Many Lenders Offering Low Rates for Multifamily

It seems like the perfect storm: investors are paying record prices to acquire residential rental apartments in metropolitan areas. And at the same time, financial institutions—especially regional and local commercial and savings banks—are offering the lowest rates for long-term financing for this asset class. Ramping up the competition, Fannie Mae, Freddie Mac, insurance companies, CMBS and conduits are all offering borrowers low rates, with terms we have not experienced in decades.

People in the commercial real estate finance world are left scratching their heads, intrigued as to why lenders are offering such amazing loan rates for financing.

Ronnie Levine, a managing director at Meridian Capital Group, told The Mortgage Observer that doing the math helps make the low rates make sense for lenders.

“Even though the rates for financing are low, the banks are earning considerably higher returns based upon the cost of funds,” Mr. Levine said.

Mr. Levine’s assertion was echoed by the executive vice president of a commercial bank, who, preferring to remain anonymous, pointed out that spreads to comparable Treasuries are above 200 basis points. “Several years ago, lenders were lending at spreads to Treasuries of less than 100 basis points,” the person said. “They are making considerably higher returns in 2013.”

While rates are at record lows, industry leaders are worried that banks might be under pressure to meet budgets for loan production, while reducing the level of due diligence and underwriting. This was the concern of a chief lending officer for a local financial institution who also requested anonymity.

“Way back in 2007—first interest rates went to record lows,” this executive told  The Mortgage Observer. “Now borrowers are trying to gain on the structure of the loan, which includes interest-only, lack of covenants and underwriting at lower criteria.”

Nevertheless, lenders are being offered the opportunity to finance high-quality multifamily residential real estate with very low loan-to-value and, in certain instances, debt service coverage of nearly two to one. For example, an owner of a prominent residential rental property near the Metropolitan Museum on Fifth Avenue secured a 10-year fixed-rate financing, interest-only, at a rate of 2.95 percent.

Banks are fiercely competing for business, lowering rates for prime properties. Many of the leading lenders in the arena are offering five-year fixed-rate financing ranging as low as 2.75 to 3 percent. Some regional banks that are interested in gaining market exposure are offering interest-only loans for one to two years and capping legal and appraisal fees.

Fannie Mae and Freddie Mac are competing with the local banks, offering attractive rates and terms. Fannie Mae is actively marketing a 12-year loan with a current rate of about 4.5 percent. Insurance companies are offering long-term rates and are in competition with CMBS and conduit lenders.

No one wants to lose market share, especially the established leading multifamily lenders, which include New York Community Bank, Capital One, Signature Bank, Investors Bank, Sovereign Bank, Chase Commercial Term Lending, M&T Bank and TD Bank.

Accordingly, regional savings and commercial banks that have been active in this arena for a number of years are also lowering rates to meet the competition. These include Astoria Federal, Dime Savings Bank of Williamsburgh, Ridgewood Savings Bank, Flushing Bank, Oritani Bank, Intervest National Bank and Amalgamated Bank.

Adding to the competitive landscape are the new players, or lenders that have become active in the market. These include Apple Bank for Savings, People’s United Bank, Bank Leumi, Popular Community Bank, Mercantil Commercebank, First Republic Bank, BankUnited (formerly Herald National Bank), Provident Bank of New York, Provident Bank of New Jersey, 1st Constitution Bank and Customers Bank of Pennsylvania.

Because rates are so low and the market is so packed with lenders offering unbelievable rates, borrowers are busily negotiating prepayment rates with their existing lenders to refinance at lower rates. And this is causing banks to accept lower prepayment rates in order to keep loans on their balance sheets.

It is definitely a borrower’s market today, with borrowers clamoring to seize the opportunity to lock in long-term financing ranging from five to 10 years.

Urban American CEO Philip Eisenberg perhaps summed it up best, adding his own words of advice on the trend.

“In the two generations that my family has been in business, we have never [seen], nor do [we] expect to see, rates at these record lows,” Mr. Eisenberg said. “Therefore, take advantage and refinance your properties.”

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