EverBank Financial Corp. is betting that it can get Wall Street securitizers to take another look at a lending niche they have largely ignored: multifamily and commercial loans of $2.5 million and under.
This month the $4.2 billion-asset Jacksonville, Fla., thrift company bought Fidelity Bancorp Funding Inc. and its Apartment Lending Group, which specializes in making such loans. Since this segment is in many ways more like home lending than skyscraper financing, EverBank plans to leverage investments it has made in its residential business.
"Not only is the product attractive, but the distribution channel — the ability to generate leads through residential mortgage brokers with whom we have a broad and strong network — is a big part of the attraction," said Robert Clements, EverBank's chairman and chief executive.
Jamie Buckland, EverBank's senior vice president of commercial and community banking, said Apartment Lending Group, of Westminster, Calif., gives EverBank $1 billion of origination volume. Those loans could be sold in bulk to investment banks, which would in turn repackage the loans into securities, but such arrangements right now are not common, he said.
There is "a well-organized secondary conduit market" for commercial real estate loans of $10 million or larger, Mr. Buckland said, but EverBank would be focusing on the small-balance segment, where loans are made to "mom and pop" borrowers.
"This is the last asset class" for real estate securitization, Mr. Buckland said. "It's new only because it's not as well organized as the large-dollar-volume stuff and the residential market, but it's becoming more efficient every day."
Joe Garrett, a principal at the mortgage consulting firm Garrett, Watts & Co. and a former president of Sequoia National Bank and American Liberty Bank, said commercial real estate, particularly apartment lending, can provide meaningful portfolio diversification for thrifts.
"It offers a different element of risk than residential loans," Mr. Garrett said. "The real surprise is that more thrifts don't do more commercial lending, since the pricing has slightly higher yields."
William Sonsma, who owned Fidelity Bancorp, said the small-balance market is changing rapidly as residential brokers, whose volume is drying up, migrate to commercial lending.
"This is a natural progression for everybody — for Wall Street firms, bankers, and brokers," said Mr. Sonsma, now an EverBank senior vice president and managing director for commercial lending.
"The small-balance platform is similar to the infancy stage of subprime and alt-A lending," he said. "It has the same opportunities and capability of turning into a huge, huge market."
Other companies are eyeing the segment, if not necessarily committing themselves. In January, Mr. Sonsma agreed to sell Fidelity to Impac Mortgage Holdings Inc., an alternative-A home lender in Irvine, Calif.
At the time, Impac's chairman and chief executive, William Tomkinson, said increasing small-balance commercial and multifamily volume was a strategic goal, and he cited Fidelity's ability to originate such loans through residential brokers.
That deal fell through; Mr. Tomkinson later said the parties could not agree on some terms.
Scale is not the only thing that has kept small-balance commercial loans off the radars of mortgage-backed powerhouses like Lehman Brothers, Citigroup Inc., and Bear Stearns & Co., Mr. Sonsma said.
There is no automated underwriting for commercial mortgages as there is for consumer ones, so it can take 90 days or longer to close a commercial loan. Small commercial loans also tend to have recourse to the borrower, whereas the commercial mortgages that Wall Street likes are backed only by the property.
Appraisals for commercial properties can take up to a month and underwriting a commercial loan can take up to six hours, versus 15 minutes for residential appraisals.
Some lenders are trying to streamline the process with 48-hour pre-approvals and lucrative commissions to residential brokers.
The small-balance lender Silver Hill Financial LLC, a unit of Bayview Financial LP of Miami, started a referral program this month that compensates mortgage brokers for referring small-balance commercial deals of $100,000 to $1.5 million. Also this month, it started offering loans of up to $1 million for gas stations, which it called "an underserved" property type.
Silver Hill unveiled a 97% LTV product for owner-occupied properties this month, and it trains residential brokers to diversify into commercial lending. "We try to capitalize on the similarities with residential loans," said Joanna Schwartz, a managing director at Silver Hill. "Why should these small loans be underwritten in the same way that a $5 million to $10 million loan is underwritten?"
Mr. Buckland said EverBank plans to drive down costs and exploit its partnerships with Wall Street firms. "The spread or yield to us on a smaller loan in Des Moines, Iowa, will probably be greater than on a $10 million apartment loan in Chicago," he said.
EverBank, which is owned by the Jacksonville private-equity firm Lovette Miller & Co., recently took on more exposure to another niche: reverse mortgages. This month it bought the 49% of the reverse lender BNY Mortgage Co. that it did not already own from Bank of New York Co., which is quitting consumer banking.
