Freddie Mac Announces Small Balance Loan (SBL) Offering
October 9, 2014
Executive Vice President of Freddie Mac Multifamily David Brickman publically announced the kick-off of their new Small Balance Loan (SBL) offering during the opening session of the Customer Conference in New Orleans today.
This new offering provides approved SBL Seller/Servicers a dedicated platform to originate and sell loans on smaller rental properties.
Freddie Mac SBLs are defined as loans on multifamily properties with five units or more ranging from $1 to $5 million. The securitization of SBLs will be similar to that of a standard Freddie Mac securitization structure, the K-deal, in which Freddie Mac transfers the first loss risk to private capital. Unlike the K-deal execution with the subordinate B-piece immediately sold to third-party investors, the originating Sellers are obligated to purchase the B-pieces secured by their underlying loans, which they in turn can sell to other investors, and the collateral securing the securities will be entirely comprised of small balance loans.
SBL Seller/Servicer and Borrower Benefits
The benefits of this new offering to approved SBL Seller/Servicers and their borrowers include:
- Increased liquidity for SBLs in the secondary debt market
- Expanded execution options for small rental property borrowers
- Simplified pricing process
- Streamlined early rate-lock and full underwriting paths with less documentation
- Abbreviated third party reports (appraisal, property condition etc.)
- Simplified SBL insurance assessment process
- Standardized and shorter form SBL loan documents
- Reduced legal due diligence requirements
SBL Sourcing and Underwriting
The sourcing and underwriting process for SBLs consists of:
- An SBL Pricing Grid is distributed weekly to approved SBL Seller/Servicers. More frequent updates may be warranted from time to time.
- Seller/Servicers source SBLs that comply with SBL requirements which include credit parameters, document delivery, and loan documents.
- A Multifamily Seller/Servicer Guide addendum has been established that identifies the requirements associated with the SBL product.
- Upon submission of initial loan requests and Freddie Mac completion of preliminary review, Seller/Servicers are authorized to rate- lock.
- Seller/Servicers complete their due diligence and submit full underwriting packages to Freddie Mac for underwriting, approval and commitment. Freddie Mac’s review include a property inspection by its regional staff.
- Seller/Servicers will then be authorized to close the loans using joint single counsel and approved legal documentation.
- After Seller/Servicers submit the final delivery packages, Freddie Mac reviews and approves the packages, and purchase the loans.
SBL Seller/Servicer Requirements
SBL Seller/Servicer requirements include:
- Assessment – Each Seller/Servicer will undergo a comprehensive assessment, evaluating their financial condition and their small loan origination and servicing platform.
- Origination – Each Seller/Servicer is committed to delivering a minimum of $50 to $75 million in SBLs per quarter.
- Repurchase – Each Seller/Servicer is required to repurchase any SBL that becomes delinquent (60 days or more) and for certain non-monetary defaults for up to 12 months or securitization.
- Loss Sharing – Each Seller/Servicer is subject to a 10% top pool-level loss obligation up to securitization.
- B-Piece Purchase – Each Seller/Servicer is obligated to purchase the B-Piece upon securitization of their loans.
- Collateral Requirement – Each Seller/Servicer will post collateral to support the SBL repurchase, loss share and B-Piece purchase obligations described above.
Once a Seller/Servicer has been officially approved to submit SBLs, they will be provided with access to a separate stand-alone web page that includes (1.) all SBL Loan Documents, the SBL Guide Addendum, and the SBL Pricing Grid. The SBL team will send an email to approved Seller/Servicers and Single Counsel, which includes a unique URL to access the web page with a recommendation to bookmark it for future reference.
We have also updated our existing Products and Find a Lender web pages, created a new SBL Lender Contacts page and an SBL Term Sheet, and posted a new blog from Nashwa Moussa on our website to reflect this new SBL offering.