The foundation of long-term mortgage rates

Last year the 10-year treasury enjoyed lower levels.  CRE rates for long term money at that time ranged generally from 3.75% to 4.50%, depending on product type and LTV ratio.  This year, as you can see from the chart, the 10-year raced up, then leveled off and began a sporadic descent down, as everyone awaits the short-term rate increases by the Fed.  This is essentially the flattening of the yield curve, which is GREAT for long term loans and borrowers seeking long term loans.  Bank financing is generally based on short term rates; however, we believe banks will definitely cut back on CRE loans if they haven’t started already.  Non-bank financing will become more attractive over the next year as bank’s are cutting back and short-term rates are increasing.  The likely reduction in commercial real estate loans from banks will be due to the bank regulators, who do not like to see too much concentration in the portfolio.  The old pendulum will be swinging if not already at banks.  Loan amounts are being cut potentially in all financing sectors due to DSC ratios not achieving adequate underwriting targets.


Generally, it depends on LTV ratios.  The cheapest money is always related to lower LTV ratios and high debt yields (NOI / loan amount), which result in higher DSC ratios.  Only FHA multifamily and senior housing rates do not price differently at maximum LTV ratios (up to 85% for non-cash out transactions.)  

Here is what we have seen in the market:

Current FHA rates fixed for 35 years is 3.95%, approximately 112 basis points over the 10 year.  These spreads (rate over the 10-year treasury) were quite tight but are now WIDENING.  

Insurance rates fixed for 10 years range from 130 basis points to 170 basis points over the 10-year treasury, depending on the LTV ratio and market.  This results in the underlying rate at 4.13% to 4.44%.   Smaller deals (below $5 million) will increase pricing by approximately 30 basis points.  The spreads are still rather thin and have not yet begin to widen.  That will change soon.  Just look at investment grade bonds (BBB and better).  As of today, the yield is 4.25%.  It is easier and less risk to buy a liquid 10-year bond than invest in a loan asset that yields less.  Spreads are widening in all sectors, and it will happen here as well.

FNMA and Freddie Mac have provided nice reductions and pricing exceptions, particularly with “green initiatives” and property rent levels being categorized as lower than market median.  These initiatives can take 60 basis points off of the mortgage rate.  Mortgage rates are approximately 214 basis points above the 10-year treasury.   There are non-agency lenders quoting 180 basis points over the 10-year Treasury, which is quite attractive.  Both FNMA and Freddie Mac spreads have begun to widen.

We have an article that will be out in the Southeast Real Estate news May addition that address the potential challenges borrowers will have with banks over the next few years.  Please look out for that article.


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