Borrowers get white-knuckle ride despite falling interest rates on loans

Borrowers who tried to close loans in the past month were met with something similar to the story about cheaper hamburger meat that was for sale down the street but unfortunately no longer available.

Commercial mortgage rates came tumbling down along with the yield on U.S. Treasury bonds last month, but volatility in the capital markets affected the decision-making ability of lenders and gave borrowers a white-knuckled ride.

Despite the choppy market, rates ended the month markedly lower and now range from 5.25 percent to 5.40 percent for 5-year loans and 6.25 percent to 6.40 percent for 10-year loans, according to the Barron's/John B. Levy & Co. National Mortgage Survey. As one market participant observed: "Senior credit officers have a bad case of Enronitis; they're second-guessing every decision."

Indeed, the market was on edge most of the month and for good reason. The fear of a protracted economic slowdown, or even "double-dip recession," has every investor second-guessing decisions.

The same "second-guess" mentality spilled over into the public arena last month when City Council failed to approve a development agreement between Richmond and The Cordish Co., which would allow the real estate company to get started on their proposed $80 million Brown's Island mixed-use project.

The stumbling block was what members of City Council view as poor economic return on the $5.9 million in incentives Richmond would put up to finance public roadways and infrastructure. Those close to the project indicate that a significant portion of the “incentives" is necessary for any development of the eastern end of Brown's Island.

City Council's stalemate and the resultant setback come at an unfortunate time. City Council asserted their authority just as Richmond was riding a wave of publicity that has led to national developers focusing on the region, particularly the revitalization of downtown.

All is not lost however. According to John Woodward, Richmond's director of economic development, "This was an anomaly because of a shortened schedule with City Council not meeting in August; there have been discussions with the developer and the city since the [vote]."

On a positive note, loan delinquencies, according to Trepp LLC, have been virtually unchanged for more than six months. July delinquencies came in at 1.69 percent of total loans, while those in January were only a tad lower at 1.55 percent. The feeling in the market remains unchanged, as economic weakness will tend to push delinquencies higher. The data indicated that lodging and retail properties represent the largest percentage of delinquent balances.

This national trend can be witnessed locally with defaulted hotel loans going to foreclosure auctions.

The most recent sale was a foreclosure auction by a lender for the Holiday Inn at Exit 69 off Interstate 95. Virginia Beach-based Tranzon Fox handled the transaction for the lender, and the 167-room hotel was auctioned for $2.45 million, or $14,670 per room, a pittance compared to the cost to develop a new and similar hotel.

Andrew R. Little is an investment banker with John B. Levy & Co.