Fed Conditions Present Rare Opportunity for HUD Senior Housing Finance

The federal funds rate appears to be bucking historical trends as it remains at a low rate for what Department of Housing and Urban Development lenders predict will be an extended period of time, industry leaders say.

The federal funds rate has narrowly fluctuated between 0.06 percent and 0.25 percent since January 2009, when the Fed moved to aggressively lower short-term interest rates in an effort to stimulate economic growth, HUD Lean lender Cambridge Realty Capital Companies says in a recent news release.

“When the year began the expectation was that interest rates would rise as the Fed began winding down its QE3 quantitative easing bond purchasing program and increasing the fed funds rate,” says Cambridge Chairman Jeffrey Davis. “However, while the Fed has begun to wind down the QE3 program it hasn’t raised the fed funds rate. Most economists are now saying this isn’t likely to happen until sometime during the middle of next year.”

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Senior housing and health care borrowers should pay attention to how long-term interest rates are responding to these developments, Davis says, adding that analysts believe regardless of when the Fed decides to raise the fed funds rate it will still keep it low relative to historical norms.

The fed funds rate, among other factors, is impacting 10-year Treasuries, Davis says, noting the relationship is important to borrowers because “HUD rates tend to move up and down more or less in tandem with what’s going in with these securities, and conventional commercial mortgage rates may be influenced by Fed policies as well.”

Rates on Section 232 HUD Health care loans are most correlated with 10-year Treasury Securities, and tend to rise in a similar pattern, says Senior Vice President Michael Vaughn of Walker & Dunlop, a commercial real estate finance company.

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“While there can be fluctuations in the spread between long rates such as the 10-year Treasury and short rates such as the fed funds rate, there is no question that today’s environment represents a rare opportunity for healthcare facility owners to lock in favorable financing,” Vaughn says.

Yields on 10-year Treasury notes dropped from 3% in January to about 2.5% in May as demand for these securities rose, Davis says, adding that the company is telling clients the outlook for rates in the immediate future is not as bleak as some previously feared.

Written by Cassandra Dowell

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