MORTGAGE LENDING: COMMERCIAL BANKS

APARTMENT FINANCE TODAY • FEBRUARY 2008

Banks Fall Behind

As Fannie Mae lenders regain their interest-rate advantage against banks, commercial banks must fall back on relationships, flexible underwriting to win business.

By Bendix Anderson

After a brief moment in the sun, banks are once again in the shade. For a few months this fall, banks were offering multifamily borrowers spreads equal to or even lower than the spreads offered by Fannie Mae lenders. That, plus the more flexible underwriting offered by banks, made bank loans more attractive to large numbers of borrowers.

But now that moment has passed, and commercial banks are back where they were before the capital crisis, trying to hold on to their dominance as Fannie Mae lenders aggressively expand their business with low rates.

In January, Madison, Wis.-based Anchor Bank was offering rates in the low-6 percent range for five-year loans, its most competitive loan term. Washington Mutual and First Federal of California also were offering five-year apartment loans in the high-5 percent and low-6 percent range.

In contrast, Fannie Mae lender PNC ARCS offered interest rates in the mid-5 percent range for its seven-year loans, its most competitive loan term, beating the rates offered by banks even with a longer term, which usually pushes the interest rate up.

This state of affairs, with Fannie Mae undercutting bank interest rates, is a return to business as usual, said Dan Nichols, executive vice president for Anchor, which originates both Fannie Mae loans and bank loans from its own balance sheet.

“We have been doing a bit of Fannie Mae,” he said. “Every year it’s increased.” In the last several years, Fannie Mae lenders have been chipping away at the dominance of bank loans with low rates. However, as rising defaults threw the market for bonds backed by commercial real estate into chaos last summer, the interest rates offered by Fannie Mae lenders climbed by as much as a full percentage point.

Commercial banks, on the other hand, did not have to raise their interest rates because they were not as dependent on the bond markets. That left them free to offer apartment loans from their balance sheets at interest rates in the high-5 percent and low-6 percent range.

Anchor doesn’t break down its volume figures by the month, so it’s difficult to say how well the bank did during the months in which its rate ducked below Fannie Mae lenders, but Nichols describes a sharp increase in activity for that short time.

By January, falling five-year bond yields allowed Fannie Mae lenders to drop their rates sharply, while commercial bank rates remained stubbornly in the same high-5 percent and low-6 percent range.

Some experts speculate that banks are trying to cover losses from defaults on home loans with income from apartment loans.

Even with high interest rates, though, banks can still compete for borrowers based on their flexibility. For example, banks can offer interestonly financing for the full term of a five-year loan. In contrast, lenders that securitize loans to sell to bond investors, like Fannie Mae lenders, have been forced to cut back on interest-only financing.