Category: Financing

Low Interest Rates Spur More Refinancing Activity

Even more favorable rates have unleashed a fresh wave of refinancing activity in recent months.

Borrowers have been enjoying a low interest rate environment for some time. Yet the further drop in interest rates this year has stoked a surge in refinancing activity.

The Federal Reserve kicked off the first of three rate cuts in late July, which subsequently pulled commercial real estate lending rates lower in the third quarter. Notably, the 10-year Treasury dropped by 50 basis points in August to a near cyclical record low of 1.47 percent. The favorable rates have unleashed a fresh wave of refinancing activity. “You are seeing a lot of borrowers paying off loans early to take advantage of the low rates,” says Peter Norrie, managing director, capital markets, at Cohen Financial in Portland, Ore.

For example, some of the 10-year loans that were done seven years ago were done at 5.5 percent, whereas borrowers now have an opportunity to refinance at sub-4 percent. So, the math on that works very well for some borrowers, even if they have to pay a penalty for an early exit, notes Norrie.

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CRE Lenders Try to Hold On to Underwriting Discipline to Avoid Future Refi Risk

In a market with high demand for new loans, lenders are trying to structure deals with an easy exit at maturity.

The drop in interest rates has been great news for borrowers, with low cost of capital that is effectively giving them more buying power. Yet, for the most part, lenders are keeping borrowers in check on leverage and structuring deals with an eye on an easy exit at maturity.

Lenders learned some hard lessons in the last recession that are now being put to work to mitigate future refinancing risk. “We’re nowhere near the same place that we were back before the Great Financial Crisis,” says Tom Genetti, a managing director at capital services provider Berkadia. “I think the discipline being shown in the marketplace today is substantially higher. There is real equity in these deals, and no one is allowed to put in fluff or big fees to make their (equity) look bigger than it should be.”

There’s a lot of data that goes into refinance tests, and that data definitely helps the lender get comfortable with the refi risk coming out in the future, adds Jeffrey Erxleben, executive vice president, regional managing director with NorthMarq Capital in Dallas.

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Maximizing LIHTC Investments: Understanding Nuances Can Determine Profit

Underwriting structuring and due diligence risk management for Fannie Mae, Freddie Mac, or HUD financing vary greatly, as with government money comes a host of requirements.

The Low-Income Housing Tax Credit (LIHTC) is a federal tax credit created through the Tax Reform Act of 1986, and administered by the IRS, to encourage private equity investment in affordable and public housing by commercial real estate stakeholders.

Tax incentives are provided in exchange for capital for development and/or financing costs directly used to create and preserve affordable housing, including new construction, acquisition, or rehabilitation of existing properties. These tax credits are proportionally set aside for each state based on population and are distributed to the state’s designated tax credit allocating agency. These state agencies then distribute the tax credits based on the state’s affordable housing needs and federal and state-specific program requirements. This is known as the Qualified Allocation Plan (QAP) process. The Federal Housing Finance Agency also recently increased the lending caps for Fannie Mae and Freddie Mac, which have been putting more capital into LIHTCs since 2018, to $100 billion per agency for five quarters. The FHFA will also require that 37.5 percent of agency lending be “mission-driven, affordable-housing” loans. Earlier this year, The Department of Housing and Urban Development (HUD) announced the start of a LIHTC Pilot Program, including an expedited review process for loan approvals for new construction or rehab tax credit projects.

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Lenders Won’t Cover Rising Construction Costs on Multifamily Projects

To make up for rising materials costs, apartment developers are being forced to put more equity into their projects.

Low interest rates are not enough to make up for the rising cost of construction on new apartment building projects.

“The drop in interest rates will not make a bad project look good,” says Matthew Swerdlow, director of capital services for Ariel Property Advisors, a real estate and advisory services firm based in New York City. “If it didn’t work with higher interest rates, it might not work with low.”

Apartment developers across the U.S. are struggling to pay for the rising cost of construction. Banks and debt funds are still eager to make construction loans at low interest rates, but these loans are not typically large enough to cover the higher cost of development. Many developers are now being forced to accept lower profits to make their deals work.

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Fannie-Freddie Fall as Trump Plan Shows Quick Windfall Unlikely

Treasury officials acknowledged their recommendations could take years to implement.

(Bloomberg)—The Trump Administration’s plan to release Fannie Mae and Freddie Mac from their government shackles laid out a vision that could eventually lead to hedge fund managers minting riches on their investments in the mortgage giants.

But the Treasury Department’s proposal left much to be ironed out, signaling there might not be a windfall unless President Donald Trump wins re-election in 2020. That sentiment was palpable on Wall Street Friday with Fannie and Freddie suffering their biggest one-day drops since January.

Treasury officials themselves acknowledged that their recommendations could take years to implement — a timetable that would extend beyond Trump’s first term. And the report, released late Thursday, left it to a politically divided Congress to handle some of the most sweeping changes.

