Small-balance commercial loans generally have a minor impact on overall securitization production, but the sector came out with a couple of significant developments last week. Not only did Lehman Brothers market a $500 million transaction; a rating agency added categories of small-balance commercial servicers, acknowledging the growth of the sector.
Lehman Brothers Small Balance Commercial, Series 2007-2, is the second such transaction this year and securitizes fixed- and floating-rate loans on 900 commercial and multifamily properties originated by Lehman subsidiary GreenPoint Mortgage Funding, according to Fitch Ratings, which rated the bonds between triple-A and triple-B-minus.
CNL Commercial Finance, a specialty finance company, was one of the largest originators of small-balance commercial loan collateral. Lehman Brothers took over that role after it bought the company in 2004. It also became the most active issuer of bonds from that sector, according to data from Thomson Financial. Over the past three years, the sector produced only about a dozen deals - most of which were underwritten by Lehman. The investment bank's previous small-balance commercial loan securitization this year priced in early April.
Another development came behind the scenes, when Fitch Ratings said it would add two new rating categories for servicers in that sector: small-balance primary servicer and small-balance commercial special servicer. The agency currently maintains two primary servicer ratings and one special servicer rating for the sector. That number will likely increase over the next year, along with the issuance of small-balance commercial loan ABS, said Mary Kelsch, a senior director at Fitch.
Typical balances are $1 million, and generally reach $3 million, according to the rating agency. Normally, the loans are treated as small-business loans, which are secured by the borrowing company's real estate holdings, according to market sources familiar with the field.
An increasing number of originators in the small-balance commercial loan business are considering securitization as a way to increase market share and offer a full range of products to their clients, according to Fitch.
"Servicing these loans typically requires greater customer service interaction with borrowers than is necessary with traditional commercial loan servicing," Kelsch said. - DM
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