Bond Market Volatility: Financing updates

[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. 

[Greg Dickerson]

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.