 84 percent of investments into U.S. multifamily mortgages in 2009.

But what many large-cap commercial property investors might not realize is that Fannie Mae's small loan program has become pretty much the source of choice for $3 million (mostly) and under borrowers that qualify. In other words, for experienced borrowers with stable properties in large markets, the program's combination of bargain-rate pricing, 80 percent maximum leverage and lengthy loan terms keeps Fannie a step or two above the competition.

"Quite frankly no one's really challenging Fannie on a national basis" in the multifamily small-balance lending arena, relates Ken Fazio, national sales manager with Arbor Commercial Mortgage in Uniondale, NY.

While pricing varies according to many factors, quotes under the Fannie program are typically "well under" bank comparables on longer-term loans, adds Rick Warren, managing director overseeing Centerline Capital's small loans solutions team in Irvine, Cal. "If you want 7- or 10-year financing, the most competitive spread will be a Fannie lender."

A trio of Arbor-originated 10-year Fannie fixed-rate deals closing over the past couple of months illustrate the program's attractive rates: 5.93 percent on a $2.61 million loan in Billings, Mon; 5.95 percent on a $688,000 deal in Portland, Ore.; and 6.12 percent on a $2.3 million mortgage in Paris, Tex.

Floating and convertible options are available as well. Furthermore, the loans are for the most part non-recourse, they're assumable, and up-front fees and costs have become quite affordable - even with six-figure loan amounts. The program's "canned" documents mean legal fees aren't necessary to close loans, Warren notes.

And with Fannie's delegates competing heavily for this business, up-front costs to borrowers under the program have come down to about half what they were two years ago, Fazio calculates. An application fee of $4,500 has become something of a standard in major markets.

"It's a low-cost, non-recourse solution for long-term borrowers with cash-flowing apartments," comments Dan McIntyre, a director with Holliday Fenoglio Fowler in Washington DC.

Indeed, if you've kept 11 of your dozen desirable apartment units full for several months running – and have at least a couple years' hands-on experience managing them or a comparable property - you're unlikely to find more attractive rates and flexible terms than you will with the Fannie small loan program.

Of course, there's no shortage of smallish apartment owners out there who don't fit the program's target borrower and property profiles. Fannie's originations delegates are mostly sticking with small-balance deals in major metros, for properties that have maintained 90 percent occupancy for 90 days, and with borrowers boasting applicable management experience (or are paying professional third-party managers).

"It's a great deal if you qualify but underwriting is really tight today," observes Keith Van Arsdale, president/CEO of BMC Capital in Dallas. "They’re focused on major metros rather than secondary markets, and they want experienced borrowers."

But at least Fannie is willing to exceed program limits and buy mortgages of up to $5 million under the small loan program in 10 high-cost MSAs.

Fannie's lending delegates around the country can place small-balance loans in smaller markets, but also feel compelled to perform additional due diligence - and in turn charge higher up-front fees than is the case in major metros, Warren explains.

But many of the program's other restrictions, such as the "90/90" rule, are set by Fannie. This includes a loan-to-value ratio that can't exceed 80 percent, with the minimum debt-coverage ratio at 1.25x.

Fannie likewise expects relatively inexperienced borrowers and absentee landlords to engage professional property managers. Local players should be able to demonstrate two years of related experience if they want to manage internally. And most borrowers based 100 or miles from the subject property won't be allowed to manage it.

Over the longer-term, it's impossible to say whether Fannie's now-explicit federal backing and bond-buyer guarantees, and consequential capital markets pricing advantages, will allow the GSE to continue offering market-leading small-balance rates.

It's encouraging that the division that includes apartment lending actually earned nearly $100 million during the first quarter after losing $6.2 billion (yes, with a 'b') in the year-earlier period. But the company as a whole lost $11.5 billion and requested another $8.4 billion in government aid.

Hence as regulators and elected officials debate Fannie and Freddie's ultimate fate, it’s unclear whether they'll maintain an explicit or even implied federal backing - or manage to avoid the liquidation some politicians are pushing.

But for the time being, many small-balance borrowers are happy that efficient Fannie originators are able to close loans with exceptional rates and terms at fees well under $5,000 - even for sub-$1 million mortgages.

As Fazio puts it: "These are customers that need to be served."