The Small Balance Intersection Update - August 6, 2024

Quote Of The Day: Success is the sum of small efforts - repeated day in and day out

Did You Know: Ohio will become the 25th state (plus the District of Columbia) to make recreational weed legal. As marijuana sales begin today.

Regulatory Lane

Fannie and Freddie Set to Implement Stricter Lending Rules to Combat Mortgage Fraud

Fannie Mae and Freddie Mac are poised to tighten their lending rules for commercial property loans in response to increased regulatory scrutiny on mortgage fraud within the multifamily sector. The new rules would require lenders to independently verify borrowers' financial information, assess the adequacy and sources of borrowers' funds, and perform more rigorous due diligence on property valuations. These changes mark a significant shift from the current system, where lenders often rely on the financials provided without stringent checks, potentially reducing deal activity in the market. The tightening of rules comes amid rising fraud cases, especially after the Federal Reserve's interest rate hikes exposed inflated property valuations and doctored financials. These regulations could be implemented as early as this summer, aiming to curb fraudulent activities that have proliferated in the industry. As the crackdown continues, Fannie Mae and Freddie Mac have already blacklisted some brokerage firms involved in fraudulent practices, with major lenders like Berkadia re-evaluating their relationships with brokers. The move reflects a broader effort by federal prosecutors and the FHFA to enhance oversight and ensure market integrity.

For more details, you can access the full article here.

Caution: Rising Insurance Costs

Steep Insurance Hikes Force Small Businesses into Tough Choices

Small businesses are encountering significant increases in insurance premiums, with nearly half reporting health insurance cost hikes of 10% or more this year, and some experiencing jumps of 25% or higher. Rising labor costs and demand for expensive medications are key drivers of these increases. To manage these expenses, businesses are tightening hiring practices, enhancing workplace safety measures, and in many cases, raising prices to offset the costs. According to a recent survey, more than 30% of small businesses also reported double-digit increases in commercial auto, liability, and property insurance.

Healthcare expenses are particularly burdensome for smaller businesses, accounting for nearly 12% of payroll for firms with less than $600,000 in revenue, compared to 7% for those with over $2.4 million. Some businesses are exploring options to switch insurance providers or reduce coverage to control rising premiums. The situation is exacerbated by the broader economic challenges of rising wages and material costs, making it difficult to remain competitive. This combination of escalating costs and a tight labor market is creating a "perfect storm," forcing small businesses to make difficult decisions to sustain their operations.

See the full article: Small Businesses Grapple with Rising Insurance Costs.

Resilience Road

Service Sector Rebounds in July Amid Broader Economic Uncertainty

The latest report on the ISM Services Index offers a positive outlook on the U.S. economy, indicating a return to expansion in the service sector for July with a reading of 51.4. This comes at a time when global markets are concerned about a potential economic slowdown, underscoring the resilience of the service sector. Key sub-components, including business activity, new orders, and employment, all shifted from contraction to expansion, suggesting that the sector has regained momentum. Despite a recent jobs report signaling possible economic softening, the rebound in the ISM services employment component to 51.1—the highest since September—reflects a steady, albeit cautious, labor market recovery. However, only eight out of 18 industries reported increased hiring, aligning with broader trends of moderation in employment growth. The prices index also edged up to 57.0 in July, but this slight increase is not seen as a major hurdle to potential Fed easing later this year. The report highlights the ongoing strength of consumer spending, particularly in non-discretionary areas, which continues to support economic activity.

You can read the full Wells Fargo report here.

Country Driving

U.S. Farmland Values Continue Upward Trend Amid Economic Pressure

U.S. farmland values have reached a new record, with average prices rising to $4,170 per acre, marking a 5% increase from the previous year, according to a USDA report. This marks the fourth consecutive year of growth in land values, although the pace of increase has slowed since 2021. The continued rise in farmland values comes amid a challenging economic backdrop for farmers, with net farm income projected to decline significantly this year. The drop in income is largely attributed to abundant grain harvests, which have led to falling crop prices and reduced sales of agricultural equipment. Despite these headwinds, land and building values on U.S. farms remain resilient, indicating strong demand or other factors supporting land prices. The persistence of high farmland values reflects underlying trends in the agricultural real estate market that are resisting the downward pressures from lower commodity prices. This trend could have implications for agricultural investment strategies, as well as the financial health of farmers facing tighter profit margins. For more detailed information, you can access the full USDA report here.