Freddie Mac Multifamily marked the 10th anniversary of its Small Balance Loan (SBL) program in October.
Over the past decade, the SBL program has had significant impact, including:
- Total volume of nearly $45 billion;
- Over 16,000 loans;
- Approximately 600,000 units financed;
- Loans in all 50 states and Washington, D.C.;
- 95% of business has been affordable to households earning at or below 100% of the area median income (AMI); and
- 63% of properties with SBL financing are in minority census tracts.
According to Freddie Mac Multifamily, the SBL program finances properties with a loan amount ranging between $1 million and $7.5 million with the average loan amount sitting at approximately $2.7 million. Property sizes generally range from five to 50 units with an average of approximately 37 units.
MFE caught up with Freddie Mac Multifamily leaders Steve Johnson, senior vice president and head of production and sales, and Steve Malloy, senior director of production and sales, to hear more about the program’s impact and lessons learned over the past decade.
What was the mission behind creating the program 10 years ago, and has it met its goals?
Malloy: Freddie Mac’s SBL program was created to meet the needs of the market. Prior to this program, the space was highly fragmented and underserved in many areas. Freddie Mac brought standardization of terms and consistency to small balance markets across the country—from top markets like New York and Los Angeles to secondary and tertiary markets like Amarillo, Texas, and Anchorage, Alaska. This has helped preserve affordable housing while also spurring greater investment from borrowers to improve and maintain their properties—addressing the growing deferred maintenance of aging apartment buildings.
Johnson: Our SBL program helped create certainty in what had been an uncertain space. Certainty that led small property owners, lenders, appraisers, and engineers (who may have been hesitant to fully engage due to lack of options and access) to develop strategies and capabilities to optimally and actively participate in the space. Stepping into this space and providing borrowers with greater access, and optionality, consistency, and standardization, also helped raise the bar for others who were already operating in these markets. We’ve seen numerous financial institutions adopt our terms and loan documents as part of their lending platform, helping to give more certainty to the borrower while creating more efficiencies in the market.
Malloy: Not only has the SBL program met its initial goals, in so many ways it has exceeded our expectations. We initially thought this program might reach $1 billion a year in total funded volume. However, since inception a decade ago, we’ve averaged $4.5 billion per year and total funded volume of $45 billion. The SBL program has supported close to 600,000 units in all 50 states and the District of Columbia. Over the life of the program, 95% of the units funded are affordable to households making at or below 100% of the AMI, and more than 60% are in majority-minority census tracts.
What impact has the SBL program had over the past decade?
Johnson: The impact of the SBL program has only grown over time. While the average loan size of around $2.7 million is orders of magnitude smaller than our typical multifamily loan, the impact it makes in advancing affordable housing is significant. The SBL program supports apartment buildings with five to 50 units and has a high impact on affordable, workforce housing. Tenants commonly include working professionals—think nurses, teachers, etc.—many of those who play a vital role in supporting the communities they reside in.
Malloy: Also, our impact has been felt on the capital markets side. Our SB-Deals, like our K-Deal execution, transfers risk to third-party investors. This allows us to provide the consistency in pricing and credit terms across all markets. We issued 115 SB-Deal securitizations with over 600 investors participating, including up to 14 different subordinate buyers. Banks have been our most common investor in our SB-Deals. During this time, we have allocated $4.9 billion of SB-Deal investments to meet Community Reinvestment Act needs. Small loans have not been securitized to this scale before.
We couldn’t have achieved this level of impact without the commitment of others throughout the industry. Since the SBL program began in 2014, our Optigo Lender network has quadrupled from three approved lenders to a dozen.
What lessons have you learned from the program? Has the program evolved?
Johnson: We are continuously learning and adapting in order to respond to ever-evolving market needs while maintaining discipline and prudence in the right places. The needs and challenges in the market today are very different than when the program was created in 2014. In order to effectively serve our mission, adaptation and evolution aren’t simply optional, they’re required. We don’t sit on the sidelines when market conditions get tough. That’s when our liquidity is needed the most.
Malloy: Just in the past few years, we’ve faced several challenges that have had a great impact on the SBL market. We learned how resilient the SBL borrower can be with a little bit of help, whether it was proactively offering forbearance during COVID or offering additional years of interest only during the other challenging periods to help weather the market. We are consistently evaluating our terms, requirements, and processes to provide the best execution to our lenders and borrowers.
Why should lenders and borrowers consider this program today?
Malloy: A common theme with this product is certainty. SBL borrowers (not unlike other multifamily borrowers) look for certainty, particularly in a volatile market. So, one of the most meaningful ways we provide that certainty through our SBL program is with pricing simplicity. Our program is coupon-based, and pricing is held at application for a set period of time.
Beyond certainty, optionality is critical for our borrower base. Our program offers flexible prepayment options, hybrid adjustable-rate mortgages, or fixed-rate loan terms—all of which give the sponsor flexibility to find financing that works for them—and yet keeps it simple compared with a traditional agency execution.
Johnson: Product features can only get you so far in this industry, you must also have the right people, with the right skills and expertise behind the product. The SBL program has over 60 Freddie Mac production and underwriting staff spread across the country. Because we live and work in the markets where we do business, we are experts at balancing the needs of the borrowers and the dynamics of a given market with the needs/wants of the specific tenant base, along with local development plans, regulations, and more. We take that expertise and apply it to every deal. When issues arise, they have the opportunity and are empowered to think critically and find solutions. Creative solutioning isn’t just a cliché tagline, it’s a mindset for our team, and we embody this in their everyday actions. We also rely on a close working relationship with our network of highly experienced lenders who specialize in SBL. After all, you don’t make it one day nor do you produce $1 in volume, let alone 10 years and $45 billion, doing anything on your own.
