The 10-year UST began to drop in the second half of the year as the market gained confidence that inflation was under control and the Fed would soon cut rates. By August, the 10-year had a solid three-handle, and financing activity began to pick up. Even with the 10-year rising to the low-fours as yearend approaches, there is a consensus that we are past this cycle’s peak high and there is enough stability to transact in a market where rates settle into a range still low by historical standards.

With this backdrop in mind, 2025 should be a productive year for agency (Fannie Mae and Freddie Mac) financing as borrowers adjust to the new normal of interest rates. This is especially true as many banks–the agencies’ main competition by volume–have either pulled out of the multifamily lending market altogether, modified their requirements to lend only to existing customers, or require borrowers to deposit a significant sum to get a loan. For more context, we talk to Michael Pop, a managing director at Lument based in the firm’s Irvine, California office, on how investors can leverage the benefits of Fannie Mae’s Small Loans and Freddie Mac’s Small Balance Loan programs.

What are the key benefits of small balance multifamily loans compared to other sources such as banks, CMBS, etc.?

Pop: These programs are specifically designed to efficiently finance properties with five to 50 units and loan sizes of $1 million to $7.5 million (there is some flexibility here). Competitive advantages are numerous, and include: 

  • No deposit requirements. As a non-bank lender, we do not require any deposits to process loans for our clients. Banks, on the other hand, often use minimum deposit amounts as a loan requirement. That could be in the form of a deposit equal to 10% to 30% of the loan amount or a requirement that the borrower move its operating accounts to their institution.
  • Ability to expand to new markets. As a national agency lender, we can follow clients to different regions as they expand their portfolio. Banks are often geographically focused, and a borrower may need to find additional funding sources if they want to move into new markets.
  • More favorable amortization periods. The agencies offer 30-year amortization periods for small balance loans, as opposed to 20 years or 25 years from banks. Longer amortization results in more proceeds by improving the debt service coverage ratio (DSCR).
  • Always in market. Agency lenders maintain their market presence regardless of fluctuations. Banks often go in and out of the market based upon changing fundamentals, deposits, and regulatory issues. Having a lender that is there for you regardless of market conditions is critical.
  • Non-recourse. Agency loans are non-recourse while most banks and credit unions will be full recourse. A full recourse lender may pursue additional assets aside from the subject property in the unlikely case that a borrower defaults on a loan.

What are some of the trends you are seeing in small loan structures? How do you align these programs to best serve a borrower’s needs?

Pop: Regarding terms, we offer five-year, seven-year, and 10-year fixed-rate options, as well as hybrid options (fixed to floating rate). Step down and yield maintenance prepayments allow us to further tailor strategies depending on the borrower’s desired balance of flexibility and pricing.

Recently, transactions favor five- and seven-year terms with step-down prepayment structures. For five-year teams, we are seeing a preference for the optionality afforded by 3-2-1-1-1 or 3-1-0-0-0 step downs–if rates were to drop, borrowers can refinance at low or no cost.

That being said, the most attractive pricing for someone looking for a long-term plan right now tends to be a 10-year fixed-rate structure with yield maintenance. We’ve been executing a lot of those recently as well.

Has acquisition activity picked up? What is the proportion between small balance refinancings and acquisition loans?

Pop: Activity is very refinance heavy. Requests are coming in with an 80/20 ratio for refinancings versus acquisitions. That being said, cap rates are widening a bit and investment sales activity is on the uptrend. It will take some time for more investors to get off the sidelines, but I think participants are getting more comfortable with all-in rates in the 6% to 7% range. There is still capital that needs to be deployed, and I expect we will get closer to a 70/30 ratio over the next year.

Overall, there should be increased activity from borrowers looking to refinance and/or acquire in general. Refinancing opportunities should be plentiful, as many borrowers with bank financing from a few years ago are starting to enter the adjustable-rate portion of their term. If they locked a five-year term around 2020 with a 3.5% rate, they may now face an adjustable rate that could be as high as 7% or 8%. As such, it may be an ideal time to refinance and find a lower fixed rate. That’s going to be a common scenario in 2025.

As acquisitions become more prevalent, speed of execution becomes more important. What steps can investors take to secure the fastest possible financing for small balance multifamily properties?

Pop: Ideally, borrowers have well-kept properties with minimal deferred maintenance and a keen understanding of their own market. To expedite agency financing for small balance properties, borrowers should source and provide property financials early. We underwrite with a focus on property conditions and operations as opposed to tax returns. Specifically, borrowers should diligently prepare trailing three-month (T3) and 12-month (T12) financial reports. We typically underwrite to T3 on income and T12 on expenses (exceptions are possible). A current rent roll that details any concessions, delinquencies, vacancies, or down units is also a key element in underwriting any deal.

For more information, contact Michael today.