FEDERAL RATE INCREASE: EFFECT ON COMMERCIAL LOANS

As expected, the Federal Reserve’s Open Market Committee (FOMC) raised the target range for the federal funds at the most recent Dec. meeting.

The rate rose 25 bps to a 1.25-1.50% range, with the move the Fed has now hiked the Fed Funds rate 3 times this past year and five times since they started to raise the rate at the tail end of 2015.

Monetary policy is seen as remaining accommodative and consistent with strong labor market conditions and a sustained return to 2% inflation. While the policy statement did not change materially, the forecast for real GDP growth has been raised significantly.

The unemployment rate is now seen at falling below 4 percent in 2018 and 2019 but only modestly so, with the median estimate for the unemployment rate at 3.9 percent for both years. Inflation expectations for both the overall and core PCE deflator are expected to rise 1.9 percent in 2018. The median interest rate forecast calls for 3 rate hikes in 2018, 2 in 2019 and 2 more in 2020.

There is little sense monetary policy will deviate from the current measured pace as a result of the new Chairman, Jerome Powell, replacing Janet Yellen this February … as long as the economy stays on course!

So what does this mean to me, the commercial mortgage borrower?

If the Fed stays accommodative, lenders will remain accommodative. Lenders are still making loans, although this late in the credit cycle some sectors are more active than others. The recent ¼ point bump was immediately reflected in forward commitments. As an offset to this some conventional lenders have walked the amortization period out to 20 years from 15 to keep debt service qualifying. Variable rate SBA 7(a) loans in place and seasoned beyond the 3 year prepayment period are looking to refi with conventional loans fixed for 5 to as much as 10 years to avoid later rate increases.

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Michael Green is a Commercial Loan Originator for the Counsel Mortgage Group, LLC. Copyright © 2017 Counsel Mortgage Group®, LLC.