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How rate sensitive are borrowers? Slight uptick in interest rates leads to decline in mortgage applications

MBA report shows mortgage applications fell in last week

Are mortgage borrowers sensitive to small movements in interest rates? Recent data shows that refinances are on the rise thanks to the low interest rates of the last few weeks, but what happens if mortgage rates start to move back up? Will that demand dry up just as quickly as it appeared, even if rates only pick up by a few basis points?

It appears that may be the case, as new data from the Mortgage Bankers Association shows that mortgage applications fell for the second straight week as mortgage rates increased for the first time in more than a month.

According to the MBA’s Weekly Mortgage Applications Survey for the week ending Aug. 23, 2019, mortgage applications fell by 6.2% on a seasonally adjusted basis from one week earlier.

On an unadjusted basis, the Market Composite Index, a measure of mortgage loan application volume, fell 7% compared with the previous week.

Interestingly, the decline was seen across both purchase and refinance applications, perhaps indicating that borrowers, especially those looking to refinance, are paying close attention to mortgage rates.

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PMI gains as fewer first-time homebuyers use FHA

Most young buyers aren’t waiting to save for a 20% down payment

The share of first-time homebuyers using conventional mortgages that require private mortgage insurance, or PMI, to compensate for low down payments increased in the second quarter while the use of FHA loans fell.

Fannie Mae and Freddie Mac typically require buyers to purchase PMI if they’re using down payments smaller than 20% of a home’s value. While PMI allows buyers to get into a property earlier than if they waited to save for a larger down payment, it can add hundreds of dollars to a monthly mortgage bill. FHA loans also charge a monthly insurance premium which can be lower than PMI, depending on a borrower’s credit score.

The share of first timers using conventional mortgages with low down payments requiring PMI rose 6% from a year earlier, while the share using FHA mortgages fell 5%, according to a report from Genworth, one of the nation’s largest providers of PMI.

Overall, purchases of single-family homes by first-time buyers dropped 4% to 559,000 in the second quarter, the report said. The total share of first timers using some form of low down payment mortgages was about 80%, Genworth said.

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Life Companies Find CRE Lending Opportunities in a Volatile Market

Some life company lenders are offerings interest rates as low as 3 percent.

Life insurance companies have maintained a steady appetite for commercial real estate debt over the past several years. And some see recent interest rate volatility as an opportunity to edge out the competition.

A few life companies have tapped the brakes on lending amid interest rate volatility and are waiting for things to smooth out, but the majority remain active participants, notes Jeffrey Erxleben, executive vice president/regional managing director at NorthMarq Capital, a commercial real estate debt and equity provider. “A lot of life companies view some of the volatility in the market today as a good opportunity to pick up good commercial loans that are out there. So, we see them being pretty aggressive,” says Erxleben.

Interest rate volatility has given life companies an opportunity to distinguish themselves compared to other capital sources. Notably, life companies are being aggressive on rates, with some lenders offering rates as low as 3 percent. They have also added different options to create value for borrowers, such as pre-payment flexibility, notes Erxleben. Life company lenders bring certainty of close, along with an ability to rate-lock early so there is less interest rate risk for the borrower.

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Low-income Housing Tax Credit Prices Remain Steady

Syndicators discuss income averaging, GSEs, and market concerns.

A little more than a year after “income averaging” was introduced into the low-income housing tax credit (LIHTC) program, the option is being pursued in a number of projects.

In sister publication Affordable Housing Finance’s annual midyear survey, syndicators reported closing on more than 65 income-averaging deals around the country, with more coming down the pipeline.

The option expands the reach of the LIHTC program to more families by allowing LIHTC-qualified units to serve households earning as much as 80% of the area median income (AMI) as long as the average income limit at the overall property is no more than 60% of the AMI, but these deals require additional scrutiny and underwriting.

Several syndicators are stressing the need for a buffer to make sure projects stay within the AMI requirements.

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Bank or Private Loan: Which Financing Strategy Should You Choose?

What to consider when choosing a lender for your real estate investment.

Borrowers looking to increase their assets and diversify their portfolios have more financing options today than ever before. Yet securing the proper financing for a real estate project can prove to be challenging, especially considering investment strategy is not a one-size-fits-all approach. Investors can choose to borrow from a traditional bank or a private lender and it’s important to note the complexities of each to see how they fit into your overall plan. Let’s take a closer look at these two popular financing methods.

Borrowing from a bank

Bank lending is the most traditional and commonly sought-after financing strategy for commercial real estate professionals. According to a recently published report by the Mortgage Bankers Association (MBA), 2018 was another stellar year for commercial and multifamily mortgage originations with a 14 percent rise in borrowing reported at the close of the year. Additionally, a preliminary measure from the 2018 fourth quarter mortgage originations survey pointed to volume that was 3 percent higher than the record-breaking $530 million reported at the close of 2017. Multifamily, industrial, offices, hotels, and retail spaces ranked as the most in-demand properties contributing to this increase.

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