How 'How low can you go?' is mortgage-rate mantra
Author: Andrew R. Little
Source: Richmond Times-Dispatch
Date: 09-09-2002
How 'How low can you go?' is mortgage-rate mantra
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The last time the yield on the 10-year U.S. Treasury was this low was 1963 and Chubby Checker had a chart-topping hit called "Limbo Rock."
As in the song, many analysts, bankers and borrowers are singing, "How low can you go!"
Currently, 10-year commercial mortgage rates are in the 5.80 percent to 6.00 percent range and 5-year rates are lower, ranging from 5.15 percent to 5.25 percent according to the Barron's/John B. Levy & Co. National Mortgage Survey.
The obvious and simple an swer to "What is keeping com-mercial rates at historic lows?" is that U.S. Treasury yields are at rock bottom levels.
There are no simple answers, however, to the questions most asked: "How long will they stay this low, and are they going lower?"
Rates have fallen very quickly, in virtual lockstep with the yield on the U.S. Treasury. In less than three months, coupons and Treasury yields have fallen more than 100 basis points, taking many borrowers and lenders by surprise.
In addition to the precipitous fall in the U.S. Treasury yield, real estate has been riding a popularity wave, making loans secured by real estate very much in demand.
On a relative basis, August was an extremely active month for lenders. However, loan demand from insurance companies, pension funds and Wall Street continues to outweigh loan supply, creating a borrower's market.
Although lender pipelines are filling up because of record low rates, the August calendar for new commercial mortgage backed securities, otherwise known as CMBS, offerings was fairly light.
Banc of America led the most recent CMBS offering with a $1.7 billion transaction that met with strong buyer demand.
Included in the offering was a $38.4 million loan secured by the 334,625-square-foot Two James Center.
According to an offering "pre-sale" report issued by Fitch Ratings, the $115-per-square-foot loan was underwritten to a 73.8 percent loan-to-value by Banc of America, which implies an underwritten value of $156 per square foot.
Fitch Ratings recently released a study of defaults that occurred in 2000 and 2001 for conduit loans (loans batched up and sold as CMBS).
The study had no real surprises; hotel and health-care-related loans suffered the highest default rates when accounting for defaulted loan balances as a percentage of total loan balances, and retail loans in 2001 had the highest incidence of default.
An interesting side note was that the reason retail loans suffered the largest incidence of default was largely because of one tenant that accounted for some 31 percent of all defaulted retail loans in 2001.
That tenant was Heilig-Meyers, the Richmond-based furniture retailer that originally filed for bankruptcy in 2000 and then decided to liquidate its stores in 2001.
Andrew Little is an investment banker with John B. Levy & Co.