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Perspectives
December 01, 2014

What's the Big Deal about Small Balance Loans?

David Brickman
By
David Brickman, EVP Multifamily Business

Apartment properties with five to 50 units make up around 29 percent of the multifamily market and provide affordable homes to a major portion of the nation's moderate- and low-income renters. Given the widening gap between the supply of and demand for affordable rental housing, it's more important than ever to finance these smaller properties.

Our new, innovative Small Balance Loan (SBL) offering creates a broad platform for financing loans ranging from $1 million to $5 million and bringing much-needed liquidity, consistency, and stability to this market segment.

With the SBL offering in place, Freddie Mac Multifamily® now covers every corner of the multifamily housing finance market. But we're not just checking boxes. We're transforming them.

The Market Need

Traditionally, community and regional lenders have served this segment with a hybrid of small business lending and relationship lending. This approach has provided a good basis for local lending.

On the other hand, the fragmented nature of this segment makes it less liquid. Also, access to capital varies across the country – and can dry up during economic downturns.

FHFA's renewed focus on affordability and access to credit opened the door for Freddie Mac Multifamily to enter the SBL space and work with the industry to help address some of these challenges.

A New Standard

As a newcomer to an established market segment, we have the opportunity to take a fresh look at how to serve it. We're well aware of the real and perceived challenges of being in this space, and intend to build our presence in a way that supports the market, and provides the template for a sound business. We're confident that we can do well here, while doing good for renters nationwide.

Our SBL offering leverages our proven strengths in the conventional loan space, while taking into account this segment’s unique needs and challenges:

  • Working in partnership with a network of qualified, experienced lenders and underwriting each loan in-house (even though it might cost a little more) to create consistently high-quality loans and reduce the volatility that the SBL space can experience.
  • Leveraging the capital markets to attract private capital, increase liquidity and stability, and reduce risk to taxpayers.
  • Maintaining our credit culture to assure investors of the quality of our loans.

Many of our existing processes have been simplified or streamlined to fit these properties and borrowers – who tend to be individual investors without the infrastructure or experience of institutional investors. But we didn’t cut corners on standards of quality.

SBLs will be securitized using our K-Deal securitization technology. In this case, though, the lenders agree to buy the unguaranteed slice or place it with another investor, taking a first-loss position to absorb any credit losses. Pairing the tailored loan-creation process with our K-Deal structure increases the effectiveness and efficiency of making and securitizing SBLs. It also enables us to support this market in all economic conditions, good or bad, with minimal risk to U.S. taxpayers.

Continuing Innovation

Multifamily property owners and developers, working with their lenders, now can look to Freddie Mac Multifamily to meet the full spectrum of financing needs. Our SBL offering, along with our recently announced Tax-exempt Loan and Manufactured Housing Community Loan offerings launched earlier this year, provides for much greater, more consistent support for moderate- and lower-income renters across the country.

And we continue to seek creative, meaningful ways to enhance liquidity to the entire market, support affordable housing, and build a better multifamily housing finance system. So while one more set of boxes has been checked off the to-do list, we’re already working on the next ones.

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