Small Balance Loans to Hit High Marks in 2017
- Aug 30, 2017
In July, Arbor Realty Trust Inc. announced it had surpassed the $2 billion threshold in Freddie Mac Small Balance loans. The company was the top-producing Small Balance lender in 2015 and 2016, and its performance in 2017 is also on track to exceed expectations. Commercial Property Executive approached John Caulfield, chief operating officer at Arbor, to discuss more on this record in origination volume, the changes in the small balance loan market and the role of technology in this financing story.
CPE: Arbor does research on the small-balance loans market. According to the company’s report for the first quarter, it seems that 2017 will exceed 2016 in terms of total origination volume. Do you see this happening?
Caulfield: The model estimates we’ve developed with Sam Chandan (professor and economist, founder of Chandan Economics) show that the small-balance loan ($1 million to $5 million) origination volume has increased every year since 2009. While growth in multifamily sales activity is slowing down, price appreciation and refinancing volume should be enough to set another high-water mark for small balance loans in 2017.
CPE: How do you see the small-balance loan market compared to other types of debt financing?
Caulfield: The small-balance loan market is better served today than it was in the past. Thanks to our agency partners at Fannie Mae and Freddie Mac, multifamily participants looking to finance smaller properties can now consistently access a high-quality multifamily loan product on a national basis.
CPE: Could you outline a few challenges in the small loan market and maybe suggest a few solutions to overcome these difficulties?
Caulfield: We’ve found that roughly the same amount of work goes into screening, underwriting, processing, closing and servicing a small loan as it does for a larger loan. This naturally becomes a challenge in a high-volume environment. We’ve made significant investments in our technology infrastructure in recent years to automate and streamline the loan application and processing components.
The result is an online portal for our staff and borrowers, known as ALEX (Arbor LoanExpress). The platform has allowed us to increase our small loan volume efficiently and we now save roughly 23 work hours for every loan that runs through ALEX.
CPE: How have the needs of small property borrowers changed in the past few years?
Caulfield: Over the past few years, Fannie Mae, Freddie Mac and the Federal Housing Administration have developed new programs to help multifamily borrowers access non-recourse loans. This has let more small property borrowers get comfortable with the space. This is a notable major difference between agency products and bank products, the latter of which are typically recourse loans.
CPE: What can you tell about the role of smaller real estate deals in the industry as a whole?
Caulfield: Smaller apartment properties play a critical role in U.S. housing. Rental properties with five to 50 units are actually home to more than one in 10 American households. Given the widespread nature of these types of assets and the fact that they are more affordable to rent than larger, highly amenitized properties, we find that smaller properties cater strongly to the workforce.
The inherent value in smaller properties means that this sector should enjoy higher occupancy than the greater multifamily market moving forward. As a result, more institutional investors are coming to see the value in preserving smaller apartment communities.
Image courtesy of Arbor Realty Trust