May 2024 Market Rate Update
Each month, the IAACU Small Business Team aims to provide you with insights into the current trends in Commercial Real Estate market rates, which are influenced by movements in the US Treasury yield.
With all the economic forecasts, rumors, government budgets, upcoming elections, and ongoing world events all predicting different outcomes, we won’t pretend to know what US Treasury Rates are going to do in the future. We are not economists, nor do we have a crystal ball. This piece intends to simply pause, take a look back, and make an educated guess forward.
Commercial Loan Rate Projection:
Given the continuing upward trajectory of US Treasury index rates over the past several months, we have not moved from our previous forecast. We still feel that the 5-year US Treasury Rate will continue to trend up towards the big, even level of 5.00%. We suspect it will then remain range bound between 4.75% and 5.25% for the next several months following it reaching the 5.00% mark. From there we expect it will take an unknown BIG event to either quickly propel it towards 6.00% or higher or begin dropping it back down towards the 4.00% range.
Feb 1st: 3.80%
Mar 1st: 4.17%
Jun 1st: TBD
Although the above is a monthly rate snapshot on the 1st of every month, please note that these rates change hourly. As world events pop up and economic data is released, they move both up and down. With IAA Credit Union, we don’t play games with the margins. As a Commercial Loan rate is floating, we simply pass each increase (or decrease) to this index on to the borrower until the loan closes or the rate is locked.
Commercial Loan Rate Lock Option/s:
Because of the larger loan amounts of most Commercial Loans and the lack of government-owned market investors to buy these Commercial loans, rate locks are extremely uncommon. Unlike a residential mortgage where Fannie Mae or Freddie Mac will commit to purchasing a borrower’s first mortgage at a specific rate under a set of strict terms, and by a certain date, Commercial Loans have no secondary buyer. Therefore, most financial institutions only offer a floating interest rate until closing. This leaves their borrowers to bear the full brunt of volatile interest rate risk over that timeframe, sometimes as long as 90 days, as their commercial loan request moves through underwriting and toward closing. The impact of this floating rate, using the last 90 days as an example, means that a business member who qualified for a $1MM Commercial Loan at a rate of 7.50% on March 1st, and closing on May 1st, because of the increase of the 5 year Treasury rate over that time, they would receive a rate of 7.97%, not 7.5%. On a 15-year amortization, the difference in monthly payment would be $269. This equates to over $48,000 in extra interest costs over the life of the loan.
Although floating borrowers’ Commercial Loan rate until closing is “normal” in the business lending world, we set out to be different. Because IAACU cares about COUNTRY Agents and their financial well-being, we do not want them to be exposed to a volatile interest rate swing just before closing. We also could not afford to erase our extremely small margin for interest earned by taking the rate risk on ourselves, either. So, we went to work to find a solution. Without getting into all the mechanics of it, for a relatively small price, our COUNTRY Agents now have the option to lock in the index interest rate before closing. And if that index rate happens to be lower 7 business days prior to closing, we provide them with a free float down to the lower rate. This allows a COUNTRY Agent to not only eliminate the risk of their loan’s interest rate increasing while their loan goes through underwriting, but it also allows them the opportunity to receive a lower rate if rates have dropped at the 7 business day mark, before closing. This also protects the credit unions because we can take the money the member paid to lock the rate and purchase a hedge in the market to protect ourselves from the potential interest rate risk. In true “cooperative” fashion, this solution is a win-win for all our members and IAACU!
Read our April 2024 Market Rate Update.
*Rates from Resource Center | U.S. Department of the Treasury as of May 7, 2024.