The prime interest rate is down, but so are bankers’ spirits and that is making it more difficult to refinance commercial loans to take advantage.
The Northwest Arkansas market, widely overbuilt in both the residential and commercial sectors, suffered another huge blow to its confidence after the May 9 failure of ANB Financial NA when federal regulators took over the $2.1 billion bank.
Shaky nerves flow naturally from bad news, said Jeff Dunn, president and CEO of Bank of Arkansas NA.
“Banks have gotten more conservative,” Dunn said. “That happens when things aren’t going so well. If you don’t have a strong deal or strong people behind it, it is difficult to get refinanced.”
The prime interest rate has fallen to 5 percent from 8.25 percent in the last 12 months as the Federal Reserve has lowered interest rates in an effort to inject liquidity into a market rocked by billion-dollar writedowns tied to subprime mortgage securities.
“The subprime mess is spilling over,” said Jeff Rauth, president of Commercial Finance Advisers Inc. of Birmingham, Mich. “For a lot of lenders that deal in the secondary market, the same buyers of the subprime bonds buy the commercial bonds.
“And even though delinquency rates on commercial loans are at historic lows, lenders that deal on that side of the business are having a tough time selling those bonds to hedge funds, pension funds, insurance companies, huge institutions like that.”
Banks that blithely dismissed risk in the heady days of 2004 and 2005 – when many of Northwest Arkansas’ most troubled mortgages both residential and commercial were written – are now obsessed with minimizing it, Rauth said.
“It comes down to how much skin [the borrower] has in the game,” Rauth said. Uncle Sam lowered rates with the idea to free up capital, but what’s really going on is the indexes are going down, but margins are going up.
“So rates for borrowers are basically the same.”
Dunn said refinancing to the prime rate carries the risk of raising red flags with regulators if the interest rate is below the market value.
“If the market is 7 [percent] and you modify the loan terms to below market to make it work and start loosening up the structure, that could increase scrutiny from banking regulators,” Dunn said.
Rauth reports widely varying quotes on commercial loan applications by as much as 2.5 percent compared to the usual difference in rates of just 0.3 percent.
“It’s hard to make sense of what’s going on,” Rauth said.
Rauth said owner-occupied property, in which the borrower’s business occupies 51 percent or more of the building, are easier to refinance especially with Small Business Administration loans. An owner-occupier can still get loans through the 504 or 7a loans, which respectively cover loans from $2 million to $7 million and from $400,000 to $2 million.
Rauth reports 90 percent financing available with rates in the 6 percent to 7 percent range and lenders are more willing to take on the risk with the U.S. Government guaranteeing the loan.
But banks are running from raw land and speculative deals. If a project doesn’t have cash flow and a borrower doesn’t have a secondary source of repayment, refinancing options, if any, are limited.
“If you have a project that has cash flow, the market on the commercial side has lots of opportunities,” said Gary Head, chairman and CEO of Signature Bank of Arkansas.