Has a call earlier today with the head of real estate lending for a community bank (very borrower/relationship oriented).
They quote exclusively using Prime as a benchmark (as I understand that is more common with community banks). I asked them if they could offer fixed or floating rate, and the response was "we can do either, we're ambivalent".
Asked them to price a 60% LTC multifamily construction loan ($15M loan size). "Prime plus 50-100bps floating". Ok, I thought. Thats the equivalent of SOFR plus 375-425bps, within realm of what I've heard lately on apartment construction loans at that leverage point.
I then asked for pricing on a mini perm/bridge facility, $12M loan on a retail center with significant deferred maintenance, absentee ownership, being purchased as a value add turnaround. 62% LTV on purchase price. The quoted me same pricing as the ground up construction loan, Prime plus 50-100 bps.
Found that to be a little bizarre. Asked the bank what that would translate to on a 3-year fixed rate loan. The guy says "Prime plus 50-100, we just fix it at that rate".
This made zero sense to me. I explained to him that using SOFR, the swap rate on a 3 year fixed using same math would be 3.2% (3 year swap rate as of today) plus 375-425 spread = 6.95%-7.45% fixed.
His response: "we don't do anything with a rate less than 8% currently, that's our minimum threshold".
I'm sorry, but if a borrower wants to swap to fixed, how is the bank "losing money" but entering into the swap agreement and providing borrower with fixed rate option? I understand the concept of swaps being in or out of the money, but acting as though a 6 or 7 handle fixed rate loan is so low that it will reduce net interest margin or profitability seems crazy.
If I am wrong or am looking at this incorrectly, someone please tell me.
Well a bank can lose money on a swap if it is in the money. Example - swap with a 3.5% strike price. 1M is ~5.3% so the Borrower will pay 5.3% plus spread to the bank and the bank will pay you back the 1.8% delta. Say their cost of deposits is 4%, they are losing money.
I don’t work at a community bank so I can’t explain why they use prime.
In theory the bank is hedging that risk since both deposit rates and SOFR/Prime are floating rate. The issue for banks providing fixed rate loans is that they have fixed rate assets and floating rate liabilities. By executing swaps, they can convert their assets into floating rate and thus removing that risk. If the bank borrows money from the FHLB for example, that can muddy the waters since then they have both floating and fixed rate liabilities tied to an asset which is either fixed or floating.
I always assumed most banks facilitate swaps to offer fixed rate loans but offload the interest rate risk. Maybe this isn’t true for smaller banks.
That is a good question. I am at one of the big banks and we have a separate derivatives team come in and execute the swap. I do not have any of the licenses, nor does anyone on my team (to my knowledge) to talk about pricing, using us over third parties, etc, so I let them do their thing. To your point about offloading the interest rate risk, I am not certain what goes on behind the scenes after execution, but I'm sure those guys are trying to make the greatest risk-adjusted return for the bank.
Look into XVA desks
Banks also need to manage their capital adequacy - not sure how it is in the US but in Europe/UK IRRBB (interest rate risk in the banking book) bites if there is too much fixed rate exposure and the bank has to swap it back to floating - essentially to limit the unrecognised P&L loss on those positions resulting from movements in risk free rates in the case that liquidation of the positions i.e. in an orderly wind down is required.
You are talking to the wrong bank or the wrong banker.
Plugging myself here but just got a fully non-recourse quote at 60% S+250 for multi from a FDIC bank. They want to do as much as possible in the next 12-18 months.
Buy a SOFR cap for $50k at 4.5% and have yourself a 7% fixed rate deal.
DM and we can discuss.
Was under the assumption that all banks were recourse when it came to CRE. Sounds like you found one that isn’t.
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