Bond Market Volatility: Financing updates

Multi-Family and Apartment Investing
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Bond Market Volatility: Financing updates

Spencer Gray
Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes

While there has been major volatility in the stock market as of recent there has been even more in the bond market which is more unique than the stock market swinging. Combined with the anxiety related to the COVID-19 we're not exactly on terafirma.

This week we saw the 10 year treasury bottoming out at a historic 0.35% ( it was 1.8% at the beginning of the year, an 80% decline in yield/increase in price). Unsurprisingly there has been a rush to take advantage of this unprecedented situation with the prospect of lower rates. According to one lender, Freddie Mac as of Thursday has $9B in their pipeline which roughly equals their annual production to date. Fannie and Freddie have caps this year of $100B each with the idea they would do $25B per quarter. If we stay remotely on the same trajectory we will hit the quarter caps and would be on pace to exceed the $100B caps. However, the capacity to process these new loans is declining with the spread of the virus. Between increased demand, price volatility, and capacity issues it not surprising that spreads will be moving and widening.

For those are are still trying to get deals done what are you seeing out there in terms of multifamily financing?

As a followup question, is anyone seeing deals be put on hold? Are you considering taking a pause on any acquisitions/transactions?

We have several deals we are in the process of negotiating PSAs and lining up financing so we're reexamining options and communicating with lenders on a regular basis. 

This is what we are seeing:

  • HUD is moving very slow with most personnel working from home. The 3-year rule was relaxed and has only further increased volume. Rates around 3.25%.
  • Hospitality lending has essentially grinded to a halt.
  • Lobbying is ongoing with FHFA to widen lending caps
  • Fannie is generally 10-20 bps wider than Freddie
  • Recent quote for a 10 year Freddie 75% LTV/1.25x, 5 years IO , 279 spread over a 75 treasury floor, 3.6% rate with 5bps for index lock.
  • Life insurance company's still lending, rates with 3%-3.25% floors. Some projects have been able to lock below 3% but that has dried up apparently. 
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Greg Dickerson
Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
6y
Originally posted by @Spencer Gray:

While there has been major volatility in the stock market as of recent there has been even more in the bond market which is more unique than the stock market swinging. Combined with the anxiety related to the COVID-19 we're not exactly on terafirma.

This week we saw the 10 year treasury bottoming out at a historic 0.35% ( it was 1.8% at the beginning of the year, an 80% decline in yield/increase in price). Unsurprisingly there has been a rush to take advantage of this unprecedented situation with the prospect of lower rates. According to one lender, Freddie Mac as of Thursday has $9B in their pipeline which roughly equals their annual production to date. Fannie and Freddie have caps this year of $100B each with the idea they would do $25B per quarter. If we stay remotely on the same trajectory we will hit the quarter caps and would be on pace to exceed the $100B caps. However, the capacity to process these new loans is declining with the spread of the virus. Between increased demand, price volatility, and capacity issues it not surprising that spreads will be moving and widening.

For those are are still trying to get deals done what are you seeing out there in terms of multifamily financing?

As a followup question, is anyone seeing deals be put on hold? Are you considering taking a pause on any acquisitions/transactions?

We have several deals we are in the process of negotiating PSAs and lining up financing so we're reexamining options and communicating with lenders on a regular basis. 

This is what we are seeing:

  • HUD is moving very slow with most personnel working from home. The 3-year rule was relaxed and has only further increased volume. Rates around 3.25%.
  • Hospitality lending has essentially grinded to a halt.
  • Lobbying is ongoing with FHFA to widen lending caps
  • Fannie is generally 10-20 bps wider than Freddie
  • Recent quote for a 10 year Freddie 75% LTV/1.25x, 5 years IO , 279 spread over a 75 treasury floor, 3.6% rate with 5bps for index lock.
  • Life insurance company's still lending, rates with 3%-3.25% floors. Some projects have been able to lock below 3% but that has dried up apparently. 

Things are still moving forward and I am advising people to keep on with business as usual in what ever capacity / working situation as needed. Capital is abundant and cheap and will continue on that road with the exception of hospitality. That funding will dry up and get very expensive until things have cleared up. It will take a bit longer to close as you mentioned. 

I have seen a couple of sellers cancel negotiations until further notice.

Equity will get easier to raise with the situation in the stock market. Once people rebound they will be looking for safer more stable alternatives and will be willing to accept lower returns in exchange for stability. Those who got out before the decline are already looking fro places to park capital.

We will see some defaults with all types of properties as some owners are over leveraged and had little to no reserves to weather any kind of downturn. This will create opportunities to buy assets and or JV by proving capital to struggling owners and companies.

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  • Spencer Gray
    OP
    Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes
    6y

    Additional followup: Who all is examining refinancing eligible assets?

