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| John Oharenko |
Chicago, IL,
Nov. 1, 2019 – The Real Estate Capital Institute® (RECI) notes The Fed cut its benchmark rate a quarter point just before the
end of October, the third such drop this year.
As agency
lenders and other traditional sources reach their mortgage lending limits, Wall
Street and private capital players expand market share. Other
important trends to watch include:
Japan
continues to stagnate, while Australia dropped its lending rates to the lowest
levels in history. The Eurozone demonstrates slower industrial
output
Lastly,
the US/China trade war provides further pressure for low growth. As
such, global demand should continue for US treasuries as safe-haven
investments, translating to favorable long-term mortgage rates in the
foreseeable future.
Diversified
Funding Sources: The Real Estate
Investment Trust (“REIT”) lending format, in particular, is now an important
source of providing liquidity for housing, since Freddie Mac and Fannie Mae’s
role become more limited.
These
lenders are issuing more private label mortgage bonds that include blended
agency debt. Expect other private, public and institutional
investors to offer more programs based on changing risk/yield profiles.
Few
borrowers make realty debt decisions solely based on pricing. Other
terms such as interest-only payments, extended amortization, reduced (or
eliminated) recourse provisions, leverage and prepayment flexibility dominate
negotiations.
Regulatory
Environment: Since the Great Recession, various
federal banking regulations tamed aggressive underwriting practices for
construction and conduit loans.
More
typical leverage is 65% of value, as banks focus on credit quality over other
underwriting benchmarks such as leverage. As banks take a more
active roles in leading conduit debt offerings, less risky loans prevail.
Lastly,
construction loans are more carefully structured as select markets show signs
of supply/demand imbalance for new developments.
On
the other end of the regulatory spectrum, FHA/HUD underwriting requirements are
being streamlined to help provide more competitive terms.
John Oharenko, executive director of Real Estate Capital Institute’s®,
recommends, "More diverse funding sources entering the market help
maintain a healthy balance and overall better liquidity.
The
Real Estate Capital Institute® 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.
Contact:
John Oharenko
Executive Director