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Commercial Mortgage Broker excited about SOFR

Commercial Mortgage Broker excited about SOFR

Commercial mortgage broker excited about SOFR:  LIBOR is a waning index, was replaced by SOFR.  Touted as a more perfect rate.  SOFR stands for secured overnight financing rate. Its the rate of overnight borrowing of cash in the repo market with US Treasuries as collateral. These days LIBOR has daily transaction volume in USD of $500 million and SOFR more than $1 trillion daily.

Term Structure of LIBOR

Also, LIBOR had always been a rate determined by a panel of banks. And because of its term structure (i.e. 30 day libor, 90 day libor, etc) there is inherently credit risk built into those rates.

SOFR on the other hand is last night’s average rate.  Its not a forward looking index.  For SOFR there are indices like ‘last 30 days average SOFR’ and ‘last 90 day average’. SOFR can be thought of as the risk free rate above which credit spreads can be calculated, and this commercial mortgage broker feels that SOFR is a great index for floating rate bridge loans.

sit down LIBOR

And SOFR is less subject to manipulation because it’s a market derived rate, and not a rate chose by a panel of banks, whose panelists are humans who have their own opinions and agendas. SOFR is just better, in commercial mortgage broker Financial Compound’s opinion. In step, in commercial mortgage finance we are seeing transition now from swap semi-bond rate to SOFR swap rates.

There is probably an arbitrage play here. Once we figure it out we’ll let you know. Look to SOFR. Study SOFR. Its the key to the capital markets….

Standing on my SOFR box

Transition from LIBOR to SOFR was watershed. We were doing away with an index chosen by a select few banks as well as term structure risk. With SOFR a market driven rate from the night before, it is not subject to manipulation and is agnostic with respect to term structure. SOFR seems to be the best indicator of the risk free rate from which to benchmark and gauge risk.
But a few months ago this all seemed to change. With the advent of term SOFR, like 30 day SOFR, 90 day SOFR the term structure risk is being mixed in with the risk free rate, and we’re back to LIBOR methodology all over again.
commercial mortgage broker
Seems that just about all floating rate commercial mortgage lenders jumped on the bandwagon and quote spreads over 30, 60, or 90 day SOFR. I would argue this is a bastardization of SOFR. There are still a handful of lenders quoting over pure SOFR.
Commerical mortgage broker Financial Compound leaves you with this. SOFR at the time of this writing is 2.29%. 30 day SOFR is 2.6%. Is the risk premium for 30 days really 0.31%? Seems high to me.

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