Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC.
Reminder from our last issue:
You’ve heard of ZIRP – zero interest rate policy – from 2008-2015. Now get ready for NIRP – negative interest rate policy. Currently about $16 trillion of sovereign bonds (all countries that issue), or 25% of the total outstanding, trade at negative interest rates. This trend is firmly in place and increasing. The investor is paying the issuing country for the privilege of lending them money, or seen a different way, the investor has locked in a guaranteed loss if the bond is held to maturity. This is Alice in Wonderland monetary policy. Will Jay Powell turn out to be the least insane man in the asylum? And what does this mean to us in the CRE borrowing business? How might we expect this trend to color our borrowing potential going outbound?
Assuming Powell follows through with rate-reduction madness (they just reduced rates again this past Wednesday), how far down the rabbit hole will lenders go in following the Fed? For conventional loans we don’t know. However for Government guaranteed loans the Treasury will see that funds remain available. That’s fine for residential loans – FHA & equivalents – but how about CRE loans with businesses … especially with businesses. (Small businesses create jobs, and our Government is all about creating and retaining jobs. Sub-4% unemployment is good at election time.)
This sounds like an SBA loan … it is an SBA loan!! A type 7(a) to be specific.
There are 2 characteristics of this type of loan that are notable at this time.
1. The rate is variable (with only a few lender exceptions that I suspect will fade away in the current rate-declining environment). The rate will adjust up or down with changes in the Prime rate. In our current lending environment this is good. We think rates are low now, and historically they are, but we’re pioneering new ground on our way back to ZIRP, and possibly NIRP. We suggest you not want to lock in the low fixed rates that are being promoted by lenders.
2. More flexibility. Borrower’s go nuts when they hear the term is 25 years fully amortized. How can I possibly forecast 25 years in this highly charged rate environment? After all, the Fed is only one step removed from the Government and fiscal policy … that’s 6 election cycles! Well here’s the good news that almost always falls through the crack. The pre-payment penalty schedule for a 7(a) is 5, 3, 1, then zero!! That’s 5% in year one, 3% in year 2 and 1% in year 3, then zero for the next 22 years! After 3 years there is no pre-payment penalty. From a re-financing standpoint this looks a lot like a 3 year bridge loan with built-in extensions for the next 22 years, and without the up-front and back-end points (SBA guarantee fee notwithstanding). If rates are indeed going to bottom over the next few years, refi your loan then and lock in that fixed rate in the lower interest rate environment that will exist. (I don’t expect you’ll get a ZIRP loan, but you never know.)
Want more on this, how to participate, find a lender for your asset class, circumstance-specific qualifying? Give us a call. (Operators are standing by!! Not really, but John will answer the phone.)
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