In another gem from Kenny Pratt at Simple RE, he explains how swaps affect conduit loan pricing. The post has lots of links to where he pulled information and is a pretty quick, but thorough, explanation. I definitely found it helpful.
If you've finance property with a conduit loan, you have heard the people at your originator of choice talk about swaps, swap spreads, and that they can impact the interest rate you will pay on your loan. I wanted to know more about swaps and now that I have some answers, I thought I'd share with you. The information here is pulled from two sources: an email interview I had yesterday with Damon Reed of Capmark Finance (Capmark bought GMAC Commercial Mortgage over a year ago), and from the Bridger Funding website.Damon Reed explains the pricing process: "In the past, lenders would determine what breakeven pricing was and then add on [their] profitability to the spread along with any other add on's (I/O, forward rate lock, etc.) “break-even” would move as deals sold in the market and as swap rates moved up or down. Generally, as swaps increase, your spread increases on a one for one basis. Today, some lenders are quoting deals over swaps [rather than over treasuries] due to the volatile market."
Background on Swaps From the Bridger Funding Website: (See the source here)
Swaps -- also known as interest rate swaps -- are an important determinant in the pricing of most fixed-income instruments, including Commercial Mortgage Backed Securities (CMBS). Swaps are a security that most financial institutions utilize to manage interest rate risk. Interest rate risk reflects the potential impact that movements in general interest rates (e.g., U.S. Government Treasury Securities) will have on the value of fixed-income securities. For instance, as interest rates increase, the price (value) of fixed-rate bonds tends to decrease (at higher amounts for longer term bonds).
For the full post, go here.