Freddie Mac Hybrid Small Apartment Loans Give Green Flag to Finance Multifamily Properties

One-third of all multifamily units are in small multifamily properties which are an important component of the affordable rental housing stock for low and moderate income individuals. Although many small multifamily properties receive some form of govt. subsidy, UN-subsidized units account for three-fourths of units with rents below $600.

Multifamily mortgage debt organization and investment is highly fragmented although a handful of institutions holds about one-third of outstanding multifamily debt, the remainder is held in portfolio by almost 6,000 Federal Deposit Insurance Corporation. Although secularization plays an important role in supporting multifamily finance, UN-secularized portfolio holdings remain a significant source of multifamily investment. Commercial multifamily mortgage secularization is slowly recovering, and life insurance companies play a measurable role as multifamily investors.

How Freddie Mac Hybrid Small Apartment Loans Set a Class for Finance?

Albeit small multifamily properties are commonly defined as those with five to 50 units, but Freddie Mac define small multifamily properties by loan size ranging from $1 million to $5 million. Smaller properties with two to four units are also an important source of affordable rental housing, loans for these smaller properties are originated using Freddie Mac hybrid small apartment loans’ guidelines.

In recent days, Freddie Mac hybrid small apartment loans have represented a limited segment of the total multifamily business activities. Though Freddie Mac is a government sponsored enterprise that provides a secondary finance market for residential mortgages, billions of dollars have been provided through Freddie Mac hybrid small apartment loans for multifamily financing.

Freddie Mac Hybrid Small Apartment Loans in Multifamily Housing Finance

As secondary market investors, the Freddie Mac hybrid small apartment loans provider’s role in providing liquidity to the multifamily market is an important one; however, they face a number of challenges in financing multifamily properties. These hurdles are particularly acute for small multifamily loans.

The characteristics of multifamily properties to qualify for Freddie Mac hybrid small apartment loans are to make financing more challenging. More than half of the small multifamily housing stock is more than 30 years old and tends to have higher maintenance costs than larger properties. Although vacancy rates for smaller properties are only marginally higher than those for properties with more than 50 units, losses due to vacancy are higher for smaller properties. To manage these concerns, adequate reserves to cover temporary liquidity problems and meet anticipated capital expenses are even more critical for smaller properties.

Although individual borrowers are important contributors in the small multifamily arena, they have unique characteristics that present challenges to financing. In small multifamily properties with less than 25 units, borrowers tend to be individual property investors or smaller commercial enterprises that invest in just few properties. Typically, the ownership structure in small properties with more than 25 units involve more formal legal arrangements such as limited liability partnerships, limited liability companies, or other types of corporate entities.

Individual multifamily borrowers operate on thinner cash flow margins that larger property owners, and are exposed to higher income fluctuation risk when vacancies occur. Many individual borrowers don’t have the resources to outsource the management of their properties; instead, they manage their properties themselves which can impact the maintenance of the units or the speed of filling vacancies.

Accessing the entire secondary market data is difficult for individual small multifamily borrowers who often lack the deep pockets to meet secondary market underwriting requirements for minimum net worth, liquidity reserves, or es crowed reserves for capital expenditures. In addition, individual borrowers may not have audited financial statements to meet reporting requirements.

Evaluating these multiple factors before applying for Freddie Mac hybrid small apartment loans not only adds to the complexity and cost of underwriting small-balance multifamily loans, but also limits the field of investors willing to purchase these loans. Due to a combination of unique factors that are typical of Freddie Mac hybrid small apartment loans, investors view the market as highly heterogeneous. In every loan transaction, all of the distinctive characteristics of both the property and the borrower must be considered. In many circumstances, these characteristics render a loan to a particular borrower, or on a small multifamily property, ineligible for purchase by the government sponsored enterprises.

Need immediate assistance to qualify for Freddie Mac hybrid small apartment loans? Get in touch with qualified loan advisers at ALB Commercial Capital waiting eagerly to respond to your calls.