Home > Mortgage Loans > Fence sitters respond to falling Mortgage Rates
Fence sitters respond to falling Mortgage Rates |
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Commercial mortgage rates go down sharply
throughout May and early June each year, according to the Barron's/John B. Levy & Co. National Mortgage Survey. In April 2004, prime mortgage rates for 5-, 7- and 10-year loans were all north of 10%; but after that it started declining and became single digits in May. Treasury curve closely followed this decline of mortgage rates, trimming all prime mortgage rates by a strong 3/8% to 1/2%. Demand for loans always goes up when mortgage rates hit single digits, and this time was no exception. A number of fence sitters determined it was time to take down fixed-rate funds. But there was no mad rush as expected. Many other borrowers are still playing the wait-and-see game, hoping that mortgage rates will go down at least another 1/2% or so. The pipeline of awaiting deals at most institutions were in the fair to modest range. One survey participant compared his pipeline to an accounts receivable aging schedule. The longer the transaction stayed on the list, the less chance there was of converting it to a done deal. The older pipeline deals seem to be waiting for mortgage rates and underwriting conditions, which aren't rational in today's market condition. In today's environment, converting a deal from pending to committed is no easy task. To be sure, competition over mortgage rates are quite common with developers and lenders each struggling to preserve that last 1/8% or so. But equally troubling is the question of the appropriate loan amount. Borrowers continue to object to today's tougher underwriting standards, which translate into lower loans amount. In some cases, today's lower loans just aren't sufficient to pay off the existing construction loans. With both sides standing firm, chances of an early end to these brush wars are seemed to be limited. Delinquencies, fearfully known as the "D" word in trade, have been discussed repeatedly in the survey discussions throughout. They will remain the way they are. Frankly, it was easier when these discussions were restricted to the Oil Patch. Oil could be made a convenient scapegoat. Now the fearful delinquencies have cropped up everywhere, in all sectors. The list includes regions like South Florida, Detroit, Boston and Minneapolis. On the other hand, the Pacific Northwest is seen as the hottest investing area and overbuilding is possible. Different institutional lenders are vexed because of the debt that is present in the whole project and the delinquencies are not taking place because of their poor underwriting. The second mortgages are in need of additional debt service. The reason why mortgage rates are not acceptable by the tenants: the projects already suffer from weak rentals and low occupancy. The reason for such a situation is the shrinking away of the developers from their responsibilities of maintaining and making capital improvements in a way to keep the subordinate debt current. In a vicious circle, the tenants keep away from such properties as they keep waiting for the improvements in the property. Today, most of the big homes maintain a strict watch over the subordinate debt and are even attempting to freeze it altogether. Real estate is definitely suffering from a recession, as the loan delinquencies and defaults are on a rise. The banking crisis is another reason for that. Therefore, falling mortgage rates cause increasing spreads but the prime-deals are still the same. |
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