McLEAN, VA–Freddie Mac rang up $1.26 billion in its Small Balance Multifamily Loan program in the first quarter of 2017. While that may seem to be par for the course at the GSE — given the volume of lending it processes in general — the small balance program is relatively new. By way of comparison, in the first quarter of 2016, there were some $935.7 million in small balance transactions. In the first quarter of 2015, there were $50 million.
As for 2017, Freddie expects its Small Balance Loan program will exceed its 2016 volume of $3.72 billion well before the end of the year, Steven Johnson, VP of Small Balance Loan Business, tells GlobeSt.com.
In short Small Balance Loan has become one of Freddie Mac's fastest growing programs.
At the same time the GSE added a new investor for the SBL securitizations at the start of this year, Garrison Investment Group. It joins the program's main investor, the hedge fund Axonic.
All together, these developments add up to a relatively young lending program registering a strong growth trajectory.
Gaining Momentum
That is not surprising to Johnson. Freddie Mac was doing small balance loans off the side of its desk since its beginning but a full-fledged program only got approved in the Fall of 2014, he tells GlobeSt.com “We have been asking to do this for a long time,” Johnson says. “We have been incredibly excited about this program — to craft the product and go after a market that we hadn't been focusing on before.”
Freddie Mac unveiled the details of the program in 2014, alerting the market that it planned to purchase and securitize small multifamily loans of $1 million to $5 million for assets that have least five apartment units. It started out with three lenders participating in the program, Arbor Commercial Mortgage, Greystone Servicing Corp. and Hunt Mortgage Group. With active outreach on the part of Freddie, the number of participating lenders would grow from there, Johnson said.
In August 2015, it did its first securitization. For the program's initial securitization the SB Certificates was similar in structure to Freddie Mac's K Deals except for one significant distinction: there was only one originator of the loans.
By December 2015 it launched its ninth small balance loan securitization. At $400 million, it was the largest to date and more significantly, it had collateral from multiple lenders.
By February-March of the following year the program had clear entered a strong growth mode, Johnson says. “A significant portion of the origination was starting to come through brokers.” From there the program continued to gain momentum.
By year end 2016 the program's momentum had generated $3.72 billion in loans.
2017: A Year To Bring In New Capital
Now the program has added more capacity on the investment side, Aaron Dunn, senior director of Freddie Mac and head of investor relations, tells GlobeSt.com.
The first 27 of the securitizations were mostly purchased by the New York City hedge fund Axonic, he says. “They are extremely supportive and have been a great partner to work with. They were crucial to helping us grow the program in the early days.”
One of the GSEs' requirements for securitizations is that eventually programs must develop a diversified capital-support program. So at the start of 2017, Freddie set out to bring new investment partners into the program and secured Garrison Investment Group via an auction process for SB-28.
The requirements around the B piece also changed. The first 27 deals required seller-servicers to retain the B piece or place it with a third party. Now seller-servicers could originate their own B pieces.
“We were delighted with the number of people that showed interest in the program,” Dunn says. “From our perspective it went very well.”
“Essential To Add Capital”
“At some point in future we will conduct other auctions and bring other sources of capital into the program,” he says. “It takes a lot of work and effort to bring new people into the program but it is essential to add capital.”
Bringing in new capital is a major milestone for the Small Balance program. It gives the GSE confidence it can distribute the program's credit risk in a more traditional fashion, akin to its K Deals.
“Knowing we have multiple sources of capital to run the business gives us confidence in knowing we can execute,” Dunn says.
McLEAN, VA–Freddie Mac rang up $1.26 billion in its Small Balance Multifamily Loan program in the first quarter of 2017. While that may seem to be par for the course at the GSE — given the volume of lending it processes in general — the small balance program is relatively new. By way of comparison, in the first quarter of 2016, there were some $935.7 million in small balance transactions. In the first quarter of 2015, there were $50 million.
As for 2017, Freddie expects its Small Balance Loan program will exceed its 2016 volume of $3.72 billion well before the end of the year, Steven Johnson, VP of Small Balance Loan Business, tells GlobeSt.com.
In short Small Balance Loan has become one of
At the same time the GSE added a new investor for the SBL securitizations at the start of this year, Garrison Investment Group. It joins the program's main investor, the hedge fund Axonic.
All together, these developments add up to a relatively young lending program registering a strong growth trajectory.
Gaining Momentum
That is not surprising to Johnson.
In August 2015, it did its first securitization. For the program's initial securitization the SB Certificates was similar in structure to
By December 2015 it launched its ninth small balance loan securitization. At $400 million, it was the largest to date and more significantly, it had collateral from multiple lenders.
By February-March of the following year the program had clear entered a strong growth mode, Johnson says. “A significant portion of the origination was starting to come through brokers.” From there the program continued to gain momentum.
By year end 2016 the program's momentum had generated $3.72 billion in loans.
2017: A Year To Bring In New Capital
Now the program has added more capacity on the investment side, Aaron Dunn, senior director of
The first 27 of the securitizations were mostly purchased by the
One of the GSEs' requirements for securitizations is that eventually programs must develop a diversified capital-support program. So at the start of 2017, Freddie set out to bring new investment partners into the program and secured Garrison Investment Group via an auction process for SB-28.
The requirements around the B piece also changed. The first 27 deals required seller-servicers to retain the B piece or place it with a third party. Now seller-servicers could originate their own B pieces.
“We were delighted with the number of people that showed interest in the program,” Dunn says. “From our perspective it went very well.”
“Essential To Add Capital”
“At some point in future we will conduct other auctions and bring other sources of capital into the program,” he says. “It takes a lot of work and effort to bring new people into the program but it is essential to add capital.”
Bringing in new capital is a major milestone for the Small Balance program. It gives the GSE confidence it can distribute the program's credit risk in a more traditional fashion, akin to its K Deals.
“Knowing we have multiple sources of capital to run the business gives us confidence in knowing we can execute,” Dunn says.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
