Freddie Mac Small Balance Loan Borrowers Face Stricter Cash-Out Rules

This month, Freddie Mac announced that it would be increasing the strictness in which it evaluates cash-out refinance deals for its Small Balance Loan (SBL) program. This likely means that fewer borrowers will qualify for cash out refinances, and those that do will probably be eligible for a smaller amount of funds. Freddie Mac issued the statement below to lenders:

“We are evaluating our program requirements for cash-out refinances and expect to have guidance circulated to you in early fall. Until that time, any SBL loan with more than 15% of current UPB cash-out beyond transaction costs, regardless of term of ownership, must be prescreened prior to application with the regional SBL production team.”

To gain a deeper understanding of how this will affect the small balance multifamily market, I sat down with Janover Ventures’ Brandon Ramineh to learn more:

Overall, how important is it for multifamily borrowers (particularly small-balance borrowers) to take cash out?

Very important. In the small balance market, we see a lot of clients that have acquired property within the past few years, and, after completing improvements and raising rents, are now looking refinance the property based on the appraised value.

In addition to recently raising rates, the popular Freddie Mac Small Balance Loan (SBL) program is now adding additional restrictions for cash-out refinances. For those who aren't aware, the program offers non-recourse apartment loans between $1 million and $7.5 million, with LTVs up to 80%.

How often do Freddie SBL borrowers attempt to get cash out refinances? For those that do, what do they typically do with the proceeds?

Fairly often. Although it can be very tempting to go out and spend $200k on a new Ferrari, most of the investors we work with will take that money and reposition it into a new asset or put it back into the property through upgrades or repairs.

How strict do you think Freddie Mac’s new rules will be? Will they make it significantly harder for borrowers to take cash out using the SBL program?

For the time being, I think Freddie Mac will be fairly strict with their cash out refinancing rules. For first-time agency borrowers, it might be more challenging to get cash out than say, a 10th-time agency borrower. Overall, I think borrower strength and the potential for repeat business will play a huge role in how lenient they are.

Do you think these new requirements will lead certain borrowers to opt for other products that could be more lenient regarding cash out refinances, such as CMBS?

Although Freddie SBL has and will always be a great product, this definitely does create an opportunity for CMBS to compete. For multifamily, FHA/HUD is also a great option that can provide higher leverage.

Is this simply another restriction (like the recent rate hikes) placed on borrowers due to Freddie Mac’s high lending volume this year? Or is there another, specific reason that they would want to restrict SBL cash-out refinances?

I believe their thought process is that stricter cash-out rules leaves more room for purchase transactions. That equals more room for new agency borrowers that can potentially come back in the future. Starting in October, Freddie and Fannie will start underwriting loans that can potentially close in 2020. That’s when we believe they will start cutting back on all these rules.