On October 8th of this year, the Treasury yield curve switched gears and went back to its normal, albeit ever so slight, positive upward slope.   And since the spread between the 1 and 10 year Treasury yields is currently minimal, the same principal regarding yield maintenance penalties on your multifamily loans still applies – double-check everything in your portfolio.   
Contact your lenders and ask them to provide payoff calculations for those yield maintenance loans which mature from 2020 to 2023. 

 

If your 2020 goals include looking for hidden gems of equity in your portfolio, selling a property, or refinancing existing loans to reduce debt service, this is a great time to be analyzing and planning your strategy.

 

Now might be the ideal time to critically review your multifamily investment schedule to determine if any of your loans are ripe for refinance.

Many multifamily agency loans (Fannie Mae and Freddie Mac) contain yield maintenance or defeasance (“YM/D”) prepayment penalties.  Simplistically speaking, the investor who funded the agency loan is looking for a yield to maturity – the amount of interest that would have been paid if the loan was held to maturity.  If you’ve ever requested a payoff statement from your loan servicer on a YM/D penalty loan, you may have been astounded at the size of the penalty amount on the payoff statement.

The calculation of a YM/D penalty amount is a function of the following items:

  1. The outstanding loan balance;
  2. The interest rate on the note;
  3. The amount of time remaining in the YM/D period;
  4. The reinvestment rate.

The reinvestment rate is the rate at which the investor can re-invest the payoff proceeds of the loan if the loan were to be paid off early.  The Treasury yield used to calculate the reinvestment rate is tied to the remaining term of the YM/D period.   For example, if you have three years remaining in your YM/D prepayment penalty period, the investor would use a three year Treasury yield to help calculate the reinvestment rate and the corresponding penalty amount.

In the current interest rate environment (October 2019), the Treasury yield curve is inverted.  The yield on the one year Treasury bill is higher than the yield on the ten year Treasury bond.  This atypical occurrence tends to more rapidly reduce the amount of the prepayment penalty on a multifamily agency loan.   If the yield on the reinvestment rate goes higher than the note rate on the loan, the prepayment penalty amount could conceivably become negative.

Bottom line – now is a great time to get payoff quotes on any of your multifamily agency loans to determine if a refinance or sale may be plausible in today’s inverted yield curve environment.   JS MultiCapital is working with all of our clients to advise them if a debt repositioning is feasible, particularly since we are approaching a new year, when Fannie Mae and Freddie Mac will have fresh volume cap authority.

If you would like to discuss your multifamily debt schedule with us to confer on options for 2020, please call Kathryn Cassidy at (216) 765-9000 or kcassidy@jsmulticapital.com.