Mortgage Rate Trends

When borrowing rates are high its smarter to borrow less in longer durations and borrow more in shorter. That means the borrower is not locking up high rates for long term. In the case of bank borrowing, sometimes there is scope to refinance at a lower interest rates once rates have fallen enough. However when the government is borrowing via treasury instruments the securities are not 'callable'. This implies that government cannot repay the debt ahead of schedule and refinance at lower costs. This makes debt management absolutely essential to ensure the tax payers don't have unnecessary burden. In recent times yields on treasury securities have hit multi decade highs. The rates are also significantly higher than current inflation rates. This is the time short term borrowing should increase. In reality we did the opposite. As per the chart below we have increased borrowing via treasury bonds and decreased via bills. As a result the yield curve went through a 'bear steepening' at the peak of the rate cycle!! In a bear steepening long term yields increase more than short term ones. I am urging our policymakers to reconsider this strategy. When fiscal pressure is rising let us not burden our tax payers for long periods. Once yields drop we can move into longer tenor instruments. Chart created by EDGE Research team.

Hedging Fixed Assets: Enabling Variable Benefits Through Swaps In the intricate world of bank treasury management, hedging strategies play a pivotal role in stabilising financial performance against market volatilities. One essential strategy involves hedging fixed assets, particularly through interest rate swaps, which can substantially shield a bank's balance sheet from interest rate fluctuations. Consider a typical scenario where a bank has substantial fixed-rate assets, such as long-term loans. While these provide a stable income stream, they also pose a risk should the interest rates rise, increasing the bank's funding costs. To mitigate this risk, banks often enter into interest rate swaps as a hedging mechanism. In an interest rate swap, the bank would agree to pay a fixed rate to a counterparty while receiving a variable rate in return. The crux of this strategy lies in the variable receive leg of the swap. This variable rate adjusts with market conditions, ideally increasing when the interest rates climb. Thus, if the bank's funding costs rise due to higher interest rates, the receipts from the variable leg of the swap also increase, offsetting or covering the heightened costs. This approach is not only conservative but also advantageous, as it aligns the bank’s income with its expenses in a manner that is both prudent and responsive to market conditions. By employing such hedging tactics, banks can better manage their asset-liability mismatches and enhance financial resilience. Understanding these strategies is essential for banking professionals who strive to ensure the financial health of their institutions in an unpredictable economic environment. Through such realistic and accurate risk management practices, banks can safeguard their operations and maintain a robust balance sheet.

Dear Mortgage Industry, Originators- this is for you. Be alert and proactive, not too early, but not too late regarding mortgage rates decreasing and future refinance opportunities. Many buyers who secured a loan/interest rate from 2022 to the recent decline might benefit from refinancing, but not so fast. The first step is notifying and quickly producing the data. Have templates created to show the benefits and the recapture analysis. Explain what is also anticipated with the economic changes, which seem somewhat inevitable when inflation comes down to avoid anything premature. Create templates (now) for all those who may benefit from obtaining the information you need on their existing loan terms. Save these custom scenarios in your pricing engine to compare new terms for quick updates and consistent input. This will inform borrowers of their options and when they (not you) wish to act on opportunities. Find those potential opportunities now, but understand that things will be volatile. Never allow emotion to impact math and facts. Some are consistently busy or active, and I understand some are slow or verging on desperate... but desperation has no place in this industry as licensed professionals when coaching a client or potential borrower on refinance timing as you don't want to be premature on more significant savings potentially ahead. Some reminders as this is a unique territory after the market we were in: - Mind and respect EPO's - Mind and respect the borrower's equity - Understand and educate on investor's float-down policies - Provide choices on all rate coupons and share the full rate sheet for analytics on recapture math so the borrower is educated and has financial options. NEVER quote one random rate coupon or miss 'all' fees and costs/credits associated with any new loan. - Share market trends and data. Speculation is part of that but produces choices and financial impact on every borrower - Discuss the pros and cons of financing closing costs or refunded prepaids - Discuss all consumer debts for consolidation opportunities and savings - Closely monitor economic reports and track MBS daily - Be fast, accurate, and organized on all updates #future #refinancing #mortgage #data #recapture #math #ethics

