Pre-underwriting every building in the country
Opening agency doors for the SBL market
We believe multifamily small balance loans (SBL) are headed to a brave new world including lower interest rates and non-recourse loans. Investors in properties with five to 50 units will finance on terms competitive with conventional loans to properties with 200 or more units.
The sources for this funding are the same agencies that cater to conventional lenders: Fannie Mae and Freddie Mac.
Unlike the conventional market where all government sponsored enterprises (primarily Fannie and Freddie) control about 46% of the loan market, the SBL market is much more fragmented with agency market share much smaller.
Investors in the SBL space more frequently finance their multifamily properties in non-agency deals with banks, credit unions, and other financial institutions. They take on higher interest payments and incur personal liabilities. And they don’t have to.
The agencies are waiting
It’s not that financial institutions funneling SBL loans to Fannie or Freddie aren’t available. At GeoPhy, we seek to educate investors that agencies are seeking to finance properties much like the ones they own.
As government sponsored enterprises, the agencies are very explicit about their lending criteria. They publish general guidelines that allow anyone to determine whether a property might fit in a Fannie or Freddie loan portfolio.
So that’s what we did. Our Evra by GeoPhy platform already combines data from public and proprietary sources such as property-level aggregated tenant financial health statistics, as well as appraiser-verified property and market information from our joint venture Apprise. All this data is used by lenders in underwriting a loan before sending it to an agency for review.
We applied all our resources to each of the more than 425,000 multifamily properties we track across the U.S. In effect, we have pre-underwritten the U.S. multifamily universe.
As we like to say: real estate, meet data science.
Programmatic is not problematic
Think about the conventional multifamily space for a moment. Why do agencies have such commanding market shares?
Such predominant positions usually occur in commoditized markets. The loan is “conventional” because it is well defined. Once a market is defined, competition causes economies of scale and their efficiencies kick in. The results are fewer vendors. In the lingo, the execution of the loan has become so well defined that it has become programmatic.
Agencies’ daunting market shares might make them seem unapproachable compared to the head of lending for a local credit union. But consider how comfortable individuals have become with automated lending platforms such as Quicken Loans for their home mortgages.
The same structure and rigor that helped Quicken Loans conquer residential mortgages is coming to SBL lending. Savvy investors will be the ultimate beneficiaries.
Meeting agency checklists
What do the agencies want in an SBL loan? Among other things that they check, Evra by GeoPhy helps assess:
- The stability of cash flows for a property and its surrounding area by tracking the financial health of a building and its neighborhood
- Changes to occupancy/tenant population (a.k.a., demand)
- Affordable housing suitability
- Growth and strength of the location and its market
For instance, we recently identified a 28-unit property in Houston that looks ripe for a refi that matches agency requirements. Its current loan was issued in 2008 and carries a 6.1% interest rate – well above what Fannie or Freddie would offer today. It’s a long term loan at 25 years, maturing in 2033. But the interest rate and current market value of just under $4.3 million (the current loan balance is under $1.45 million) make a refinance worthwhile. From a cash-out perspective and for operating cash flow, a refi makes sense even with prepayment penalties.
Your bright future
The key to giving more investors access to agency lending is working at scale. Having the right data in place allows GeoPhy to pre-underwrite every SBL property in the country.
That promises an SBL mortgage market that is more competitive. Investors who previously only had access to recourse loans will now be able to get their financings without personal strings attached – assuming, of course, that they have a track record in the markets where they’re playing.
Evra by GeoPhy can help borrowers identify whether their properties meet agency thresholds before meeting with lenders. They will be able to finance anything as long as they can pay for the privilege of the debt. If you have the right terms, you can get a mortgage for any property. Come sign up for a free trial and see if you can free up some capital on your properties.