Mortgage loan rate today

Commercial mortgage interest rates continued to decline during November, according to the Barron's/John B. Levy & Company National Mortgage Survey of large institutional lenders. There is no question that today's low interest rates are fueling the hot market for commercial mortgages. In fact, with the exception of a brief period in 1993, interest rates are as low as they have been since 1968! Because 10-year Treasury bonds are now yielding less than LIBOR, an adjustable rate benchmark, borrowers can now pay less for the security of a long-term, fixed-rate loan than they would for a floating-rate loan.

Pension funds, REITs and other institutional investors have shown a voracious appetite for buying properties this year. Subsequently, many have taken the opportunity to put modest levels of leverage -- generally 50% to 60% of the purchasing price -- on their new acquisitions. With today's low debt rates, the return on their equity is greatly enhanced. But institutional borrowers are an interest rate-sensitive lot, and if rates head in the other direction, they would cease seeking new loans, putting a severe cramp in the number of new deals.

Many large life insurers will set new loan production records this year. Though the mid- to late- '80s saw previously unheard of levels of loan originations, production levels at many businesses are up this year by 20% to 45% over their previous records. Most lenders are quick to point out that the current group of mortgage loans is of far higher quality than those of the '80s. Given the expensive lessons that were learned in the early '90s, outside real estate analysts can only hope that their assessments are true. A few skeptics say that while loan quality is still good today, it has declined steadily since 1992.

Though the mortgage production business is flourishing, layoffs have become a regular event. Two industry giants, Prudential Life Insurance Company and AETNA Life Insurance Company, announced sizable cutbacks in their real estate and mortgage staffs. In Prudential's case, it is an attempt to become more cost competitive while AETNA intends to dismantle its entire commercial real estate operation.

POSTSCRIPT: Twelve months ago, we noted that the National Association of Insurance Commissioners had put the commercial mortgage-backed securities (CMBS) industry into a tailspin by deciding that some CMBS should be treated as mortgages rather than bonds for reserve purposes. That decision started a chain of events which kept insurance companies waiting for the NAIC to decide what levels of capital should be required to back CMBS and REIT offerings.

The NAIC has ended the year by saying that all CMBS should be treated as bonds requiring dramatically less capital than mortgages. Non-rated tranches will be treated as bonds with a "z" notation, meaning that their rating has been assigned by the company but not approved by the NAIC. Their permanent status will be decided next year.

Larry Gorski, chairman of the NAIC's Invested Assets Working Group, notes that the rating process has "gained a higher degree of rigor" during the last 12 months and filing requirements have increased greatly. He agrees that the "door may be open as wide" as it has been in the past, but warns that the rating process has become more complete and dependable than it was previously. Ideas and comments are welcomed via E-Mail: AHVB88A@Prodigy.com.

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