Where readers ask and we try to answer:
I’m wondering if anyone has some up-to-date information on where individual TIC loans are headed? I bought in 7/06, my interest rate is 7%.
With mortgage rates dropping, are we likely to see corresponding drops in these individual TIC loan rates? I went to an open house last weekend on some TIC properties on Carl Street just to scope out the financing picture. The rates they were quoting were really high….7.5-8? A recent article in the Chronicle revealed TIC loans were actually a safe risk for lenders, zero defaults…even zero late payments. Borrowers are vetted out very carefully. When is all of this going to translate into lower interest rates? Bottom line is, we would really like to re-finance at a lower rate. Appreciate any feedback.
That is a damn good question, and Kelly McCray provides an answer:
I am answering this question assuming the reader is in a fractional TIC, which is a very special kind of loan and is only done by a few lenders and the market for them is relatively small, even here in San Francisco.
The pricing is not just risk based, though there are more risks in these types of loans than a borrower defaulting. Remember, we aren’t talking about a condo, we are talking about a loan that is secured by a percentage of a property. We are also talking about tricky legal and legislative issues that could weaken or kill the security the bank has in the deal. I am very glad that borrowers have performed well, so the banks will keep doing them.
The banks who make these loans have to keep the loans on the books until they are paid off. A more common mortgage is bundled up and sent to Wall Street where it is sold, replacing the money the originating bank laid out so it can lend some more and make more money.
The interest rate that the fractional loan provider offers will be based on the margin between what it is paying for the money and the profit it needs to make. Simply put, if the bank is paying 5% for the money and needs a 3% profit margin the interest rate will be 8%. The good news is that this is related to the Fed rate which has recently been cut, I believe that these cuts could help lower what we are paying for our fractional loans. We’ll see, it takes time for the effect to be felt and seen. Let me reiterate, the rates for the fractional loans will not correspond with rates that are based on the price of mortgage bonds like other mortgages, the rates will correspond to what banks are paying for money + their profit margin.
I would also note that the fractional loan rates went higher after this reader closed with his 7%, about a year ago some projects had rates of over 9%.
If you’d like to contact Kelly, send us a note and we’ll pass it along.