Due to the US’s downgraded S&P credit rating, interest rates will rise, but the question is when and how much. Opinions vary about the significance of this historic event, but all agree it will have some effect on real estate, both residential and commercial.
DSNews.com reports that on Monday, the S&P downgraded credit for Fannie Mae, Freddie Mac, and 10 of the 12 Federal Home Loan Banks from AAA to AA+, sending shock waves through the market and resulting in decreased yields on US Treasuries.
Some experts expect interest rates to climb 500 basis points within the next six months. Others disagree. The National Association of Realtors expects that within the next 3-5 years, loan demand will be much higher and at that point the downgraded credit rating might contribute to higher interest rates. Analysts say if Moody’s and Fitch downgrade US credit, the impact could be more drastic. National Real Estate Investor reports the impact on potential multifamily borrowers:
“The emerging consensus among the U.S. commercial real estate community is that long-term interest rates will begin to rise in the near future. This is especially true for multifamily borrowers who have relied on Fannie Mae and Freddie Mac to finance their projects.”
Finance & Commerce reported on Friday that S&P will downgrade Fannie Mae and Freddie Mac credit if no agreement is reached to raise the borrowing limit for the US government. With Fannie and Freddie owning or guaranteeing nearly half of all mortgages, and taxpayers having spent $150 billion to bail out these government-sponsored enterprises, it’s critical that proper steps are taken to minimize the impact on the economy and housing market when these agencies are eventually phased out.
Opinions vary greatly among those in real estate as to whether privatization of the secondary mortgage market is a realistic goal. Eduardo Padilla, CEO of Northmarq Capital, cautions:
“The private sector does not have the capacity to replace the $324 billion portfolio of fixed-rate mortgage capital for multi-family rental properties held or sponsored by the GSEs and related agencies.”
Padilla emphasizes that while many are focused of the effect of these changes on single-family home buyers, multi-family property investors rely on the stability of the financing products offered by GSE’s, especially when the market is turbulent. “A critical component of every apartment investment is consistently available fixed-rate mortgages.” Padilla attributes Fannie & Freddie’s less than 1 percent multi-family rental delinquency rate (compared to a 15.7% delinquency rate in the CMBS market for the same property type) to the standards and management of the professionals who run the GSE’s, many of whom have recently stepped down.