Thoughts on Small Balance Commercial Loans?

I recently noticed that Angel Oak acquired a small balance loan shop. Large PE shops like Lone Star have dedicated teams for small balance loan. I am just wondering what makes small balance loans different from traditional senior mortgages.

Also, what's growth potential and/or exit opportunity for a small balance loan underwrite/originator.

Thank you

Comments (4)

Mar 12, 2019

It's way more profitable than conventional loan, about 8x more profitable than conventional loan in 2015-2017, and now at about 5x after reduction in premium

Mar 12, 2019

Thank you. Correct me if I am wrong - because of the balance constraint, borrowers can't secure financing from traditional sources; therefore, they go to alternative lenders and lenders charge higher coupon. From an UW perspective, I would assume the process is largely the same.

Mar 12, 2019

No, it's not alternative financing

It's called small balance because the loan balance is small, by Fannie/Freddie definition anything under $7M is small balance.

And it doesn't charge higher coupon, debt shop makes money selling these loans to secondary market (Fannie/Freddie), and GSE would pay 5x more for small balance loans vs conventional loans

Jun 8, 2019