In a falling rate environment, the ability to lock a rate early and quickly becomes magnified.
And an early rate lock takes on added importance as the Federal Reserve is set to end its Quantitative Easing program. Many industry veterans expect interest rates to start rising again soon as a result.
So, it’s no surprise that life insurance companies find themselves very busy these days. Unlike the government-sponsored enterprises (GSEs), most life insurance companies can lock a rate at application, which has become a huge competitive advantage. The GSEs wait until some preliminary underwriting is done, so it takes 10 days at least before you can lock a rate with them.
“It’s one of the biggest advantages in using a life company right now,” says Bill Hughes, managing director of Encino, Calif.-based Marcus & Millichap Capital Corp. “Even if I’m leaving some loan dollars on the table, where rates are now, I’d opt to lock them in as early in the process as I absolutely could.”
The yield on the 10-year Treasury has dropped more than 50 basis points since mid-April, taking all-in rates with them. A standard 10-year loan from the GSEs and other capital sources is now being quoted in the 5 percent to 5.25 percent range.
But as Hughes alluded to, life companies are more conservative than the GSEs when it comes to loan-to-value (LTV) in two key ways. First, life companies approach valuation in a much different fashion than the GSEs. “The GSEs are going to recognize the cap rates that are in process,” says William Ross, an executive vice president at Minneapolis-based Northmarq Capital. “But life companies tend to have set cap rates that they use in markets, and those cap rates are typically higher than what the actual current sales are.”
So, a GSE loan at 70 percent offers higher proceeds than a life company loan at 70 percent. And even given this lower valuation, life companies generally won’t go past 75 percent LTV.
But not every borrower is looking to push the envelope on leverage, and that’s where the life companies are strongest. On a 65 percent loan for a Class A acquisition, a life company can price 20 bps or more inside of the GSEs—especially on five- or seven-year loans. For full leverage, 10-year loans, though, the GSEs still have an advantage.
“If leverage is not an issue, they can crush the agencies on pricing right now, and I’m not talking by just a little bit,” says Don King, head of GSE production at Boston-based CWCapital. “If it’s a short-term deal, they can blow Fannie and Freddie out of the water.”
Life companies also have an advantage in terms of flexibility. The GSEs hold pretty fast to the 90-for-90 rule—an asset must be 90 percent occupied for 90 days to qualify for a loan. But for a pre-stabilized asset that has shown good lease-up momentum, life companies are all ears.
“There are more than a handful of life companies that will look at the operator and market and make a bet on that,” Ross says. “If you’ve got a good lease-up story, they’ll make a bet that by the time they fund that loan, they’re hoping it’s at 90 percent, but they’re not going to require it.”
In terms of which life companies are active, it’s almost easier to list those that aren’t active since so many of them have jumped into the fray over the last six months. But some of the life companies with the biggest appetites include MetLife, Prudential, Allstate, Nationwide, New York Life, Principal, Guardian, and German insurer Allianz.