Interest Rates are Dropping, the Fed Cuts by 3/4 and My Commercial Mortgage Rate Looks High! Why?

As Fed Funds rates have been coming down, commercial mortgage rates in many markets have stayed the same or even gone higher.  This prompts many borrowers that are not in the top tier and with properties that may not be pristine to ask why?  The reasons are many, but primarily because of the turmoil and uncertainties in the bond market that cause lenders to be uncertain as to where they can sell their loans.  Although we are lenders, a good explanation has been offered by one of our competitors, so I will share it here.

What is the fed-funds rate:
Although banks would like to lend out every dollar they can, the Federal Reserve mandates that they keep a certain amount of cash, or capital reserve requirements, on deposit at their local Federal Reserve branch office at all times. The fed-funds rate is the rate that banks charge each other for overnight loans of capital reserve balances.  The fed-funds rate directly influences other short-term interest rates, such as deposits, credit card interest rates, and lines of credit secured by real estate (HELOCs, for example).

How the fed-funds rate works:
When the fed-funds rate drops, banks lend more because the cost of capital is cheaper.  As a result, businesses expand, home loans are cheaper, the housing market improves, and homeowners take out home equity loans to finance home improvements, buy new cars, finance education, thereby stimulating the overall economy.  These "short-term" loans, the ones with shortest-term maturities, are more sensitive to adjustments in the fed-funds rate.

Does a drop in the fed-funds rate influence mortgage rates?
While the Fed determines the fate of short-term interest rates, they do not directly call the shots on long-term interest rates (what you might pay on a 30-year fixed loan, for example).  Instead, long-term rates are determined by investors who buy and sell fixed income securities in the market and by the lending institution (ie, us), which change daily.  

As far as some lenders are concerned,  rates are set by management based on a varierty of factors that include how much it costs us to originate our loans, what investors require from our bonds, general and secondary market conditions, etc.  

When does Prime play a part in Silver Hill loans?
Although Prime is listed on the rate sheet as our index, it does not explicitly influence the rates we publish.  Prime only comes into play when the adjustable portion of our loans kick in after origination.

Michael Haltman, President
Commercial Capital Alliance/Exeter Commercial LLC
Commercial mortgage lender/broker since 1990
131 Jericho Turnpike, Suite 202
Jericho, New York 11753
516.741.8880 (O)
516.741.6838 (F)
haltman@easycommercial.com
www.easycommercial.com
www.thecommercialcapitalmortgageseminar.com