In the last month and a half, interest rates have spiked, stabilized and come down some.  The question is, why haven’t FHA Multifamily rates come down more?  This brings up how the markets work and how the Fed can raise rates without raising rates themselves.

As I write today, the rate spread over 10 year treasuries are about 210 bps, including the servicing of 25 bps.  That means that, given this morning the treasuries were at 2.60%, you could expect to be in the market at about a 4.70% rate, exclusive of the Mortgage Insurance Premium. Why are spreads that large, given that several months ago, the spreads were considerably smaller?

Two themes are going through the market right now:

  1. The REMICS that were underway when the interest rate sea change occurred are now loaded down with number of below market loans in the Conduit package.  The Investment Bankers need to leaven the REMIC with higher yielding assets in order to make the REMIC profitable in this new interest rate world.
  2. Investors in GNMA Multifamily securities are aware that rates are going up, if not now then next year.  While they do not require as much yield on 223 (f) existing apartment loans, since they start paying now, the (d) 4 loans, where funds are committed now but perhaps not put to work until drawn down upon a year from now, generate an uncertainty for investors:  where will rates be in another year?  How do I protect myself from locking in a lower yield in 2014?  The answer is to keep spreads wide.

While there is almost equal likelihood that treasuries will go down as there is that they will go up in the next 60-90 days, they aren’t the real driving force on rates right now.  Spreads need to be considered when you are trying to formulate your expected rate.