Agency Loan Volume has been Very Strong in 2020 Despite Covid-19

ON THIS EPISODE OF PEAK MARKET WATCH:

We are excited to have Colin Cross on as a guest speaker! Peak Market Watch host and CEO of Peak Financing Anton Mattli, accompanied by this week’s co-host Feras Moussa, will dive into what Colin is currently seeing within agency and bridge loans. Colin will be breaking down the advantages and disadvantages of fixed rates vs. variable (floating) rate loan programs, how sponsor track record and experience is more crucial than ever for both agency and bridge loan, why P&I escrowing will likely stay in place for a while, and why agency loan volume (Fannie Mae & Freddie Mac) has been very strong in 2020 despite COVID-19.

VIDEO TRANSCRIPTION

00:00
capital one of the leading multi-family
00:02
agency lenders
00:04
including programs from fannie mae
00:06
freddie mac and hurt
00:08
welcome colin it is a pleasure to have
00:11
you on today
00:12
why don’t you give us a brief background
00:15
of your career
00:16
as well as hunts activities
00:19
thanks anton very nice to be here today
00:21
and uh thanks fairas as well
00:23
uh yes colin hunt real estate capital
00:26
i’ve been in the business since uh 2008
00:30
uh all in multifamily finance uh
00:32
previously with
00:33
a different agency lending shop and with
00:36
uh hunt real estate capital
00:38
and our predecessor companies for the
00:39
last eight years here in dallas texas
00:42
uh focusing primarily on uh like like
00:45
you said anton multi-family financings
00:47
through the agencies
00:48
fannie mae freddie mac and hud as well
00:51
as
00:51
uh with uh with our new acquisition uh
00:54
of our firm from
00:55
oryx usa who is uh our parent company
00:59
now
00:59
they have access to a large balance
01:02
sheet that we’re able to do
01:03
um floating rate bridge transitional
01:06
bridge lending
01:07
as well as mezzanine financing for
01:09
multifamily and a few other unique
01:11
products occasionally some uh
01:12
some jv equity or uh or pref equity uh
01:15
positions as well
01:16
so kind of all across the uh
01:18
multi-family space and uh happy to be
01:20
here today and talk to you about uh
01:22
what’s going on right now
01:23
glad to have you on colin we’ve
01:25
definitely done a lot of deals with you
01:26
and you know you’re definitely one of
01:27
the easiest most reliable guys to work
01:29
with so definitely a pleasure to have
01:30
you going
01:31
thank you ferris and you guys are great
01:33
as well so appreciate it
01:34
so maybe uh let’s kick it off right 2019
01:38
versus 2020 right let’s kind of maybe
01:39
get ahead and just go straight to the to
01:41
the elephant in the room right
01:42
you know kind of we’re obviously late
01:45
2020 right near in the fall and
01:47
you know what has been kind of i guess
01:50
maybe my question is really ultimately
01:52
what has been the difference right with
01:54
what fannie is starting to position kind
01:56
of outlook
01:57
kind of forward-looking and what
01:58
requirements are they starting to to
01:59
really put in place and things are
02:01
starting to dig into
02:02
sure yeah amazingly um on the agency
02:06
front
02:06
it honestly hasn’t been that different
02:08
of a year when it comes to
02:11
uh kind of their volumes and what their
02:13
focus has been
02:14
um you know over the last several years
02:16
they’ve had uh
02:17
their federal regulator that has uh kind
02:20
of been overseeing everything for
02:22
them and managing their cap numbers of
02:23
the amount of volume that they can do
02:25
making sure that they’re focusing on
02:27
affordable housing business that drives
02:30
you know uh that b and c apartment space
02:32
and uh and that renter
02:34
uh pool and so this year they already
02:36
had their caps in place from late from
02:38
late last year
02:39
and they have 80 billion dollars each
02:41
for fannie and freddie to hit for this
02:43
year
02:43
and if you look at where they are year
02:45
to date right now i think fannie mae
02:47
just came out with something uh fairly
02:49
recently that as of
02:50
august of this year their total volume
02:53
of loans closed
02:54
was 43.1 billion whereas in 2019 they
02:58
were 45.2 billion
03:00
so if you and i think freddie mac has
03:02
said that they’re in the pretty much in
03:03
the same position or so
03:05
so really what you you know at the end
03:07
of the day they’re kind of in the same
03:08
position they were last year
03:10
obviously covet and the the market uh
03:13
shakeups back in march and april
03:15
really kind of set things off on a
03:17
little bit of a different path in that
03:19
um you know the interest rate
03:20
environment was really what
03:22
has been the driver behind uh all of
03:25
that business that they’ve been able to
03:26
do through
03:27
