The End Of Spread Lending

In 2007 and 2008 the commercial securitized mortgage market vaporized. Gone are the days when borrowers, brokers and lenders would fear losing a deal by one three or five basis points. Gone are the days when liquidity abounded with life companies and investment banks killing each other with interest only periods, negative amortization and projection lending to win deals. In the high flying years of times past, the only metric lenders had to differentiate themselves by was “the spread.”

Today we return to a simpler time. Back to a time reminiscent of the 1960s, ’70s and ’80s when banks and life companies issued a rate and that was that. A five year loan for 6%, and a 10 year loan for 7%. Retail for x%, office for y%. Sure, for a low loan to value deal you could knock off a quarter percent. For a really super sponsor with property in a great location, the lender may take off an eighth. In meetings today, when quoting a rate, lenders do not need to refer to the latest tick of the treasury market. They just quote a rate.

Life companies and commercial banks today are originating loans to keep on their balance sheets. Long-term holds. Their loan committees can indicate a minimum rate they will charge to attract the quality of business they want. With few lenders in the credit starved commercial real estate market and liquidity at a premium, lenders who are open for business are able to cherry-pick the business they want.

With the exception of multifamily lending, spread lending or quoting a rate over the treasury bill no longer exist. There are some lenders quoting spreads, but almost all are subject to a floor. The floor acts as a rate at which they will not go below. With the dearth of lenders actively in the market the participants who “are in,” do not need to break rate in order to attract business.

The one exception is multifamily lending. Fannie Mae and Freddie Mac continue to lend subject to spreads. Treasury market fluctuations do affect final pricing with these two lenders. Over the first five months of the year we have seen the 10 year Treasury in a trading range of 2.25% to 3%. Spreads have generally been between 230 to 300 basis points over the Treasury to net a final rate in the 5.3% to 6% rage for loans with Fannie Mae and Freddie Mac.

Will spread lending return? All who are in the commercial real estate market hope so. Spread lending represens a fluid, liquid financing market that facilitates and fosters a strong commercial real estate market. Sure, we all expect a market with governors and restrictions to hold developers and lenders back from themselves. But as liquidity returns to the market–and that may not begin until 2010 or beyond–spread lending will return.

It reminds me of that saying we heard back in the early nineties: “God please let me have one more real estate boom, I promise I won’t squander it away this time…”

Mark Scott is senior vice president and co-managing director of NorthMarq Capital’s Northern New Jersey office located in Parsippany. NorthMarq represents over 50 lenders in real estate markets nationwide. He can reached at 973.944.5727 or msco[email protected]. The views expressed here are the author’s own.