Non-Recourse Financing Limits Risk for Investors
Fortunately for borrowers, Freddie Mac Small Balance Loans are generally non-recourse. When a borrower signs a non-recourse loan agreement, they do not have to sign a personal guarantee (PG), putting their personal property up as collateral if they default on their loan. Instead, lenders can only go after the property itself if a borrower defaults.
“Bad Boy” Carve-Outs and Non-Recourse Financing
Nearly all non-recourse loans, including Optigo Small Balance Loans, are subject to “bad boy” carve outs. These are additional agreements that “carve out” sections of the recourse agreement, making the loan full recourse under certain conditions. Typical actions that could trigger “bad boy” carve out provisions include committing criminal acts, intentionally declaring bankruptcy, and avoiding violating any of the covenants of the Special Purpose Entity (SPE) that will actually own and hold the collateral property. While some carve out provisions are only triggered upon a borrower committing seriously fraud or negligence, others can be triggered by minor administrative issues. Therefore, it’s extremely important for borrowers to carefully read and understand all the components of any carve outs included in their loan agreement– before they sign on the dotted line.
Some Freddie Mac Small Balance Loans Have Limited Recourse
While Freddie Mac’s terms for the Optigo SBL loan program can be strict, they aren’t set in stone. For loans that stretch Freddie Mac’s loan terms– such as having a DSCR below the standard requirements, or having an LTV slightly above the regular limits, the lender and/or Freddie Mac may add a limited recourse provision to the loan in order to reduce their risk.