The bulk of refinancing activity this year has been done through Fannie Mae and Freddie Mac, as the government- sponsored enterprises (GSEs) offered the best rates in town.

The GSEs provided sub-6 percent debt for much of the year, serving to boost liquidity and fill the void left by the collapse of conduit lenders. The attractive rates, combined with a soft sales market, spurred a wave of refinancing activity through the first half of the year.

But borrowers won't see sub-6 percent fixed-rate debt again anytime soon. The GSEs have slowly but steadily raised their prices for both long- and shortterm debt since late spring. The agencies are quoting 10-year deals with spreads of about 255 basis points over the yield on the 10-year Treasury, for an all-in rate of around 6.4 percent, as of Aug. 15.

In contrast, that same standard 10- year loan, at 70 percent loan-to-value (LTV) and a 1.25x debt-service coverage ratio, would've gone for 6 percent at the end of May. In February, the same loans were going for just 5.6 percent.

“Six percent debt is a thing of the past,” said Tim White, president of agency lender PNC ARCS. “And I expect there would be additional price increases as we work through the balance of the year.”

It's not just high-leverage loans that are growing expensive. Even 10-year fixed-rate loans of less than 55 percent LTV are priced at more than 6 percent, White added.

Short-term, too

Fannie Mae had raised its prices incrementally for several weeks over the summer, frustrating many Delegated Underwriting and Servicing (DUS) lenders trying to quote deals with certainty. Responding to lender concerns, Fannie Mae raised prices significantly one week in August with the caveat that one big increase would lessen the chances of several small increases.

On Aug. 11, Fannie Mae was quoting five-year deals at 265 basis points over the benchmark Treasury, but by Aug. 15, that figure was 302 basis points. Spreads on seven-year deals went from 262 basis points to 288 basis points in that span.

“In the last week, we saw the biggest increase in pricing on a five- and sevenyear deal in probably the last two years,” said Vic Clark, a managing director at DUS lender Column Financial, on Aug. 15. “It's going to push everybody to do a 10-year deal.”

Freddie Mac also followed this trend gradually over the summer, though it prices deals on a case-by-case basis, unlike Fannie Mae's programmatic approach. Still, the end result is that the GSEs are raising prices in lockstep, partly due to the steep losses they've experienced as the single-family market continues to crater. In short, the GSEs' own cost of capital has gone up, and those increases are being passed on.

Other capital sources, like life insurance companies, are quoting spreads on par or above those offered by the GSEs.

Floating-rate loans gain popularity

The price spikes will force many to turn away from fixed-rate loans, since the only way to go under 6 percent is to do it with an adjustable-rate mortgage (ARM).

“The attractiveness of capped ARMs is coming back,” said Phil Melton, a senior vice president with Grandbridge Real Estate Capital. “You're going to see more floating-rate opportunities.”

ARMs with an interest-rate cap are already starting to become a more popular option. Freddie Mac, for instance, is offering floating-rate loans of around 5 percent, with many borrowers opting for an embedded interest-rate cap of about 6.5 percent to protect against inflation.

“Where we see action for the remainder of this year is people that are going after floating-rate product with the agencies,” said Dana Brome, a senior managing director in the Hartford, Conn., office of Holliday Fenoglio Fowler, L.P. “You could do a five-year deal with a minimum prepayment, so if spreads do come back in and you want to roll out to a longterm note, you could.”

Underwriting tightens

Underwriting has also grown more conservative in the last two months. In June, Column's Clark closed a $3.8 million Fannie Mae refinancing for a garden apartment complex in Houston. The seven-year loan was full-term interest -only. But the agencies won't consider a full-term interest-only seven-year loan now, unless it was for a loan of less than 55 percent LTV.

“I couldn't get that deal done today,” said Clark. “Today, it would probably be three years of interest-only, maximum.”

The rising rates and increasingly conservative underwriting may spur more owners to consider refinancing now, rather than wait on the sidelines for lower rates. “It may serve as an impetus to action for anybody that's thinking about whether they really want to refinance or not,” said White. “Anybody thinking about a refinance is better off executing today than waiting to see what will happen in another six months.”

Refinancing has been a bright spot for many agency lenders this year. The slowdown of the sales market in many ways helped to increase refinancing activity. Sellers were content to refinance a property, pull some equity out, and wait for the transaction market to come back.

Column reports that about 60 percent of its agency business this year has been for refinancing, up about 20 percent from last year. PNC ARCS also reports about a 20 percent uptick in refinancing activity year over year, offsetting a decrease in sales transaction debt volume. “Business volumes overall are up significantly, and all of that is coming from a surge in refinance activity,” said White.

But that surge may be muted the rest of the year, as many believe the worst is yet to come. “I expect pricing increases are something we're going to learn to live with,” said White.