Multi-Family Loan Update from MFLoan.com                March 1, 2001

Rate Update

For most of February the interest rate market was relatively steady.  However, as the month-ended rates began to drop and the 10–year treasury note ended the month under 4.90%.   This reduction continued even though Fed Chairman Greenspan announced that the economic slowdown is not over, but that the economy was doing better.  He indicated that the Fed would not dorp rates prior to its next meeting on March 20^th.  Most experts expect the Fed to announce a 50 BPS reduction at that meeting. 

The 10-year treasury under 4.90%, at the end of February, it’s lowest point in two years.  While a further Fed reduction may result in a slightly lower 10-year treasury rate, I do not believe that there will be a significant reduction in the 10-year treasury.  Instead I believe that any Fed reduction will have a greater impact on short-term rates than long-term rates such as the 10-year note.

So far the Fed rate reductions has started to return the yield curve to a more standard posture.  The 1-year treasury rate is currently 45 BPS below the 10-year note as compared to 23 BPS at the beginning of the year.  This normalization of the yield curve is making loans more expensive to prepay as yield maintenance and defeasance prepayment premiums have increased dramatically.

Over the past month we have seen an increase in spreads

by the agency lenders.  Early in the month Fannie Mae increased their spreads by 5-10 BPS.  This was followed by a similar increase in spreads by Freddie Mac near the end of the month.  These increases were partially in response to market conditions, but I believe they also represent the lender’s recognition of the risk of a recession and it’s effect on credit quality. 

Even with these increases the agency lenders remain the best pricing entities.   Their prices are very close to each other with most deals pricing at 195-200 BPS (actual/360).  The Fannie Mae posted rate seems lower than most Freddie Mac quotes, but my experience has been the actual quotes from both lenders is very similar. It is impossible to say which is the best pricing entity today.   Some conduit lenders are pricing loans very close to the agencies with spreads as low as 205 BPS being seen on some high quality deals. 

Overall, multifamily rates are currently 4.90% (plus/minus 25 BPS) for a 10-year loan with an 80% loan-to-value. Many lenders, including most conduits and some life companies, have established floor rates.  These floors, usually between 6.75%-7.00%, will effectively increase these lender's spreads if treasury rates continue to trend downward.  The last time the 10-year treasury dropped into the mid-4% range the only lenders that did not institute floors were HUD and the agency lenders, Freddie Mac and Fannie Mae.  

The annual Mortgage Banker Association (MBA), Commercial/Multifamily Lender’s Conference was held earlier this month.  At this meeting about 4,500 lenders and mortgage professionals met to discuss the industry and future lending trends.  The tone of this meeting was cautious optimism.  In general, most lenders indicated that funds would be plentiful for 2001 and that rates would remain relatively low.   There was some concern about the slowing economy and it’s effect on credit quality, however, most people felt the lower rates that would result from a slower economy would outweigh the impact on rental growth and vacancy rates.

The big topic at the conference was the Internet.   While last year’s conference was attended by numerous Internet or “cyber-lenders” this years conference saw traditional mortgage bankers and lenders embracing the Internet.  Most of the “cyber-lenders” are now defunct or changing their business plans, but traditional mortgage bankers and lenders all spoke about how they plan on using the Internet to speed up the loan process and make the lending more efficient.   While the talk was prevalent it is still unclear how the Internet will effect multifamily lending; I will discuss more about the Internet in next month’s issue of Multifamily Update.

At the meeting, some lenders announced new programs or changes to existing programs and others discussed their new initiatives.  Listed below is a brief synopsis of the announcements and discussion at the meeting.

Freddie Mac – mezzanine debt and interest only

Freddie announced a new pilot policy to allow mezzanine debt behind their first mortgages.  This program is designed to assist borrowers who are expecting the value of their property to increase significantly due moderate rehabilitation or repositioning.  Freddie will now, under certain specific conditions, allow a short-term, high leverage, second mortgage behind their first.  This should help borrowers achieve up to 90% leverage on certain acquisitions.

Of use to more customers is Freddie’s announcement of changes to their interest only (I/O) program.  They have reduced the required DCR to 1.50 from 1.60 and increased the LTV to 70% from 65%.  They have also indicated that they would look at I/O deals for terms longer than 10 years, something they haven’t considered in the past.  Additionally, they will now allow an I/O period for up to 2 years at the beginning of a loan term on fully leveraged 80% loans.  However, on fully leveraged loans they will reduce the maximum amortization by 1 year for each year of I/O.  Therefore, a loan with the first 2 years of interest only will have a maximum of 28 years amortization.

Fannie Mae – customer focus and lender restrictions

Fannie Mae did not roll out any new programs.  They discussed that during the next year they will have a strong focus on customer service and how they will streamline their process.  There was also significant discussion of the Fannie Mae’s new policy that a borrower can work with only 1 DUS lender on loans over $20 million.  Previously, they allowed you to work with multiple lenders creating a competitive process.  This policy is similar to other lenders and will not effect most borrowers, but it is a significant change from the previous Fannie policies.

Conduits – a strong appetite for apartments

There were no significant new products announced from the conduit lenders.  The big discussion around conduits was the large amount of floating rate business done in 2000 and the continued consolidation of conduit lenders as Wall Street firms continue to merge.  Most of the conduits expressed strong interest in new multifamily loans.  They touted their ability to lock rate quickly and achieve full 80% loans.

Life Companies – getting competitive in 2001

In general, the life companies did not announce any new products.  However, in private meetings, most life companies expressed disappointment of their ability to compete on multifamily in 2000 and they expressed a determination to compete in 2001.  Expect some life companies to increase their loan to value limits to 80% and be more competitive on rate.  This should offer a renewed source of funds for multifamily loans.

Rebuz