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| John Oharenko |
Chicago, IL - Benchmark rates hit a three-year high this week, as investors track Fed monetary moves in
the face of new government spending needs and worldwide economic
growth.
Following this trendline, mortgage rates are on the rise, although
not at full parity. Property owners can expect to see the following
underwriting trends over the
coming months:
Active Rate
Management:
Low rates are no longer taken for granted, and simply capturing cheap debt is becoming more
difficult. With short and long-term rates rising, hedging and other
interest-rate protection strategies are resurfacing. Moreover, creative
lenders offer options such as float-to-fix loans (or vice versa) for greater
optionality, if borrowers feel compelled to lock into fixed rates due to
increased pricing concerns, or alternatively need to reorganize loans to avoid
incurring prepayment penalties associated with fixed-rate debt (usually
necessary, if an asset
sale is planned in the near future).
Tighter
Spreads:
The trade-off of lower rates for lower leverage benefits
borrowers targeting the best pricing. Even as
benchmark rates climbed over
thirty basis points within the month, lenders
absorbed spreads to keep loan
production fluid. Mortgage rates are only five to
fifteen basis points
higher, as a net result.
Debt Service
Coverage:
Lower leverage loans are the norm in comparison to
historical levels. As prices rise for premier
properties, borrowers are
forced to accept less proceeds since debt service
coverage supersedes
loan-to-value limits as a key underwriting variable
in these cases. High
prices directly translate to higher equity
contributions, in exchange for
favorable debt terms. For best pricing, 65% LTV or
less are commonplace,
often based upon 1.40X or more debt service
coverage.
Mr. John
Oharenko, director of the Real Estate Capital Institute(r) ,
advises, "Borrowers are definitely paying
attention to higher rates, after
enjoying extremely low rates for a several years.
As rates gradually rise,
sellers and buyers will realign their expectations,
but at a slower,
wait-and-see pace."
For more information, please contact:
Jeanne Peck, Executive Director
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