kind of this uh this this recessionary
03:29
period and so
03:30
um but in terms of of um kind of what
03:34
their focus is
03:35
it’s still affordable housing it’s still
03:37
a mission-driven business
03:39
it’s still making sure that they’re
03:40
working with great sponsors who have
03:42
good experience
03:44
and are and are out looking at good
03:46
deals and putting good money behind
03:47
their deals so
03:48
from that perspective really things are
03:50
are kind of the same as they have been
03:52
with the agencies
03:53
and that’s been nice obviously as as
03:55
other sectors have been
03:56
uh in a bit of turmoil borrowers
04:00
are able to have a little bit of that uh
04:01
that clarity that they’re able to uh to
04:03
always rely on the agencies
04:05
yeah so so high level they’re still
04:06
doing deals right it sounds like really
04:08
about five percent it sounds like it’s
04:09
where they’re off in terms of relative
04:11
to last year
04:12
and total deals done but um maybe to
04:14
kind of distill it down right for for
04:16
the listeners
04:17
what can people see today on let’s just
04:19
say you’re doing a straight
04:20
regular fanny 10-year note right what
04:23
can people see in terms of
04:24
you know io leverage and um and uh
04:28
interest rate sure yeah so uh
04:31
what are you seeing currently right
04:32
maybe well yeah what we’re seeing
04:34
currently
04:35
is that um you know back in march and
04:38
april there was a little bit of a
04:40
i would say a pushback from the agencies
04:42
to say
04:43
okay let you know acquisitions obviously
04:45
as we all know we’re pretty much
04:47
off the table at the time no one was
04:48
really transacting on anything
04:50
so the focus was i think at the time it
04:52
was close to 85 or 90
04:55
of the business that they were doing was
04:57
just straight refinances
04:58
because you were seeing the interest
05:00
rates dropped from you know
05:02
mid to high threes that were in january
05:04
february march
05:05
down into the high to mid twos at the
05:07
time things have settled back in kind of
05:10
in that plus or minus three percent
05:12
range here recently on
05:13
what we consider to be full leverage
05:16
type of deals which would be
05:17
you know plus or minus 75 percent on an
05:20
ltv
05:21
a 125 debt cover um you know on a 10 or
05:24
a 12 year term you can usually look to
05:27
see
05:27
you know three to four years of interest
05:29
only on the twelves
05:31
maybe two plus or minus two or three on
05:34
a ten
05:34
but again all of that is really based on
05:37
um kind of how the deal underwrites what
05:39
the cash flow looks like
05:41
how much are you really pushing that
05:42
cash flow to try to get to maximum
05:44
dollars
05:45
and then that may be a little bit of a
05:47
push and pull then with how much
05:49
interest
05:49
interest only you can get on those deals
05:52
but i would say on average
05:53
you know on a good refinance or
05:55
acquisition deal expect to get something
05:57
in that 75 percent range
05:59
and maybe a couple of years of interest
06:01
only on a longer term fixed
06:03
so that’s still extremely good compared
06:06
to any other asset class
06:07
right so we always have to see it in
06:09
perspective
06:10
right uh i know a lot of borrowers
06:14
are not happy about the title and the
06:18
writing
06:19
and obviously the principal and interest
06:23
reserves that are now required
06:26
but at least you’re still able to get
06:28
very attractive financing for
06:30
multi-family so i think that’s really
06:32
always important to see and compare it
06:35
with all the other asset classes out
06:36
there
06:37
when it comes to the p and i reserves do
06:40
you
06:41
do you see any uh kind of loosening that
06:45
might be on the horizon either from
06:48
uh from fenney or freddie well in
06:51
addition to answering that question
06:52
maybe it’d be good for the listeners to
06:54
explain because the pni
06:55
reserve is the new thing that changed
06:57
right in the past so maybe if you can
06:58
quickly explain
06:59
what that is what change and then maybe
07:01
kind of continue on to anton’s question
07:04
yep absolutely so like you said ferrous
07:06
that was the one big change
07:08
uh that really came out of the covid uh
07:10
response
07:12
uh you know in addition to obviously you
07:14
know managing forbearance and evictions
07:16
and things like that
07:17
on the front end both agencies said you
07:20
know hey we’re doing a ton of refinances
07:22
right now
07:23
we’re probably going to push back a
07:24
little bit on you know your cash out
07:27
back in march april and may and they’ve
07:29
kind of loosened off of that definitely
07:31
in the last several months where
07:32
there’s not any you know significant
07:34
restrictions like there were previously
