The 10-year Treasury has entered uncharted waters, helping to keep mortgage rates at historic lows.

A year ago, many borrowers thought they were facing a once-in-a-lifetime opportunity when the yield on the benchmark 10-year Treasury hovered around 2.4 percent in the autumn, before shooting up in December. Yet, the benchmark actually dipped below 2 percent this month, closing at 1.93 percent Sept. 9, the lowest yield in history.

And mortgage rates are as low as they’ve ever been. Freddie Mac is quoting 10-year mortgages at around 4.4 percent, about 15 basis points (bps) lower than Fannie Mae, and all-in rates on seven-year deals are around 4.1 percent from both GSEs. That’s at least a 100 basis point improvement from six months ago, when the GSEs were quoting 10-year deals in the mid– to upper–5-percent range.

Fannie and Freddie are basically right on top of each other, though Freddie seems to have a slight advantage over Fannie on 10-year deals just due to its inherent underwriting model. Fannie Mae uses an underwriting floor of 5.5 percent—a tool for sizing loans—which can make a deal less advantageous to the borrower. But Fannie has been very willing to consider flexibilities.

“For the right borrower and property, Fannie Mae is going to step up,” says Vic Clark, a senior vice president at Bethesda, Md.–based lender Walker & Dunlop. “I’ve been able to get some pretty significant waivers with respect to lowering the debt service coverage requirements subject to that floor, which substantially increases proceeds.”

Not to be outdone, the Federal Housing Administration is quoting all-in rates for 10-year refi and acquisition loans in the low–4-percent range. And life insurance companies like Prudential, MetLife, and New York Life continue to remain aggressive, pricing significantly inside of the GSEs on trophy deals.

While the agencies and life insurance companies remain aggressive, the CMBS market is another story entirely, the ugly duckling of the debt markets right now.

It’s been a wild ride for conduits this year. In June, CMBS loans were pricing with spreads of about 225 bps over the swap, making them competitive with Fannie and Freddie for the first time in years. That dynamic didn’t last long—CMBS lenders are now quoting spreads of about 400 bps over the swap on the 10-year Treasury, leading to all-in rates around 6.1 to 6.3 percent.

The health of the CMBS market will be recalibrated soon, though. A flurry of new issuances—from the likes of Morgan Stanley/Bank of America, J.P. Morgan, Goldman Sachs/Citigroup, and Wells Fargo/RBS—will come to market over the next month or so. And how investors view those deals will go a long way in determining how competitive the CMBS market will be into 2012.

“The results that come out on the Bank of America deal, along with the deals that follow over the next 60 days, will decide where CMBS pricing stabilizes,” says Clark. “If it goes well, that sets the stage for some reasonable stability in CMBS for 2012, which we need as an industry.”

Low Rates Fuel Deal Making
The low–interest-rate environment has helped investors pencil out deals even at low cap rates, fueling an ever-recovering transaction market. Camden Property Trust has been one of the industry’s most active buyers, closing on more than $700 million for 19 communities between September 2010 and September 2011.

“In core markets, with interest rates as low as they’ve been, you can still acquire an asset in the mid–5-percent cap-rate range, finance it with good agency debt, and get to a decent levered IRR,” says Dennis Steen, CFO of Houston-based Camden. 

But the company didn’t see itself as big spenders last year—that is, not until the 10-year Treasury sank like a stone last summer, and 10-year agency debt plunged to the 4.5 percent range.

“We were sitting on the sidelines, and at different points last year, we were kicking ourselves as to whether we should’ve gotten more in,” says Steen. “But the interest rate environment really helped us accelerate some acquisition activity.”