Chicago, Illinois, September 1, 2019 – Benchmark treasury rates downward movement continues, as ten-year treasuries hit the lowest levels in the past four years. However, the rate drop may not directly correspond to mortgage rates based upon the following factors:
Rate Floors: Afraid to be caught in the switch if rates suddenly increase, lenders are re-instituting floors. Mid-three-percent or higher, absolute mortgage rate floors resurface for ten-year permanent loans with fixed-rate formats. Shorter-term loans (typically five years or less), less affected, as such loans are often priced on a floating rate format.
Funding Supply: As the government looks to privatize, GSE spreads widen. GSE mortgage spreads increased as much as 30 basis points. Also, less pricing discounts offered or eliminated, including “green,” workforce, etc. As the GSE pricing gap narrows compared to life companies, CMBS, banks, and debt funds, more pricing parity exists within the marketplace. Competing funding programs shift more toward offering more dollars (leverage), liberal debt coverage adjustments, and other underwriting variables.
Leverage: More lenders, specifically balance-sheet bridge sources, fill the gap on maximizing loan proceeds. Loan proceeds above 70% to 90% leverage are available at pricing in the higher-single-digit range – still low by historical standards. Some of these players will fund construction and value-add loans with terms typically targeting three years.
Alternative Investments: Mortgage lenders moving more funds into other similar risk profile investments, such as Baa bonds. Ultimately, mortgage pricing needs to stay competitive with overall bond pricing available on Wall Street.
Mr. John Oharenko, the executive director of the Real Estate Capital Institute®, believes, “If lower benchmark rates stay in place for a couple of consecutive quarters or more, mortgage rate floors may evaporate. At such time, investors will be accustomed to a ‘new normal,’ otherwise; funding sources are playing a wait-and-see game.”