07:36
on the amount of cash out over your
07:39
initial loan
07:40
uh that you can get on a new refinance
07:42
but what has been implemented like you
07:44
said is the the principal and interest
07:46
reserves
07:47
previously i think fannie mae even had
07:49
some replacement reserve
07:51
uh extra reserves as well uh that
07:54
they’ve since gone away with so right
07:55
now it’s just principle and interest
07:57
meaning
07:58
on most deals you’re looking at anywhere
08:00
between nine
08:01
and 12 months of your debt service
08:04
payments that you would normally
08:05
pay um you know as part of your monthly
08:07
payments for your loan
08:09
uh the lender is going to look to hold
08:11
back that amount of money
08:13
at the closing table from the dollars
08:15
that we fund out
08:16
and put it in an escrow account just to
08:19
make sure that
08:20
you know i mean if you talk about kind
08:22
of what’s coming up down the pike here
08:24
you know collections have still been
08:27
been a little bit off uh
08:29
nationwide right now occupancies have
08:31
been slowly dripping down a little bit
08:34
as we go along the few months here and
08:36
so just in case that there is
08:38
you know a second wave or some other
08:39
things start happening obviously
08:41
there could be volatility coming at the
08:43
end of the year that we’re all aware of
08:45
um the agencies feel like this is a
08:47
prudent way to have a little bit of fun
08:49
set aside for borrowers to draw upon if
08:52
they need them
08:53
to cover um you know to cover any
08:55
payment shortages that they may have
08:57
if all of a sudden you get some uh you
08:59
know some big move outs
09:01
um you know or non-payers uh you know
09:04
we’ve obviously got an eviction
09:05
moratorium
09:06
we can talk about a little bit more uh
09:08
later on but that’s you know
09:10
something that’s trying to keep renters
09:11
in place and trying to keep folks paying
09:14
rents but um you know just in case they
09:17
don’t we’ve got that principle and
09:18
interest set aside for borrowers to drop
09:20
down upon
09:21
we have to keep it for about 12 months
09:23
uh as an initial term
09:25
and then after 12 months actually i
09:26
think it’s now six months
09:28
uh initial term and then we start
09:30
testing it after that six month period
09:32
and if uh as long as your property is
09:34
operating at the the debt service levels
09:37
that it was initially
09:38
then we’ll start looking to release
09:40
those funds back out to borrowers so
09:42
usually somewhere between that 6 and 12
09:44
month range we can start taking a look
09:46
at
09:47
uh you know releasing those funds out if
09:49
the property doesn’t look like it’s
09:50
going to need it
09:52
so actually i mean i think there’s a lot
09:53
of there’s not enough information out
09:54
there about this specific point right
09:56
about the pni so
09:57
it sounds like six month is actually
09:58
when you probably can release it if
10:00
the property is humming it sounds like
10:02
12 months is the back end of that
10:04
is it is there any case you guys would
10:05
go longer than 12 months and as a
10:06
borrower
10:07
if i intentionally just choose to not
10:09
pay my note and then say i want to pay
10:10
it out of pni
10:11
is there any risk to that right is it
10:13
just that i’m going to have to wait the
10:14
12 months or
10:15
you know is is there any other
10:17
ramifications to kind of be aware of
10:19
yeah so um so really there is like a
10:22
moratorium period a lockout period where
10:25
we don’t touch the funds the funds are
10:26
just sitting there in the escrow
10:28
and they’re there for you to use if
10:29
you’d like even you know in month one
10:31
like you said if you’re start all of a
10:33
sudden you close on a deal
10:34
it’s month one you get in there and it
10:36
turns out you bought a deal and the
10:38
seller had been
10:39
you know stacking it you know god forbid
10:41
and it’s not going to be the case but
10:43
i’ve been stacking it with short-term
10:45
tenants or something like that and all
10:46
of a sudden you get a bunch of big move
10:48
outs
10:48
and then all of a sudden you’re you know
10:49
you’re not able to make your payment on
10:51
your loan
10:52
those funds are there for you to draw on
10:53
starting month one
10:55
that you can uh you can start using the
10:57
six-month period is really the first
10:59
point where we can just
11:00
release funds based on the strength of
11:03
the
11:03
of the property operations and of itself
11:06
but really that six month period
11:08
especially on fannie mae deals it’s kind
11:10
of the beginning point for us to
11:11
test what the operations have been doing
11:15
so really what we’re doing is at the six
11:16
month period we’re going to go and get
11:18
