I think nowadays this is one of the most asked questions in our industry. Clients, brokers and prospect buyers are
wondering, "Should I wait to purchase or refinance considering rates ‘seem' to be going down thanks to the
Feds cutting their rates?"
Hoping to halt a market break down and avoid a recession, the Federal Reserve began reducing rates in 2007, but what
does it mean when the Feds cut its rates, what rates are actually being reduced? The federal funds rate is the interest banks
charge each other for overnight loans, which a bank might need to meet its required reserve obligations.
Loans that are directly tied to the Prime Rate (which is based
on the federal funds rate) will see an immediate benefit. For example a home equity line of credit (HELOCs), personal lines
of credits, credit cards and car loans to name a few.
On the other hand, the Fed lowering rates has very little influence on commercial loans rates because commercial
loans are priced and structured based on the bond market where commercial loans are mostly packaged together and then sold
on that secondary (bond) market.
So then, how do the stock and bond markets impact commercial loans?
With changes in the economy and the stock market being so volatile, many investors pour their money into Treasury
bonds, which makes the bond yield to start decreasing in value as more money is poured into that market in turn causing mortgage
rates to drop. Once the stock market starts rebounding, investors start moving their funds to different stock options and
out of the bond market, causing the bond yield to go up, driving mortgage rates up.
If you are waiting for commercial mortgage rates to go down
even further, you might be missing out on the opportunity of securing a real good loan today. Looking at previous trends,
mortgage rates today are at the lowest levels now since 2005. But remember, in commercial lending, rates are not everything.
a result of the ups and downs of the bond market, lenders have placed "floors" on their rates and terms. Meaning,
no matter how low the bond markets go - they will stick to a minimum rate that they are willing to lend at. Furthermore, because
the bond market is so volatile, many lenders are getting "dried up" on available funds to lend. It is difficult
to assess what will happen in a recessionary period but one thing already happening is that commercial underwriting guidelines
are getting tighter every day and lenders are choosing very carefully their lending products.
At Global Funding Partners we are constantly searching up to
date information from our lending sources, and we have seen from lay-offs, company closures to dramatic changes on lending
products. But I would not ask you to just take my word for it so I am providing you with actual data.
Every quarter, the Federal Reserve conducts a study of bank
loan demand and underwriting standards. The "Senior Loan Officer Opinion Survey on Bank Lending Practices". "The January 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and
demand for, bank loans to businesses and households over the past three months. Special questions in the survey
queried banks about changes in terms on commercial real estate loans during 2007, expected changes in asset quality in 2008,
and loss-mitigation strategies on residential mortgage loans. In addition, the survey included a new set of recurring questions
regarding revolving home equity lines of credit. This article is based on responses from fifty-six domestic banks and twenty-three
foreign banking institutions.
If you are looking for the Cliff Notes: "The January survey, domestic and foreign institutions
reported having tightened their lending standards and terms for a broad range of loan types over the past three months. Demand
for bank loans reportedly had weakened, on net, for both businesses and households over the same period. "
The survey includes the following topics and a "brief"
of their answers are as follow:
Commercial and Industrial Lending - one-third of domestic institutions-a larger net fraction than
in the October survey-reported having tightened their lending standards on C&I loans to small as well as to large and
middle-market firms over the past three months.
in credit lines costs, as well as pricing on riskier transactions.
About 85 percent of foreign banks-a higher net fraction than in the October survey-indicated that they had increased
spreads of loan rates over their cost of funds over the past three months.
Commercial Real Estate lending - About 80 percent of domestic
banks reported tightening their lending standards on commercial real estate loans over the past three months, a notable increase
from the October survey. Concerning loan demand, about 45 percent of both domestic and foreign respondents, on net, reported
weaker demand for commercial real estate loans over the past three months.
Lending to Households - Significant numbers of domestic respondents
reported that they had tightened their lending standards on prime, nontraditional, and subprime residential mortgages over
the past three months; the remaining respondents noted that their lending standards had remained basically unchanged. About
55 percent of domestic respondents indicated that they had tightened their lending standards on prime mortgages, up from about
40 percent in the October survey.
Regarding loan demand, about 35 percent of domestic institutions, on net, indicated that they had experienced weaker
demand for consumer loans of all types.
Special Questions on Loss-Mitigation Strategies on Residential Mortgage Loans - A final set of special
questions queried domestic respondents about strategies that they expect their banks will employ in order to mitigate a potential
deterioration in the credit quality of their bank's residential mortgage loan portfolio or of the mortgage loans that
their banks service for others. More than 85 percent of respondents indicated that they expect loan-by-loan modifications
based on individual borrowers' circumstances to be at least a somewhat signification loss-mitigation strategy at their
banks. More than 65 percent of respondents also anticipate steps - such as short sales or deed-in-lieu of foreclosures-in
which borrowers lose possession of the house to be at least somewhat significant loss-mitigation steps at their banks.
For Further information, please visit
the Federal Reserve website at: http://www.federalreserve.gov/
We hope you find the
information above educational and it aids you in making the right decision for your real estate portfolio and overall financial
planning. From a lending perspective we would like to leave you with this thought:
If you currently have a variable rate loan now is the time to
ensure yourself great rates and terms for the long run, even if it is for just 5 years from now. If you found a great deal
on a purchase opportunity, getting a great loan on that purchase will help you structure the transaction to your benefit.
Holding off for better rates or terms, based on the information above, seems to be a risky decision. But as always, it remains
in the eye of the beholder.
Don't know what lender will approve your loan? We do! Come to Global Funding Partners, we are:
Mortgage Business Partner, Anywhere in the U.S.A.