Low Interest Rates, High Anxiety Borrowing

Money is cheap today. In a conversation yesterday with developers, low rates seemed to make it only more aggravating that lending remains a challenge to procure for new construction or rehabilitation. 

Measures to gauge risk as perceived by banks (such as the “TED spread,” shown, and swaps spread) suggest that lenders are currently charging interest rates much closer to the risk-free Treasury yield than they have since the spring of 2007. That ought to mean that lending is flowing more readily for projects with strong fundamentals. Still, looking at interest rate graphs ignores multiple issues that confound borrowers – namely, underwriting criteria put in place in crisis.


One developer described yesterday, difficulty finding a lender to underwrite a 70% pre-leased commercial development in a prime location – soon to be less than 200 feet from a new light rail station, in a growing metro area with a diverse economy. It could be that banks’ perception of risk as illustrated by interest rate spreads has changed – in which case underwriting criteria need to follow suit.

Of Borrowers and Fortresses: Hoping for Something Other Than “TARP 2.0”

Where have all the lenders gone?

Local banks are here, and they’re lending. That’s the good news.

The bad news, as we’ve all been discussing, is that the larger institutions aren’t here, and they’re not lending. So where have they gone? In a burst of sarcasm, one colleague suggested they’ve been camped out in Washington, D.C., and have canceled meetings of the credit committee until further notice.

Markets and commentators have been busy today examining the latest proposal to stabilize the lending sector. Observations from the Wall Street Journal and the Accrued Interest blog provide initial feedback about the plan. Reviewing this plan, I am most interested in its distinction from the Troubled Assets Relief Program (TARP) passed last year, which appears to have flaws rendering it ineffective.

As I discussed on this forum last month, interest rates suggest banks may have become more disposed to reengage in lending activity. In retrospect, events in the last few weeks seem to highlight that more than interest rates and capital will be required to improve the lending environment. TARP isn’t doing the job. I have multiple clients who are nearly at a loss for how to procure construction or investment financing – and these are seasoned, entrepreneurial borrowers.

In mid-January, the New York Times ran a piercing article about why the first round of federal funds targeted to financial institutions hadn’t spurred more lending activity. The article quoted three bankers with particularly striking perspectives about the premise of the public investment in their respective banks:

“We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.” – John Hope III, Chairman, Whitney National Bank

“With that capital in hand, not only do we feel comfortable that we can ride out the recession, but we feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.” – Walter Pressey, President, Boston Private Wealth Management

“Adding $400 million in capital gives us a chance to really have a totally fortressed balance sheet in case things get a lot worse than we think. And if they don’t, we may end up just paying it back a little bit earlier.” – Christopher Carey, CFO, City National Bank

As evidenced by reports of tense discussions inside the administration, there is a range of opinion about what and how strings ought to be attached to the public purchase of warrants in U.S. banks. But the costs of “fortressing” particular balance sheets are widespread – just ask any borrower stymied by current conditions. Unless the mission of the federal assistance to the banking sector is to pick and support “winners” in that industry, any future public positions in the industry must hinge on institutions actually lending with the capital.

Should Recent Shifts in Interest Rates Encourage Placemakers?

It’s been a week since I posted to the Cents of Place.  I’ve wanted to contribute more in that time, but a number of projects have taken a turn for the more involved.  Why? Chaos in the private lending market has placemakers thinking twice and three times about potential partnerships with the public sector.  

One client is a well-seasoned developer and investor, looking to break ground this spring for a project in a major transit corridor. Financing is in place for multiple floors of retail and office, and preleasing has gone well.  Perhaps, the development team has explored, we could add thirty or more rental or condo housing units by building upwards, with a stepped design to ease concerns about views from the street?  Despite their record of selling and managing housing in urban corridors, lenders aren’t enthused.

Part of banks’ lack of spirit on this point is due to the recent spike in the rates banks charge each other for overnight or short-term lending.  The enclosed graphic shows how much higher is this short-term interbank rate (LIBOR) than the three-month Treasury bill; this difference is known as the “TED spread.”  In October, banks would demand interest over 4.50% higher than the three-month Treasury bill, to lend their funds to other banks.  Such a spread between the rates indicated dramatic anxiety among lenders.  If you’ve visited with real estate lenders in recent months, you know what this has done to your odds of securing project financing.

The bright side, of course, is that the graph illustrates the precipitous drop in the TED spread, from 4.63% in October to 1.08% as of this afternoon.  Hopefully, as economist Jim Hamilton suggests in this post, the shift is part of a larger, positive next chapter for the economy.  

Thanks to good friend Courtenay Brown, seasoned bond trader, for providing the graphic.  With uncharacteristic brevity, Brown called the drop in the TED spread “pretty good.”