you know the latest trailing 12 trailing
11:20
six operating statements
11:22
and we’re going to take a look at what
11:23
the cash flows look like and say okay
11:25
things are looking great things look
11:27
like they’re you know they’re running
11:28
at or above where we expected them to
11:30
run at the beginning of the loan
11:32
process let’s go ahead and check it
11:34
right now
11:35
and then we can start focusing on on
11:37
getting those funds back out to you
11:39
uh you know within the next quarter or
11:41
so i think is kind of how that’s been
11:43
playing out
11:43
obviously we’re still very early in this
11:45
so we haven’t had too many instances of
11:47
this
11:48
uh actually going into play so we’re
11:51
just uh you know kind of going by what
11:52
the guidelines are saying but to my
11:54
understanding that’s how
11:55
uh some of that will work and then to
11:57
what you said on on you know as a
11:59
borrower
12:00
if you know you want to start you know
12:02
immediately drawing upon those funds to
12:03
make a non-payment
12:05
you know those funds are available to
12:07
you however when you come in to do that
12:10
there’s going to be some additional
12:11
information that the lender’s going to
12:12
ask you for
12:13
related to okay explain to me what the
12:15
situation is
12:16
talk to me about why it is that you’re
12:18
going to start drawing down upon this
12:20
and you’re not able to make your payment
12:21
do we need to discuss the forbearance
12:24
options that might be available to you
12:26
you know in addition to drawing upon
12:28
these funds so
12:29
it’s not that you wouldn’t be able to
12:31
access them immediately
12:32
really it’s more you know do you do you
12:35
talk to your lender does your lender
12:36
talk to you and say okay
12:38
how can we work something out here and
12:39
that’s where again having a great
12:41
relationship with your lender and the
12:42
servicing folks behind the scenes
12:44
is just critical in these in these kind
12:46
of volatile times
12:48
yeah so i think that the answer really
12:50
is like yes you can draw from it
12:52
if there is a need but don’t just think
12:55
that if you
12:55
have strong cash flow that you just
12:57
don’t pay right
12:59
right yeah and then there’s always a
13:02
need and i guess i’m just trying to
13:03
understand you know as a borrower right
13:05
you’re always looking at what all the
13:07
different options you have
13:08
and so that’s kind of where that
13:10
question comes from because you know
13:11
there’s always the case and we’ve seen
13:12
this where you’re doing rehab the draw
13:14
takes a lot longer so now what are your
13:16
options right
13:17
you have that vendor continue to wait
13:19
until that draw gets approved
13:20
do you pay you know it would have gone
13:22
your note and say you know what i want
13:23
to pay it out of the interest reserve
13:24
you know kind of play that
13:26
that that spread a little bit um but are
13:29
there any negative ramifications of
13:30
going
13:31
let’s say you take forbearance aside if
13:33
you decide to go use the p i
13:35
mean is there are you is it frowned upon
13:37
right or you look that negatively on the
13:38
next deal
13:39
no i mean at the end of the day that is
13:41
your money as the borrower
13:43
and it’s there as a you know as a tool
13:46
for the lender to have a little bit more
13:47
confidence that
13:48
there is money set aside in case
13:50
something were to happen so
13:52
at the end of the day in our position
13:54
that is your funds
13:56
and we just want to make sure that when
13:58
you guys are coming in to
13:59
to draw upon them that we understand
14:01
okay here’s why
14:02
we probably have to make a note into our
14:04
files of why they drew down and what
14:06
they drew down
14:07
and here’s why you know we think that
14:09
there’s going to be a quick ramping back
14:11
up
14:12
that’s going to uh you know that’s going
14:13
to keep the property operations running
14:15
well at the end of the day
14:16
you know we want the loan to keep you
14:18
know the payments to keep coming in we
14:19
want to have
14:20
no part of of you know getting involved
14:23
in the day-to-day management
14:24
or running on a deal we want the
14:26
borrowers to be doing that and so really
14:28
what are these are one of the tools that
14:29
we can use to make sure that they’ve got
14:30
that available
14:32
if they uh if they need it all right
14:34
that’s good to know
14:35
yeah very good uh colin you
14:38
you touched on that a little bit earlier
14:41
with
14:41
uh loans that that were uh taken out
14:45
maybe uh two years ago or so uh that’s
14:48
that have a little bit more of a of a
14:50
stress point there if someone wants to
14:52
refinance or sell a property
14:54
to do the high yield maintenance that
