Fannie Mae and Freddie Mac have made preservation deals a top priority for 2011.

But the dramatic rise of the benchmark 10-year Treasury, combined with climbing investor spreads, sent all-in rates for preservation deals soaring in the fourth quarter.

The yield on the 10-year Treasury was at 2.6 percent Nov. 8, and borrowers were still locking rates in the mid-4 percent range. But a month later, the benchmark reached 3.26, and during that time, investor spreads climbed about 25 basis points (bps). That’s a 91-bp rise in just one month.

Suddenly, 10-year deals were quoting in the mid-5 percent range, with seven-year loans around 5.10, and five-year money at around 4.45 percent as of mid-December.

That 5.5 percent is an important milestone. Fannie Mae uses an underwriting floor of 5.5 percent when sizing a 10-year loan, and that hadn’t been an issue for most of the second half of the year. But with all-in rates at around 5.5 percent in December, proceeds were starting to be affected.

“When your immediate rates are higher than the floor, you’re going to have loan proceeds impacted,” said C. Lamar Seats, senior vice president at Fannie Mae lender Columbia, Md.-based Enterprise Community Investment. “And it impacts the net cash flow of the borrower after the debt service is paid.”

Often, the government-sponsored enterprises (GSEs) will lower their spreads to keep all-in rates manageable when the benchmark rapidly rises. But the possibility and timing of such a move was unclear in mid-December. “If Treasuries just go through the ceiling, there may be some spread compression,” said Seats. “I just haven’t seen any willingness yet.”

Most agency lenders don’t expect to see any big changes in the way the GSEs underwrite deals in 2011. Fannie Mae is hoping that improving fundamentals will allow it to pare down its crowded pre-review list. When a market’s on pre-review, credit terms are tougher and lenders must get a deal approved by Fannie Mae headquarters before they can close, which slows down the process.

“I suspect that as some markets improve, there probably will be some room to take some markets off of pre-review,” said Manny Menendez, a vice president at Washington, D.C.-based Fannie Mae.  “We’re trying to calibrate the waivers and see if there are situations where we can provide more delegation back to the lenders.”


While Fannie Mae remains very competitive on preservation deals, bond deals are a different story. The New Issue Bond Program (NIBP) continued to fuel much activity in the fourth quarter, but much of the business was going to Freddie Mac.

One of Freddie’s advantages is that it routinely offers 35-year amortizations on bond credit enhancements, while Fannie stops at 30 years. And Freddie Mac still offers variable-rate executions, something Fannie hasn’t offered in years.

“Originally, Freddie was very aggressive about getting NIBP business,” said Paige Warren, a managing director who oversees affordable housing lending at Newark, N.J.-based Prudential Mortgage Capital. “And with Fannie out of the variable-rate bond business, more bond business was being done with Freddie the last few years. So there was already a lot of bond momentum at Freddie.”

Outside of the NIBP, Freddie’s variable-rate execution is well poised to win a majority of bond deals in 2011. When the 10-year Treasury was sinking like a stone in the second half of 2010, fixed-rate executions were suddenly on par with variable-rate, giving Fannie Mae an opportunity. But if the run-up in Treasuries continues in the first quarter, that window of opportunity may be closing for Fannie.