Wednesday, December 2, 2015

Real Estate Capital Instiitute Predicts Fed Preparing Bond Markets for First Rate Hike in 10 Years

Jeanne Peck
Chicago, IL - Real Estate Capital Institute predicdts The Fed is clearly preparing bond markets for the first rate hike in nearly a decade.  

Investors react by pricing two- and 10- year benchmark Treasurys to the thinnest margin since this Spring.   With the markets psychologically factoring such increases,
longer-term bond investments [including mortgages] will benefit from a slow, predictable pace of increases mainly based upon tame inflation news.

Even as longer-term benchmark rates gain more predictability, mortgage market players react differently to pricing realty risk premiums over these yields.  Major players carve out niches as follows:

Life Companies: Without question, these balance-sheet funding sources win battles on rate, less so on leverage. Fixed rate loans can be had starting in the higher-3% range. Virtually all players in this sector have targeted
appetites well above the amount of deal volume, as investment departments shift more dollars into commercial realty debt instead of corporate bonds.

Conduits:  Relentless volatility hampers Wall Street from providing consistent pricing as AAA-pieces of the loan continue to widen to their highest levels in the year; BBB-piece price widening shows no mercy on the other end of the pricing spectrum. In fear of wiping out profitability due to mismatched pricing during loan aggregation, Wall Street sources wait to
the last minute to finalize loans.  Expect more credit discipline and conservative underwriting than in the recent past, but higher leverage levels than life companies with pricing typically starting in the mid-4%

Agencies:  Despite wider pricing in recent months, agencies lead in
higher-leverage multifamily lending.  Agencies have a generous allocation of
funds for the foreseeable future.  Execution consistency and continuous
market presence remain the largest reasons for the continued success of this
funding sector.

Banks:  Local and regional banks fill any liquidity gaps for borrowers in
non-core markets.  Flexibility, especially for shorter-term debt, is the
hallmark funding characteristic of banks.  Pricing tends to fall somewhere
between life companies and conduits.

Ms. Jeanne Peck of the Real Estate Capital Institute's Jeanne Darrow Peck
advises, "keep in mind-rates are still relatively low, even as spreads
widen."  She adds, "The planned Fed actions reflect a vote of confidence in
the economy, and resulting mortgage rate impacts should be gradual and work
within project budgeting goals and objectives."

For a complete copy of the company’s news release, please contact:

Jeanne Peck,
 Executive Director

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