𝗖𝗿𝗲𝗱𝗶𝘁 𝗦𝗽𝗿𝗲𝗮𝗱 𝗮𝗻𝗱 𝗦𝘄𝗮𝗽 𝗦𝗽𝗿𝗲𝗮𝗱 To continue a point that I raised at a fixed income conference a few months ago: The credit spreads are at a very tight level (figure 1), which suggests that we should either underweight credit risk, or at least underweight the spread duration of the lower rated credit. Yet, it is also important to note that the credit spread is tight relative to the US Treasury, but they are not that tight when compared with the swap rates. At the 30Y, the US swap spread was lower than -80 bps back at that time (the white line in figure 2), or in another word, we can earn an almost risk-free spread (over the swap rate) of 80 bps+ by investing into US Treasury. As I pointed out in the closing remark of the panel, for the more sophisticated investors which have the flexibility to choose between UST-based and swap-based investment strategies, such a level of swap spread offers another source of potential alpha. Practically and takes the life insurers as an example, the typical ways that they take advantage of such are as below, 🔔 SII insurers (liabilities discounted at swap rates) may unwind their existing spread locks, to improve the carry with relatively limited risk and capital charge. 🔔 For others and depends on their internal governance on derivative usage rules, they may enter “reversed spread lock”, i.e., long 30Y UST forward (funded at ~SOFR + 30 bps) and hedge the risk-free rate by payer swaps, to earn the US gov’t spread. 🔔 And for those who do not want to explicitly use derivatives to generate income, they can invest in floating rate assets (e.g. CLOs with a descent spread over SOFR) and take some basis risk to convert investment into long duration assets using UST forward instead of the more natural choice of receiver swaps. A few months have passed and now we see some signs of reversal in the US swap spread, from -80 bps to -75 bps. This is partly attributed by a potential slowdown in US Treasury bond issuance, and partly attributed by a potential relaxation in banking regulation which may make UST holdings funded by repo to be more favorable. If the trend continues (to say -50 bps as some people anticipate), it means that the above examples of trade may generate additional mark-to-market gains due to the “tightening” of US gov’t spreads. As a final note, in the meantime the Europe swap spread is becoming more and more negative as well (the blue line in the 2nd graph). This could mean a similar opportunity in Europe– assuming the investors are comfortable with the sovereign credit risks in Europe, which is more uncertain than the US. [𝘿𝙞𝙨𝙘𝙡𝙖𝙞𝙢𝙚𝙧: 𝙏𝙝𝙚 𝙖𝙗𝙤𝙫𝙚 𝙞𝙨 𝙖 𝙙𝙞𝙨𝙘𝙪𝙨𝙨𝙞𝙤𝙣 𝙤𝙛 𝙩𝙝𝙚 𝙢𝙖𝙧𝙠𝙚𝙩 𝙙𝙮𝙣𝙖𝙢𝙞𝙘 𝙤𝙣𝙡𝙮. 𝙄𝙩 𝙞𝙨 𝙣𝙤𝙩 𝙖𝙣 𝙞𝙣𝙫𝙚𝙨𝙩𝙢𝙚𝙣𝙩 𝙧𝙚𝙘𝙤𝙢𝙢𝙚𝙣𝙙𝙖𝙩𝙞𝙤𝙣, 𝙖𝙣𝙙 𝙩𝙝𝙚 𝙚𝙭𝙖𝙢𝙥𝙡𝙚 𝙤𝙛 𝙩𝙧𝙖𝙙𝙚𝙨 𝙡𝙞𝙨𝙩𝙚𝙙 𝙞𝙣𝙫𝙤𝙡𝙫𝙚𝙨 𝙧𝙞𝙨𝙠𝙨.]

