After reducing the Federal Funds Rate three times by a total of 250 basis points, the Federal Reserve reduced the rate by an additional 25 basis points at the April meeting. Expectations are for no more reductions before increases begin later this year or early next year.

Corporate bonds are yielding 140-220 basis points more than first quarter 2007; mortgage spreads have followed the same pattern. Institutional investors continue to see mortgage loans as having strong relative value compared to other asset classes.

The current market turmoil is a liquidity driven event as opposed to a reflection of weak real estate fundamentals or significant inflation.

The conduit (CMBS) lenders are currently not a viable option. Most life company lenders are quoting a flat rate and have taken a wait and see position rather than following treasury rates down, effectively increasing spreads. Attractive projects will receive prompt underwriting on historically favorable terms.

The 10-year treasury is now in the 3.85-3.90% range. Many lenders are imposing floor rates and are taking wider spreads on corporate bonds into account. As a result, 5-20 year fixed rates are currently in the 6.00%-6.75% range.

• With the rapidly changing yield curve and short-rates considerably below long-rates, forward commitment premiums have actually increased, even though overall coupons have only increased slightly.
  
  
• Many life insurance companies have had significant additional loan requests and are, therefore, ahead of funding pace and can conceivably run short of mortgage funds later this year.
  

Decisive investors with qualified projects still have an opportunity to fix attractive long term rates and more custom structures.

TERMS:

Forward commitments of up to 12 months are available, but with premiums of 4-7 basis points per month. This reflects that lenders expect that long-term rates and spreads will continue to increase over the next 6-12 months.

Floating rate loans with fixed rate conversion options are still available, but with less pricing advantages.

Some additional prepayment flexibility is available as Lenders compete for quality loans.

SOURCES:

Insurance companies continue to be reliable sources on competitive terms. Loan structures are more flexible for Class A properties and low leverage requests. Some lenders are offering fixed as opposed to yield maintenance prepayment options.

Securitized lenders are no longer providing aggressive quotes, but volatile market changes in spreads and underwriting continue to create uncertainty.

Commercial banks provide attractive floating rates but with the associated recourse, equity requirements, capacity constraints and interest rate risk. Interest rate swaps continue to evolve.

ISSUES AND OPPORTUNITIES TO CONSIDER:

Forward commitments are increasingly more difficult to arrange. The costs have increased based on several factors:

• Steeper yield curve
• Anticipation of higher spreads and indexes
• Availability and cost of hedging instruments
  
  
  Professional Mortgage Company continues to work closely with a select group of institutional investors to provide our customers with competitive and flexible terms, and our usual high level of service and innovation. We welcome the opportunity to discuss your specific requests.