14:57
you’re facing now
15:00
now naturally the when you look at new
15:04
deals
15:04
then everyone still remembers that uh
15:08
what they have to deal with on their
15:10
existing deals with deal maintenance
15:13
and they if possible want to go with a
15:16
little bit of a shorter term fixed rate
15:18
or go with uh with a
15:22
adjustable rate program now particularly
15:26
on the fanny side i think we have
15:28
bigger issues with underwriting floors
15:31
and all that
15:32
so maybe if you could tell our listeners
15:34
what
15:35
what are the options if someone doesn’t
15:37
want to go with a
15:39
12-year fixed loan
15:42
that then potentially exposes them to a
15:45
very high
15:46
yield maintenance and i think also right
15:49
with larger deals we have also to deal
15:51
with that
15:52
massive premium for a step down pre-pay
15:54
so certainly shorter terms
15:56
and adjustable rates would be great but
15:58
maybe you can also explain to
16:00
us a little bit what the challenges are
16:02
in going in that direction
16:04
and before calling answers for those
16:06
listening definitely take notes because
16:07
this is where deals get made
16:09
and you know i mean we’ve been in the
16:11
situation where we have deals that
16:12
you know we can make a ton of money
16:14
selling them we’re just kind of stuck
16:16
you can’t really refi you can’t really
16:17
sell it can’t doesn’t make sense for an
16:18
assumption
16:19
you’re kind of stuck and so we are
16:21
absolutely considering a lot more of
16:22
these options
16:23
moving forward on some of these deals
16:25
but given just kind of the
16:26
the new interest rate role that we seem
16:28
to be kind of
16:29
staying in for the next several years
16:32
yeah absolutely it’s been uh the hottest
16:34
topic
16:35
pretty much of the last six months i
16:37
think we’ve probably run more prepayment
16:39
penalty
16:40
uh calculations than we have anything
16:42
else in uh
16:43
in the last six months and and you know
16:45
every other month checking it now what
16:47
does it look like are we down a couple
16:49
hundred grand
16:50
you know does that help make a deal work
16:51
but it’s definitely something that uh
16:53
you know
16:54
you know the last several years as a lot
16:56
of new folks have been coming into the
16:57
business and have been coming into the
16:58
space
16:59
you know what they’re looking for is
17:01
okay i want the
17:02
you know i want the best loan you know
17:04
the highest amount of loan dollars
17:06
and the lowest possible rate and how is
17:09
the you know what’s the best way for me
17:10
to get that
17:11
just to start off with and the answer
17:13
was always long-term
17:14
fixed rate 10 12-year uh agency
17:18
financing with the yield maintenance as
17:19
your prepay
17:20
at the time the interest you know the
17:22
10-year treasury was in the mid
17:24
mid to high twos and we’re at on the
17:26
lending side saying you know these are
17:28
still historically low rates
17:30
you can’t really imagine that you’re you
17:32
know if you can’t make a deal work with
17:33
uh
17:34
you know with a four to four and a
17:35
quarter all-in rate uh
17:37
right now where spreads are in the you
17:39
know 100-150 basis points and treasuries
17:41
are in the
17:42
you know two and a half percent range
17:44
then you know that that’s a
17:46
tough that’s a great time to be
17:47
borrowing money and long-term money
17:49
you want to have that you know locked in
17:51
in case something does happen here
17:53
what’s ended up happening though is just
17:54
what you guys said is that the
17:56
treasuries
17:56
have been the thing that’s fallen off
17:58
the cliff you know down 200 basis points
18:00
i think we’re at
18:01
around 65 basis points this morning on
18:03
the 10-year
18:04
and so as a result those yield
18:06
maintenance penalties from a couple of
18:07
years ago
18:08
have a huge run-up i mean we’re seeing
18:11
some that are
18:12
you know 30 percent of the total uh
18:14
unpaid principal balance of the loan
18:17
or maybe even higher that uh are due
18:20
yeah exactly that are due if you try to
18:23
pay it off now just two or three years
18:24
later whereas
18:25
you know in a normal year that would be
18:27
you know a couple hundred thousand
18:29
dollars or
18:30
uh you know maybe a three to five
18:31
percent kind of uh you know clip on the
18:34
on the upv so
18:35
it’s definitely something that’s
18:36
important right now anton to your
18:38
question
18:39
um you know there’s lots of different
18:40
options that are available but again
18:42
the question comes down to that push and
18:44
pull of are you trying to get the
18:46
absolute most dollars
18:47
and the and the lowest possible rate and
18:49
that’s what’s going to help make your
18:50
deal work
18:51