    0Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Spencer Gray:

    While there has been major volatility in the stock market as of recent there has been even more in the bond market which is more unique than the stock market swinging. Combined with the anxiety related to the COVID-19 we're not exactly on terafirma.

    This week we saw the 10 year treasury bottoming out at a historic 0.35% ( it was 1.8% at the beginning of the year, an 80% decline in yield/increase in price). Unsurprisingly there has been a rush to take advantage of this unprecedented situation with the prospect of lower rates. According to one lender, Freddie Mac as of Thursday has $9B in their pipeline which roughly equals their annual production to date. Fannie and Freddie have caps this year of $100B each with the idea they would do $25B per quarter. If we stay remotely on the same trajectory we will hit the quarter caps and would be on pace to exceed the $100B caps. However, the capacity to process these new loans is declining with the spread of the virus. Between increased demand, price volatility, and capacity issues it not surprising that spreads will be moving and widening.

    For those are are still trying to get deals done what are you seeing out there in terms of multifamily financing?

    As a followup question, is anyone seeing deals be put on hold? Are you considering taking a pause on any acquisitions/transactions?

    We have several deals we are in the process of negotiating PSAs and lining up financing so we're reexamining options and communicating with lenders on a regular basis. 

    This is what we are seeing:

    • HUD is moving very slow with most personnel working from home. The 3-year rule was relaxed and has only further increased volume. Rates around 3.25%.
    • Hospitality lending has essentially grinded to a halt.
    • Lobbying is ongoing with FHFA to widen lending caps
    • Fannie is generally 10-20 bps wider than Freddie
    • Recent quote for a 10 year Freddie 75% LTV/1.25x, 5 years IO , 279 spread over a 75 treasury floor, 3.6% rate with 5bps for index lock.
    • Life insurance company's still lending, rates with 3%-3.25% floors. Some projects have been able to lock below 3% but that has dried up apparently. 

    Things are still moving forward and I am advising people to keep on with business as usual in what ever capacity / working situation as needed. Capital is abundant and cheap and will continue on that road with the exception of hospitality. That funding will dry up and get very expensive until things have cleared up. It will take a bit longer to close as you mentioned. 

    I have seen a couple of sellers cancel negotiations until further notice.

    Equity will get easier to raise with the situation in the stock market. Once people rebound they will be looking for safer more stable alternatives and will be willing to accept lower returns in exchange for stability. Those who got out before the decline are already looking fro places to park capital.

    We will see some defaults with all types of properties as some owners are over leveraged and had little to no reserves to weather any kind of downturn. This will create opportunities to buy assets and or JV by proving capital to struggling owners and companies.

    1Reply
  • Shahriar Khan
    Investor · Houston, TX · Member since 2010 · 234 posts · 145 votes
    6y

    @Spencer Gray great thread ...Given we are in Texas ,we are adding 2 months for option on top of typical time frame for due diligence and closing . No more hard money and quick due diligence options. Happy to work with asking price but we took a position to understand COVID 19 impact .. 

    For us on refi we have found the following in addition to what you already have 

    1. HUD is off the table for assets less than 4 mln given the legal fee + other fee . Beyond agency , i have found 30 yrs AM + 10 yrs term with Local credit union on refi. (4.5% , 10 yrs term , 30 yrs AM and 1 pts, cash out refi , 80% LTV, 85% of higher occupancy, 45 days to close) ..

    2. HUD is off table on new constructions (4 mls or less) since loan takes 9-12 months to get approved. Another local Credit Unions is working aggressively on terms for new construction. (4.5% , 10 yrs term , 25 yrs AM , 1 pt and close in 60 days) ..

    0Reply
  • Spencer Gray
    OP
    Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes
    6y

    @Greg Dickerson great analysis. I think it's wise not to panic but to adapt while moving forward. I agree that this will only increase interest in multifamily investment when investors compare their experience with public equities or bonds.

    @Shahriar Khan Thanks for the updates. I would imagine parties on either side are being reasonable with extending timelines.

    I would think that unless there is an impeding note maturity (could create buying opportunities), parties who wanted to do a deal a week ago will want to do that deal 3-6 months from now. 

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    6y

    I usually don't make anecdotal comments on the forums but I expect certain aspects of commercial lending to tightening up significantly over the next 1-2 months.  China, Italy, Spain, and the US on lock down has a profound impact on the economy.  And, yes, the US is already on non-governmental lock down (excluding Charmin).

    1Reply
  • Bill Boudreau
    Clearfield, UT · Member since 2016 · 18 posts · 15 votes
    6y

    Interesting discussion. I’ve been looking to refi a property using Fannie Mae small balance program. Rates and terms seem like a great deal right now.  My loan broker is still thinking we can get it done in 60 days or so, not sure it’s going to be that quick.

    In my case, I’m just evaluating the benefit of refinancing now, vs the costs and prepayment on existing debt. 

    0Reply
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