Credit rates are low and falling, except for 10-Year T-bills, with risk premiums continuing to edge back to pre credit bubble bursting levels. This is the result of the massive liquidity injections by the Treasury department and especially the Federal Reserve Board after congress refused to appropriate enough money to restore bank solvency.

However, an increasing number of borrowers are unable to get credit at all or for a reasonable rate. Borrowers’ balance sheets and cash flow prospects have deteriorated during the deep recession. Homebuilders are having a very difficult time getting credit because they have been in recession for three years. Reduced credit access is now spreading quickly to commercial construction where building owner balance sheets have been abruptly weakened by the recent plunge in rental income. Credit access will continue to worsen well into the year for commercial building owners, developers and contractors.

Credit rates are expected to remain near the current level over the next year and then begin to rise when the FRB takes back some of the recent emergency liquidity and a recovering economy boosts loan demand.

No more serious problems from the credit market assume that the package of credit fixes continues to progressively recapitalize lenders. Some risks still remain. The plan to improve credit access to commercial real estate assumes participation by private lenders in a public-private partnership with the federal government. This is off to a very slow starts since the Obama Administration has claimed to be the senior partner and asserted the right to arbitrarily change the partnership agreement after it is signed.

Also, team Obama continues to shovel money into banks with hand and take is back out with the other hand to reduce homeowner mortgage payments. The net liquidity provided to lenders is less than the headlined gross. The latest take-back is the $60 million extracted from Goldman Sachs by Massachusetts Attorney General Martha Coakley. The state collects $9 million, the Attorney generals office pockets $1 million for “expenses” and up to $50 million is to be spent reducing mortgage loan principals for 714 Massachusetts mortgages directly owned by Goldman Sachs. This is $70,000 per mortgage. There are 49 other states and more than a dozen other major sub-prime loan packagers. If they all get the same treatment, lenders will need more cash from Washington or else the credit environment will begin to sour for borrowers.

U.S. Construction Finance Environment — April 2009