Rate Update

The Fed again, last month, reduced the target Federal Funds rate, but this time by only 25 BPS.  Many experts believe this is a signal that the easing of short-term rates by the Fed is nearing an end.   The bond market reaction to this latest cut started out positive, but as the month ended rates have risen dramatically.  About a week prior to the meeting long term rates dropped on news of strong consumer confidence and then increased slightly just before the Fed meeting.  On the day of the meeting there was little reaction, but over the past three days rates have increased.  The 10-year treasury ended the month at 5.39% or 1 BPS lower than the beginning of the month.  Short-term rates such as the 30-day LIBOR are at 3.85% down by 19 BPS from the beginning of the month.

The economic news is still mixed.  Industrial output is very weak and economic activity for the second quarter was basically flat, but consumer confidence is up.  With the initial benefits of the recent tax cut just now entering the economy, I believe the Fed will probably take no additional action for the rest of the summer.  They will give it a little time to see if the economy will rebound.  However, if there are not clear signs of an improved economy by the beginning of the third quarter the Fed will take additional action.  The magnitude of this action will be dependent on the economic news especially any signs of inflation.

Fixed rate multifamily loans were lower for most of the month mainly because of a drop in long-term treasury rates.  The month ended with multifamily rates up slightly as spreads increased about 5 BPS earlier in the month and have not yet reacted to the recent increase in the treasury rate.  If rates remain where they were when the month ended then I expect spreads to drop down by 5-10 BPS.  Short-term rates have continued to drop making floating rate deals more attractive. Spreads have widened somewhat on floating rate deals to compensate for the rate drop, but overall rates are still down. 

Overall, multifamily rates are currently 7.25% (plus/minus 25 BPS) for a 10-year loan with a 75% - 80% loan-to-value.  Spreads on full (75%-80% LTV) loans range from 190 to 220 with lower leveraged loans (60% - 65% LTV) ranging form 170 to 210. 

The agency lenders continue to lead the market in price.  Their spreads are usually at least 10 Bps better than the conduit lenders and are significantly better than the life companies.  Freddie continues to be the best lender for lower leveraged deals and Fannie for full deals.  However on any specific deal this dynamic does change.  Therefore you should always get quotes from both agency lenders.  For borrowers that are proceeds driven the conduits are still your best bet.  They often can get more proceeds than either agency lender. 

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