or can you maybe do something that’s a
18:53
little bit lower leverage a little bit
18:55
lower dollars put some more equity in
18:57
and if you’re able to do that then all
18:59
of a sudden some more of that
19:01
uh you know some more of those other
19:02
options start availing themselves to you
19:04
uh as a borrower so shorter term
19:08
the main thing to know is that if you’re
19:09
looking at a fannie mae loan
19:11
ten-year business has a five percent
19:14
underwriting floor meaning that
19:15
on every single deal that we look at we
19:18
plug a five percent rate
19:19
on your cash flow and typically we want
19:22
to see that be at a 125
19:24
debt cover ratio obviously today
19:26
interest rates are much lower than that
19:28
we’re in the
19:29
you know high twos low threes on most of
19:31
those deals
19:32
so fannie mae has allowed us to go down
19:36
to you know around a break even level or
19:38
so
19:39
uh on that five percent floor on say a
19:41
ten year and that’s the case all the way
19:43
down the line but
19:44
the problem is that can work on a tenure
19:47
and kind of keep you in the same
19:48
uh range of loan dollars as you would be
19:51
just
19:52
on your you know current cash flow at a
19:54
125 dead cover
19:55
and um and and the actual rate today
19:59
you start going down in shorter terms
20:01
seven year
20:02
five and a half percent underwriting
20:04
floor five years six and a half or
20:06
maybe even six and three quarters today
20:09
underwriting floor
20:10
so the shorter term you go on those
20:12
fannie mae deals
20:13
it’s just a way for them that floor is
20:15
to kind of disincentivize
20:17
that much volume to come in on those
20:20
deals because they want to drive
20:21
business
20:22
to the longer 10 and 12 year plus deals
20:25
and so on that front you got to make
20:27
sure you’re checking your cash flow
20:29
trying to test it at what those
20:30
underwriting floors are assume that your
20:33
lender can probably get
20:34
a little bit of leeway off that uh that
20:37
125 cover
20:38
down to maybe you know a break even 100
20:41
or a 105 or a 110
20:43
depending on the market but uh you know
20:46
make sure you’re plugging that in if you
20:47
want to look at a shorter term
20:49
uh type of hold period and then just
20:52
what
20:52
anton you were talking about earlier
20:54
declining prepays
20:56
they are available especially on the
20:57
longer term deals
20:59
you know if you’re able to get a and we
21:01
can talk a little bit about green in a
21:03
little bit but for example on a fannie
21:04
mae deal if you’re able to get a green
21:06
financing deal today
21:08
and that brings your rate down in the
21:09
two and a half to two and three quarters
21:11
range
21:12
well then maybe you can still do a
21:14
declining prepay for an extra
21:16
40 basis points or so on uh on on the on
21:19
the top of your spread
21:20
and then you still end up with a rate
21:22
that’s in that three to three and a
21:24
quarter range
21:25
and you could still have uh you know
21:26
your deal work at the max procedure
21:29
looking for but have some prepay
21:30
flexibility
21:32
on a step down basis through uh through
21:34
your term
21:35
yeah but then there’s there’s the
21:36
argument of you know
21:38
step down makes sense if you think rates
21:40
will fall right
21:42
right now the questions are do rates
21:44
have room to fall further right that’s
21:45
one big thing
21:46
um but you you know maybe kind of step
21:49
back a little bit and kind of recap for
21:50
the audience right
21:52
so with the financing it’s really a
21:53
debate between do i lock in long term or
21:55
do i give myself an option to exit
21:57
sooner
21:58
right that’s what the big kind of
22:00
decision plan is and you know trying to
22:02
weigh the different options in the pros
22:03
and cons and so
22:04
you know with that i think there’s one
22:07
other piece that i think you kind of you
22:08
know we talked about agency and what
22:10
that looks like right
22:11
being able to get to prepaid et cetera
22:13
what about floaters
22:14
right and kind of are you starting to
22:15
see upticks in those and you know for a
22:18
borrower right
22:18
how does that protect the borrower right
22:20
what can you do to protect it maybe it’s
22:21
the question
22:22
and you know is that attractive or not
22:24
right and what are the kind of pros and
22:25
cons
22:27
yeah and that’s that’s leads into
22:29
perfectly yeah the other option that’s
22:30
been available right now
22:32
has been floating rate um you know
22:35
adjustable rate of mortgage loans
22:37
especially
22:38
with uh you know with where where libor
22:40
and i guess now we’re transitioning into
22:42
sofa
22:43
um as the new index for most of that
22:45
business
22:46
uh those indexes are down in the teams
22:49
