(The following is excerpted from the December 9, 2016 episode of The Real Estate Hour, a weekly SiriusXM Radio show powered by the Wharton School of Business. The text is edited for clarity and brevity. You can listen to the full show by clicking here.)
Sam Chandan: Steve mentioned that Freddie doesn’t they don’t engage directly with the borrowers. Ivan, that is where you and come in. Can you tell us a little bit about Arbor being on the front lines of originating mortgages and how you work with Freddie Mac?
Ivan Kaufman: Arbor is on the front lines of innovation partnering with both Fannie and Freddie. We helped create certain programs to bring liquidity to the small balance and workforce housing sector. As many market participants know, we are Fannie and Freddie’s top small balance lender — and we work very hard at that. That is our focus. In fact, Arbor was the first to beta test Fannie Mae’s small balance program in 1995. We were chosen to partner with Freddie Mac to development the Small Balance Loan program in 2014 because we really understand this unique space. And as Steve can attest, we are Freddie’s top Small Balance Loan lender today.
So this is a very important segment of the market — and it is a growing segment of the market — and bringing new products and innovation to the table to make this space more efficient is something that we are committed to doing.
Sam Chandan: Steve, historically, where does small balance financing come from?
Steve Johnson: Small balance financing is coming from regional banks. Frankly, it’s also coming from Fannie Mae, our competition across the river. If you look at the West Coast, the banks have really dominated the space, as there are a lot of regional banks cluttered in those markets. If you look across the country in all the top markets, you are going to see regional banks of all sizes. In the middle of the country, in the smaller markets, you are going to see local banks who have been providing single solutions to borrowers in those markets.
Sam Chandan: Ivan, can you elaborate a little bit on how the market has changed in recent years?
Ivan Kaufman: Clearly the market has been very fragmented in terms of who the lenders have been — whether it be local banks, regional banks, or some of these institutions that come in and out of markets. Some of them don’t have standardized products. The terms can be all over the place.
What Fannie and Freddie have done — which is serving the market very well — is bring a consistent product line to the market. And you have to understand, the products have to match the nature of the borrower. These borrowers are generally buying multiple kinds of properties. They don’t have the kind of back offices and internal staffing that some of the larger players have. So bringing that kind of standardization to the market has really facilitated their ability to actively participate in the market with confidence. So I think over the last two to three years, we have seen borrowers effectively able to go out and understand what their financing would look like.
The other thing that has been very effective, and we can touch on a little bit later, is that they know what their costs are. The third party costs are down to a science. The legal costs are down to a science. The documentation is down to a science. So that has been very helpful for the borrower.
(Stay tuned for Part II of this discussion, which takes a deeper dive into the mechanics and credit culture of Freddie Mac’s the Small Balance Loan program. We’ll also examine the specifics of who lives in the smaller apartment properties, and what type of borrowers are investing in the space.)