Done Deals: Longer-Term Treasuries Throw Real Estate Capital Markets into Tailspin

Tuesday, July 2, 2013

Longer-Term Treasuries Throw Real Estate Capital Markets into Tailspin

. Chicago, IL -- What a difference a month can make! Short and longer-term treasuries skyrocketed by a half a point causing throwing the real estate capital markets into a tailspin.

Instant reaction varied from pulling out of the market to directly passing through interest rates to borrowers. In reality, most funding sources chose a path somewhere in between including structuring the following underwriting solutions:

* Rate-locked deals closed without any fanfare, while loans under application (but without rate-locks) were adjusted by 10 to 25 basis points, depending upon the specific terms and conditions. Many lenders tried to
absorb about half or less of the rate increases to show good faith to their
clients.

* Except for very highly leveraged loans, most funding sources made every effort to keep loan proceeds the same, despite more stressed underwriting.

* Debt service coverage, almost instantly, became the most important loan sizing benchmark, as increased rates quickly surpassed loan-to-value and debt yield thresholds. Today, 125% debt coverage is most common value, but exceptions are made for existing loans already in play. Even LIBOR-based structures can limit proceeds based on stressed rates starting at 6% for underwriting purposes.

* Rate floors are increasingly popular- for example, 4% for ten-yearloan. However, most lenders start loan discussions at rates in the mid-4%
range, given current mortgage spreads (mostly unchanged).

Jeanne Peck

* Forward-delivery rate-locks beyond 90 days are mostly on hold as
lenders wait for more market clarity.

* Floating-rate debt is generally unaffected as witnessed by flat
LIBOR pricing.

Jeanne Peck, director of the Real Estate Capital Institute, emphasizes, "The
dramatic widening of interest rates clearly illustrates the differences between various types of lenders, namely life companies, banks and Wall Street."

She adds, "Wall Street responds instantly, while life companies and banks try to absorb some of the volatility while chasing quality; banks chase customer relationship and balance sheets."

The Real Estate Capital Institute(r) is a volunteer-based research organization that tracks realty rates data for debt and equity yields. The Institute posts daily and historical benchmark rates including treasuries, bank prime and LIBOR. Furthermore, call the Real Estate Capital RateLine at 7RE-CAPITAL (773-227-4825) for hourly rate updates.