In an effort to become more competitively involved in the small balance loan market and to further support affordable housing, Freddie Mac on October 9, 2014 launched a Small Balance Loan Platform (“SBL”) to purchase and securitize small multifamily loans.  In order to maintain a level of quality in securitization, the originating seller/servicer will be obligated to purchase the B-pieces secured by their underlying loan, which in turn can be sold to other investors.  As of this posting, they have a growing pipeline of deals between $90-$100 million.  While most are in the early stages of quoting loans, many deals are under application and in the underwriting phase.  Freddie Mac states that the program is designed to “increase liquidity in the small balance space and provide stability in this somewhat underserved market.”  Small loans are estimated to comprise almost 30% of the multifamily market.  Freddie’s entrance into this space mirrors the increased focus on small balance loans in Fannie Mae‘s 2.0 guidelines that are to go live by the end of the year.

While the securitization of loans through Freddie’s Small Loan Program is similar to a standard Freddie securitization structure, a number of changes have been made to underwriting requirements that lenders and their borrowers should be aware of. 

Freddie SBL Program In A Nutshell

Competitiveness is one of Freddie’s main goals related to this program.  In order to compete with the CMBS shops, the Freddie SBL program is striving to achieve the following:

  • Early rate lock available at preliminary underwriting
  • Rate Lock within 12  days from full underwriting package delivery
  • Simplified pricing process
  • Pricing to occur through a Coupon Rate, which is distributed weekly to the Seller/Servicer generating a much easier quote process
  • Very competitive rate with attractive 20 year hybrid rate options
  • Full IO available for 5 year terms
  • Partial IO available for 5, 7 and 10 year Hybrid fixed-to-float 20 year term loans
  • Freddie has established a dedicated SBL underwriting and production team and their regions are assisting in the inspection
  • The Freddie Mac Underwriter field observations are not required before rate lock can occur and review of the mortgage package.

Currently, Arbor Commercial Mortgage, Greystone Servicing Corporation and Hunt Mortgage Group have been approved to sell loans for the Freddie Mac SBL program, with several additional lenders expected to be approved by the end of the year.  Each seller/servicer is expected to deliver a minimum of $50 million in SBLs per quarter or $200 million per year.  This is equivalent to approximately 60 deals per year at $2.5 million per deal.

The Freddie SBL program is provided for multi-family loans between $1 million and $5 million on properties with at least 5 apartment units.  The loan purpose must be for acquisition or refinance, with a term period of 5-, 7-, or 10 years complete with an amortization of up to 30 years.  Borrowers are required to have a net worth equal to or above the loan amount with at least 9 months of principal and interest liquidity.  Occupancy must be at a minimum of 90% of the average physical occupancy over the trailing 3-month underwriting period with the property’s combined loan-to-value (“LTV”) ratio not to exceed 80% or go below the combined debt-service coverage ratio (“DSCR”) of 1.25x.  

Streamlined Due Diligence Requirements

Property due diligence is always a process required for real estate loan transactions and the Freddie SBL is no exception. Loans approved through the program are subject to completion of the Small Loan Physical Risk Report consisting of a site visit and the completion of the new Form 1104, which requires a limited Property Condition Assessment and Environmental Transaction Screen Assessment to be performed.  The Form 1104 is broken down into six different sections including the following:

  • Section I – general information, documentation and certification (property information, consultant information, site escort information, documentation reviewed, and data collection and records inquiries)
  • Section II – unit details (unit mix, occupancy mix, units inspected, details related to commercial units, and units inspected)
  • Section III – property condition assessment (details and specific costs associated with the various building systems based on on-site observations along with typical problematic materials, agency requirements, and seismic risk)
  • Section IV – environmental site assessment (environmental summary related to asbestos, lead-based paint (LBP), radon, Polychlorinated Biphenyls (PCBs), hazardous materials, storage tanks, drinking water, prior use, neighbor waste sites, mold, O&M analysis and recommendations, and analysis related to the environmental transaction screen)
  • Section V – list of repairs and capital needs over the loan term (summary of all immediate and over the term costs including critical, priority and operational repairs based on section 14.3 (b) of the Freddie Mac Multifamily/Multifamily Seller/Servicer Guide including all associated costs.  Capital reserves are to be determined based on the overall property condition ranging from $200 per unit to $300 per unit).

Currently, the expertise, certification and licensure requirements for consultants qualified to complete these assessments are the same as they are for those performing typical Freddie Mac assessments.  This makes the pool of approved field assessors as restricted as it is for typical Freddie Mac PCA and Phase I ESA assessors.

In addition to the due diligence requirements listed above, should a property be located within a seismic zone 3 or 4 based on the UBC 1997 seismic zone map, a level 0 seismic analysis will also be required.  However, should a risk factor be indentified in the Form 1104, including items such as soft stories, high rise buildings (over 8 stories above grade), or reinforced concrete built prior to 1994, it will be required that a Level 1 seismic risk assessment be generated.  Due to this factor, it may not be cost effective for this type of real estate to continue with the Freddie SBL.

The new SBL guidelines are an addendum of the Freddie Mac Seller/Servicer Guide available only to the SBL lenders. The addendum will be posted on AllRegs in the coming weeks.

Putting Freddie’s SBL Program To Use

With the multifamily market continuing to come back strong, lenders and borrowers alike continue to look for more competitive options in commercial financing.  Freddie’s SBL program has potential to further increase activity in the multi-family and affordable housing market by enabling more competitive pricing and streamlined deal cycles.  Despite simplified underwriting requirements of the program, borrowers and lenders must be careful to adequately protect against risks and liabilities.  Continued early communication between the 3rd party vendor and the seller/servicer is crucial to determine if the Freddie Small Loan Program is a viable option for a deal.

Like with all new lending programs, a lack of clarity and knowledge of Freddie’s SBL program may initially cause some hesitation but as the industry becomes more confident about the transactions completed and more lenders get involved I expect this program to quickly gain in popularity.  Some great resources can be found on the Freddie Mac website, and please do not hesitate to contact me with any questions.