right now and so
22:50
really you’re getting all in rates on
22:52
that floater that’s probably
22:54
right in line or so with uh with what
22:56
you’re seeing on the fixed rate
22:57
long-term side so
22:59
if you want to have a rate but obviously
23:01
you’re a little bit concerned about
23:02
um you know things going up in the in
23:05
the next couple of years because like
23:06
you said fair house there’s
23:07
very little room honestly to go down at
23:09
this point you know we’ve heard from
23:11
economists uh recently who have talked
23:13
about
23:14
whether there can be negative interest
23:15
rates here in the u.s
23:17
you kind of feel like that that’s going
23:19
to be you know that’d be a
23:21
difficult situation to imagine right now
23:24
and so if you
23:24
don’t think that rates are going to run
23:26
down right now any much further
23:28
then uh they’ve only got a way to go up
23:31
and so the fixed rate side obviously
23:33
covers you on that front
23:34
but on the floaters you get a little bit
23:36
more flexibility so
23:38
normally what happens is you’re on a
23:39
seven or a ten year floater if you’re
23:40
doing one of the agency
23:42
perm loan floaters where you have a one
23:45
year lockout after you close your loan
23:47
and then you’ve only got a one percent
23:49
prepay thereafter for the rest of the
23:51
loan
23:52
uh term and so on those deals you’ve got
23:55
the same issues on the fixed rates
23:57
in terms of loan sizing so on the fannie
23:59
mae deals you got to make sure you’re
24:01
you’re managing on those on those fixed
24:02
rate floors we talked about
24:04
on freddie mac deals they’re going to
24:06
make sure they’re hitting to certain low
24:07
metrics as well
24:08
down to about a 100 to a 105 dead cover
24:12
uh on whatever the floating rate is but
24:14
what you’re really looking at there is
24:16
all right can i get to the most proceeds
24:18
that i thought i can you know maybe be a
24:20
little bit less on the floater than it
24:22
is on the fixed you might be able to
24:23
match them
24:24
but then do i give myself a little bit
24:26
more flexibility with that uh
24:27
with that perm floater and again that’s
24:29
for deals that
24:31
have cash flows that are already pretty
24:33
stable
24:34
occupancies are good you’ve got that
24:36
cash flow that can support
24:37
you know a 125 minimum coverage
24:40
uh on your uh on your loan amount
24:43
whereas on a lot of deals as
24:45
far as we’ve talked about you know the
24:47
there’s still value add plays to be done
24:50
out there and so maybe a cash flow is
24:51
not quite there yet
24:53
on a deal we’ve seen that in the last
24:56
call at three months or so
24:58
bridge and balance sheet lenders have
24:59
started coming back into the fold
25:01
whereas
25:01
a lot of them were you know shut down
25:03
during the uh you know the big part of
25:05
quarantine back in march april may
25:07
they’re back now they’re lending you
25:10
know rates are a little bit higher than
25:11
what most people were
25:12
you know used to previously whereas we
25:15
were seeing
25:16
spreads in the you know mid to high twos
25:20
over libor maybe you know this time last
25:22
year on a lot of that value add
25:24
call it 75 levered uh
25:28
you know maybe even up to 80 85 percent
25:31
um type of business today we’re seeing
25:34
those spreads being somewhere in the
25:36
mid to high threes even into the low to
25:38
mid fours
25:40
over the uh the indexes because again i
25:42
think a lot of these lenders these
25:44
balance sheet lenders did take
25:46
uh you know some hits definitely as
25:48
deals were in the middle of their ramp
25:49
up period
25:50
and the middle of their renovations
25:52
right as covid hit so
25:53
you’re seeing a little bit more of a
25:55
premium on the spreads there
25:57
but you’re still able to get that that
25:59
business and it’s about the same as what
26:01
it was before right
26:02
three-year terms with a couple of years
26:04
of um
26:06
of extension options if you need them um
26:09
you know normally you’re going up to 75
26:11
80 85 percent
26:13
uh on an ltc an ltv basis
26:16
um and um you know and those rates are
26:19
where they are
26:20
you can get out of it it’s interest only
26:22
it’s non-recourse
26:24
get out of it pretty much at any time um
26:27
unless there’s a very short spread
26:29
maintenance period at the beginning
26:30
you know that’s still business that we
26:32
see and we’re actually doing some right
26:34
now
26:34
um uh and it’s and it’s just you know
26:37
one of those things that’s definitely a
26:39
good option for folks
26:40
yeah but i guess to me there’s just two
26:42
additional things so what can people do
26:43
to mitigate right how do you make it
26:45
more like a
26:46
long-term agency right and really you
26:47