The "safe" loans were actually the killers. Picture this: You buy a solid apartment building. Cash flows beautifully. Then your floating rate loan jumps from 4% to 8%. Suddenly you're writing checks every month instead of collecting them. This wasn't bad luck. This was predictable horror. The monsters that killed deals in 2024? Unhedged floating rates. Skinny debt coverage. And "hope and pray" refinance plans. But here's the twist— Most investors are STILL making these same mistakes for 2026. Everyone talks about "getting the best rate." Wrong focus entirely. The real killers were the loan structures themselves: SOFR plus thin spreads with no rate cap. When rates spiked, these loans became financial vampires. Sucking cash flow until deals died. Short maturities with refinance dependency. Business plans that only worked if rates cooperated on schedule. Spoiler alert: they didn't. Debt service coverage ratios that looked good on day one. But vanished with a 150 basis point rate move. The scariest part? Covenant traps that triggered cash sweeps exactly when you needed capital most. Here's how we structure debt to survive ANY rate environment: Fixed rates or properly hedged floating. With caps that actually protect you through stabilization. Budget for cap replacement because hoping rates stay low isn't a strategy. Real debt coverage ratios - DSCRs. We underwrite 1.35x minimum at closing. And stress test at 1.25x with rates up 150 basis points AND income down 10%. If it fails this test, we pass on the deal. Five to seven year terms with multiple exit options. Sale, refinance, or supplemental financing. Never depend on one path. Interest-only periods sized to actual stabilization timelines. Then amortization kicks in. No fantasy timelines. Prepayment flexibility. Real reserves. Three to six months of operating expenses sitting in the bank. Whether rates drop in 2026 or stay elevated, your debt structure should protect the plan. Not become the plan. Ask these four questions on every deal: Is the rate properly hedged? What's the debt coverage under stress? When does it mature and what are your options? What triggers the covenant traps? Don't let Nightmare on Loan Street haunt your returns. What's the scariest debt structure mistake you've seen in real estate?

Taking Advantage of Rising Interest Rates in Multifamily Construction Projects Many sponsors are hesitating—or are unable—to proceed with their multifamily construction initiatives due to the current uptick in interest rates. While caution is understandable in a shifting economic landscape, there are compelling reasons to consider moving forward if you have the necessary equity. (-) Contrarian Opportunity Currently, a significant pipeline of multifamily projects is slated for construction across the U.S. Rising interest rates have led many of these developments to pause. This creates a unique window of opportunity for proactive sponsors to initiate projects, entering the market at a time when fewer competitors are active. (-) Timing & Backlogs If you choose to wait for interest rates to fall, be aware that you might find yourself in a crowded market. Once rates normalize, many sponsors will kick-start their projects, leading to an oversaturated market and heightened competition. (-) Analyzing Financial Viability Contrary to common perception, increased rates may not necessarily be a deal-breaker. Currently, debt funds are offering non-recourse loans at approximately 11-13% interest. If your project's unlevered Internal Rate of Return (IRR) surpasses this cost of debt, taking out a loan could actually enhance your returns. However, it's essential to thoroughly and confidently assess your financial projections under these conditions, as higher interest rates pose increased downside risk if things go awry. (-) A Practical Suggestion Put simply, if you're underwriting a project with an Unlevered IRR of 14% or higher on a 5-year hold, and have a defensible underwriting approach, a proven business plan, and the requisite equity, it might not be a bad idea to break ground now—despite the higher cost of capital. This could be an opportune time to differentiate yourself by navigating the complexities of the current market.

Some of the worst deals we’ve seen... looked great on paper. But the pro forma was built for 2021. (Not 2024. And definitely not 2025.) We’ve reviewed offering memos that still project 20% rent growth. Or refinancing in 18 months. Or 90% occupancy in a lease-up market that’s at 71%. That’s not a real deal. That’s a broken business plan, and it’s everywhere right now. Why? ✅ Underwriting assumptions didn’t adjust for rates or costs. ✅ Capex was underbudgeted. ✅ And timelines? Wildly off from reality. The opportunity? Step in and re-underwrite from scratch: - Use real market rents. - Stress test refinance terms. - Bake in realistic renovation timelines. - Model tax advantages based on today’s rules, not 2021’s bonus phaseout. We’re not hunting for failure. We’re just doing what other investors didn’t. And in a market like this, fixing a broken plan is often more profitable than chasing a perfect one. P.S. When’s the last time you asked: “Does this deal still work, or just look good on paper?”

𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗥𝗮𝘁𝗲 𝗖𝗮𝗽 – 𝗛𝗲𝗱𝗴𝗲 𝗔𝗴𝗮𝗶𝗻𝘀𝘁 𝗥𝗶𝘀𝗶𝗻𝗴 𝗥𝗮𝘁𝗲𝘀 An 𝗶𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗿𝗮𝘁𝗲 𝗰𝗮𝗽 is a financial instrument that sets a maximum (cap) on the interest rate of a floating rate loan. It’s a type of derivative contract that provides the purchaser protection against rising interest rates. If interest rates rise above the cap, the seller of the cap compensates the buyer for the difference – think of it as a form of insurance. Caps are typically purchased upfront with a single payment, with the costs considering the loan amount covered by the cap (the notional), the duration of the cap (the term), and the rate above which the cap will pay out (the strike rate). Interest rate caps are a commonly used interest rate hedge for borrowers, given it’s known upfront costs and no prepayment penalty. 𝘌𝘹𝘢𝘮𝘱𝘭𝘦: XYZ Corp is purchasing a 58-unit apartment complex for $22,000,000. The acquisition is being financed with a variable-rate, interest-only loan of $14,300,000 (65% LTV) on a 3-year term. The interest rate is tied to SOFR with a 250-basis point spread. An interest rate cap with a strike rate of 3.50% was purchased, limiting the all-in rate to 6.00% (3.50% + 2.50%). The annual debt service for the first year without the cap would be $920,920, while the annual debt service with the cap would be $858,000. This represents $62,920 of potential savings in the first year with the cap. In this scenario, the cap is “in the money” generating some savings that could be offsetting some of the upfront costs; however, note that if the strike rate was higher, let’s say 4.50% instead, the all-in rate would be 7.00% (4.50% + 2.50%). This is above the rates without the cap in the example and is therefore “out of the money” and would not pay out. Note that the 1-month Term SOFR is a forward-looking rate based on market expectations of SOFR over the next month. There’s a decline in the forward-looking SOFR curve, which is likely due to the market expectations of The Fed cutting rates in this coming year. Since SOFR is reflective of the cost of borrowing cash overnight collateralized by U.S. Treasuries, which is influenced by the Federal Funds Rate, it will generally move in the same direction as Fed policy changes. If you like this type of content, please drop a like, follow, or comment! I post about commercial real estate weekly.

A few lessons learned investing in short duration, senior-secured CRE credit over two decades: - When interest rates are higher for longer, relative value moves up the capital structure. - Floating rate debt with rate floors and minimum yield covenants protect you against mark-to-market and interest rate risk. - Short duration loans, particularly in volatile times, provide you with a unique ability to adapt to changing economic conditions. - Contractual cash flows backed by tangible real estate at conservative leverage reduces downside risk, even when business plans fail and liquidity dries up. - Structure loans with current cash interest payments. It keeps your borrowers honest, de-risks your position and helps you monitor your exit. - Beat up valuations and stress test for adverse economic conditions. As a lender, you are not being compensated for upside. Your first and last priority is to protect and preserve capital. - Lending at the top of the capital stack means getting paid first and controlling any enforcement action. Control is key to risk management. - Focus on inflation protection. Supply-constrained real estate (e.g., multifamily, logistics centers) tend to appreciate, with rents adjusting to sustained demand. - Relationships are everything. Lead with integrity, honesty and accountability to build long-term and repeat relationships with your borrowers. Make sure your interests are aligned. Celebrate their wins (particularly when they pay off your loan)!