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Monday, 08 August 2016

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

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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.


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Data Digest







Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44




cppichart FP



CMBS 2.0 Spreads


Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41





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