Tale of Two Interest Rate Markets

NEW YORK CITY-The first two sentences of Dickens’ “A Tale of Two Cities” aptly describe the real estate interest rate market. It is the best of times and the worst of times and, as the dichotomy of those two concepts demonstrates, caution should be the order of the day.

The current extremely low interest rates are bailing out the owners of many over leveraged properties, which only a few years ago looked as if they were on the road to foreclosure. Owners, who were able to hold on through the dark times of the post Lehman world, are now seeing daylight because their carrying costs are decreasing, while many investors, who bought the debt using the “loan to own” strategy, are being paid off as the properties are refinanced. Of course, many of those investors bought the debt at a discount, so they are being repaid with a huge premium. In addition, this is a relief to the Fed, the FDIC and all the regulators who expected to have to take over or merge many more financial institutions than the record number that have disappeared.