Daily market intelligence on mortgages, equity raising, investment sales, and CMBS.

Monday, 08 August 2016

Silver Hill Moves Back into Small-Balance Lending; Aims for Dominance of Niche

Written by 
Rate this item
(0 votes)

Commercial Real Estate Direct Staff Report

Silver Hill Funding, which only recently moved back into the business of originating small-balance commercial mortgages, is looking to once again carve out a dominant position in the market niche.

A predecessor company had been among the most-active players in the sector until the market's collapse in 2008. In 2007, for instance, it wrote $3.5 billion of loans, funding its activity by securitizing its originations just about every other month. But when the residential mortgage market imploded, it took the small-balance commercial market down with it.

Silver Hill laid low for seven years. Late last year, however, it decided to move back in, driven in part by the expectation that banks would become less dominant as regulatory pressure mounts.

"We will be the dominant small-balance player a year from now," promised Michael Boggiano, senior vice president and national sales manager of Silver Hill. It's still a way off, having originated only about $10 million of loans. But that's because it's been rebuilding its platform. Boggiano promised that volumes would increase.

The small-balance market has been improving smartly since the market's collapse, with consistent increases in property-sales and loan-origination volumes.

But it's highly fragmented, with the 15 largest players accounting for only 21 percent of the entire market, according to Boxwood Means, a Stamford, Conn., research company focused on the sector, which broadly covers commercial real estate loans of $5 million and less. It estimates the size of the market last year at nearly $176 billion.

The dominant lenders are banks, who because of their low cost of capital, can charge aggressive rates. But the expectation is that as regulators continue to frown upon the commercial real estate sector, they'll be forced to back off and only lend to the best credit risks and most stable properties.

That would leave the niche of lending to borrowers who might not otherwise qualify for a bank loan open to Silver Hill. Other non-bank national players include Cherrywood Commercial Lending, Apex Mortgage Corp. and Velocity Mortgage Capital. Meanwhile, both Freddie Mac and Fannie Mae also compete in the small-balance world, but stick to the multifamily sector.

Silver Hill, meanwhile, has fine-tuned its lending parameters. It pored through the thousands of loans it had written prior to the market's collapse and determined what attributes might contribute to a loan's default risk. It historically serviced all its originations and continues to do so.

For instance, it'll stick to writing loans only up to 75 percent of a property's value. Pre-crash, it sometimes provided loans with leverage levels of up to 97 percent. Of course, it found that the higher the leverage a property has, the greater the risk of default.

It also streamlined the list of property types it'll lend against. No longer will it write loans against gas stations, marinas and golf courses. It's also doing away with loans against properties in rural areas and now requires greater credit scores than before. And it's increased its loan minimum to $250,000 from $100,000.

Small-balance loans are not typically underwritten like their larger-balance brethren, in part because many are written against owner-occupied properties. So a borrowers' ability to pay, as evidenced by their FICO score, is generally a key underwriting metric. FICO scores range from 300 for a poor credit risk, to 850 for an exemplary risk. But lenders also underwrite property cash flows.

Silver Hill, an affiliate of Bayview Financial, wouldn't generally be the first stop for a prospective borrower with a pristine credit background and solid-performing property. Those borrowers typically would go to a bank lender that might be able to provide a fixed-rate loan with a coupon of say 4.5 percent. Loans written through the U.S. Small Business Administration, typically the next step for a borrower looking for a loan of say $250,000 to $1 million, would pay perhaps 6.75 percent.

Silver Hill, on the other hand, should be the "first stop for Main Street borrowers who don't qualify for bank loans," Boggiano explained. Its loans typically would pay a coupon of between 6 percent and 9 percent. A typical hard-money lender, which become the lender of only resort for borrowers with a credit blemish, charge more.

It can write loans with terms of five, seven or 10 years that amortize on schedules of up to 30 years. Like other lenders, it restricts the early prepayment of its loans, but lifts those restrictions after three to five years, providing its borrowers with a great deal of flexibility. And the company boasts that it's a par lender. In other words, borrowers aren't nickle-and-dimed with onerous fees.

The company relies on brokers to source originations. And most of those tend to be on the residential side. But traditional commercial mortgage brokers, such as CBRE and Marcus & Millichap, also bring in business.

Silver Hill is funding its loans internally for the time being. That's doable given the relatively low volume of loans it's completed, but it eventually could structure whole-loan sales or securitizations, or both, in order to recycle its capital. However, it plans to always retain its servicing.

Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.



weekly-call-to-action

“The Weekly”

“The Weekly” is Commercial Real Estate Direct’s PDF newsletter, sent to subscribers every Friday morning. With over 100 news stories published on Commercial Real Estate Direct each week, “The Weekly” features the top stories in commercial real estate that industry participants need to know first. “The Weekly” also contains:

  • Breaking mortgage, CMBS, and REIT news

  • Quarterly league tables with rankings of B-piece buyers, book runners, and lenders

  • Industry moves and changes in “The Insider“

Additional Info

  • Syndicate to Realpoint: No
  • Subject: Mortgages/Financing (MOR)
  • Private: No
Read 1257 times

Data Digest

 

CMBS DELINQUENCY VOLUME

dqdataFP1

 

CMBS SPECIAL SERVICING VOLUME

sschartfp

Top Bookrunners Domestic, Private-Label CMBS - 2016
Investment Bank #Deals Vol$mln MktShr%
JPMorgan Securities 14.94 10,350.16 15.14
Deutsche Bank 14.21 9,926.60 14.52
Wells Fargo Securities 13.36 9,513.96 13.92
Citigroup 10.87 8,061.79 11.80
Goldman Sachs 10.05 7,563.72 11.07

 

RCA CPPI

 

cppichart FP

 

 

CMBS 2.0 Spreads

AAAspreads

Top CMBS Loan Contributors - 2016
Lender #Loans Vol$mln MktShr%
JPMorgan Chase Bank 133.67 8,670.33 13.34
Goldman Sachs 156.20 7,418.37 11.41
Deutsche Bank 178.17 6,510.75 10.02
Citigroup 184.41 5,512.20 8.48
Morgan Stanley 113.18 4,130.53 6.35

 

 

 

REITCafe

  • Challenging Retail Environment Weights on REITs
    Mixed economic news is weighing on retail markets, pushing REIT performance down in 2015. This week, the National Retail Federation announced that back-to-school spending is expected to be down 9.3% in 2015. This news came on the heels of a report from the Commerce Department stating that retail sales declined 0.3%...
     
  • US REITs Feeling Effects from Turmoil in Greece and China
    International economic forces have taken center stage this week, affecting both US stock markets and REITs. The crash in the Chinese stock market and ongoing concerns about the future of Greece in the eurozone drove markets down during the first half of the week. REITs fared better than the overall market...

  • What Does Increased Construction Mean for Apartment REITs?
    REITs so far this year have raised $17.1 billion of capital through the sale of unsecured notes, bringing the total raised over the past two and a half years to just more than $75 billion. That’s more than they raised during the previous five years. The massive volume shouldn’t be a surprise as it comes while the yield from 10-year Treasury bonds, the benchmark...
shouldn’t be a surprise as it comes while the yield from 10-year Treasury bonds, the benchmark against which most REIT’s price their bonds
warehouse-backstage