know that’s question number one for
26:49
those that have never done it right
26:51
and i’m really i’m talking about the cap
26:52
right so maybe you can explain that
26:54
piece of it and that’s
26:55
what that does how that looks and then
26:56
the other part of that is are you
26:58
starting to see an
26:59
uptick in people doing fanny freddy
27:01
floaters
27:03
i think we definitely are um you know
27:06
mainly because
27:07
i think a lot of folks are not really
27:09
finding that they
27:10
want to go and take that you know
27:12
significant risk
27:14
with uh you know a big value-add that
27:16
maybe is a
27:17
you know you know an 80 occupied a 70
27:21
occupied deal and they’re going to be
27:23
the ones who are going to ramp it up
27:24
i think what you’re finding is that
27:26
sellers are saying
27:28
hey like we still feel like the cap rate
27:30
is good here
27:31
rates are low we don’t expect that we
27:33
should be able to sell this thing for
27:34
anything lower than what we were
27:36
maybe before whereas buyers are saying
27:39
hey i think that there’s a more inherent
27:41
risk here
27:42
for this profile of deal and there’s not
27:44
nearly the amount of
27:45
lending out there debt options for me
27:48
that there were
27:49
12 months ago so i need to have you know
27:52
a little bit more of
27:52
of comfort that i’m getting this thing
27:54
at a great price and so
27:56
we’re not seeing nearly as many of those
27:58
deals getting through on the acquisition
28:00
side
28:01
um and then to your question uh you know
28:04
as well on kind of what you can do to
28:06
hedge
28:07
and keep it as something that is more
28:09
like an agency perm
28:10
you know those types of deals are really
28:12
for the transitional you know the bridge
28:14
loans are for the transitional deals
28:16
the ones that need a little bit more
28:17
time and seasoning to get to
28:19
you know 85 physical occupancy for three
28:22
straight months that the agencies need
28:24
um you know 80 you know 75 to 80 percent
28:27
economic occupancy
28:29
um you know good strong collection uh
28:31
levels there
28:33
these deals are not those and so those
28:35
are ramping up a little bit more
28:36
and and need a little bit more time what
28:38
you can do though is
28:39
as you were mentioning is you can hedge
28:42
um you know get a cap
28:43
for the three-year term the initial
28:45
three-year term that you’d have on those
28:47
bridge loans
28:48
that can max out the amount of of
28:50
increase
28:51
that your index can go up to so if
28:54
you’re doing it based on sofa
28:55
and it’s 15 basis points now you buy a
28:58
hedge that’s maybe at a
29:00
you know two and a quarter um you know
29:03
strike rate call it
29:04
and that’s the level that sofa can go up
29:06
to
29:07
and all of a sudden your cap kicks in
29:09
and you’re not going to have to pay
29:10
anything higher than that and so
29:12
like i said if you’ve got uh you know
29:14
spreads that are somewhere in the mid to
29:15
high threes
29:17
and you’ve got a two and a quarter
29:18
percent you know that the worst case
29:20
scenario
29:21
you’re going to be paying is around uh
29:22
you know a five and a half to five and
29:24
three quarter rate
29:25
and that can kind of give you a little
29:26
bit more comfort um
29:28
that you’re not going to get just
29:29
underwater on rates running up on us
29:32
yeah very good so i think the message
29:34
here is right if
29:36
it’s a property that’s fully stabilized
29:39
that has a strong cash flow
29:41
you have uh as a buyer owner you have
29:44
two options right you go with a fixed
29:46
rate that is a long term
29:48
uh and you may get a little bit higher
29:50
leverage there but if you
29:52
want to have that that flexibility
29:56
you can go with adjustable rate program
30:00
but more likely than not you will have
30:02
to accept a lower leverage
30:04
right but at least the options are
30:08
there right uh when it comes to the
30:11
to the bridge side uh obviously
30:14
until uh corey 19 had the
30:17
bridge market was extremely active there
30:19
were a lot of players that came
30:22
into the game over the last few years
30:24
and then everything collapsed as we know
30:27
uh now you with with uh
30:30
very strong backing from oryx obviously
30:32
you have the balance sheet you do not
30:34
depend nearly as much as others on
30:37
uh on the securitized market to actually
30:41
sell these loans into
30:42
so you are able to lend so that’s
30:44
positive but maybe
30:46
it’s also important for our audience to
30:48
hear that
30:49
yes you are able to do bridge loans you
30:52
are very willing to do it
30:54
and that also maybe we can also touch on
30:56
mezzanine on jv
30:58
opportunities but i think it’s important
31:00
also that
31:01
our audience hears from you that