📊 How Banks, CMBS, Agencies & Debt Funds Really Price Interest Rates 🔍

🏦 Inside the Rate Sheet: How Commercial Lenders Price Debt Across the Capital Stack 📈

How Banks, Agencies, CMBS, and Debt Funds Price Interest Rates

Understanding the mechanics behind commercial and residential mortgage pricing

One of the most common questions borrowers ask is simple on the surface—but complex underneath:

“Why is my rate different from another lender’s?”

The answer lies in how banks, agency lenders, CMBS platforms, and debt funds price capital, and how each group interacts with the primary and secondary mortgage markets. Understanding this framework helps borrowers set realistic expectations, evaluate loan options intelligently, and avoid costly timing mistakes.

This article breaks down the methodology, indices, and market forces that ultimately determine the interest rates lenders can offer.

Primary vs. Secondary Mortgage Markets (The Foundation)

Primary Mortgage Market
This is where loans are originated. Borrowers interact directly with:

• Banks

• Mortgage brokers

• Agency lenders

• Private debt funds

Rates here are quoted based on current market conditions, underwriting risk, and where the loan will ultimately be held or sold.

Secondary Mortgage Market
This is where loans are:

• Sold

• Securitized

• Pooled

• Traded by investors

Key players include:

• Fannie Mae / Freddie Mac

• CMBS bond investors

• Insurance companies

• Pension funds

• Hedge funds

👉 Secondary market demand directly influences primary market rates.

How Banks Price Interest Rates

Primary Index:

• SOFR (formerly LIBOR)

• Prime Rate

• U.S. Treasuries (short to intermediate duration)

Pricing Formula:

Index + Credit Spread

Key Inputs:

• Cost of deposits

• Regulatory capital requirements

• Relationship value

• Loan-to-Value (LTV)

• Debt Service Coverage Ratio (DSCR)

• Sponsor strength

Why bank rates may look “cheaper”:

• Stable balance sheets

• Lower leverage

• Relationship-driven pricing

Tradeoff:
More conservative underwriting and slower execution.

How Agency Lenders (Fannie Mae & Freddie Mac) Price Loans

Primary Index:

• 5-Year, 7-Year, or 10-Year U.S. Treasury

Pricing Formula:

Treasury Yield + G-Fee + Credit Spread

Key Characteristics:

• Highly liquid secondary market

• Tight spreads due to government backing

• Standardized underwriting

What impacts the final rate:

• Treasury volatility

• Prepayment structure (yield maintenance vs defeasance)

• Market appetite for multifamily bonds

Result:
Agency rates are often among the lowest—but rigid in structure.

How CMBS Lenders Price Interest Rates

Primary Index:

• Corresponding Treasury (based on loan term)

• CMBS bond market spreads

Pricing Formula:

Treasury + CMBS Credit Spread + Structure Premium

Key Variables:

• Bond investor demand

• Property type risk

• Market liquidity

• Loan structure complexity

Important Insight:
CMBS rates can look attractive before volatility, but widen quickly when bond markets reprice risk.

How Debt Funds Price Capital

Primary Index:

• SOFR (almost exclusively)

Pricing Formula:

SOFR + Large Risk Premium

Why spreads are higher:

• No deposits

• Higher cost of capital

• Targeted return thresholds

• Transitional asset risk

What borrowers gain:

• Speed

• Flexibility

• Higher leverage

• Creative structures

Debt funds price risk—not relationships.

Why Rates Change Daily (Even Hourly)

Interest rates move because:

• Treasury yields fluctuate

• Bond investors reprice risk

• Inflation expectations shift

• Federal Reserve policy signals change

• Liquidity enters or exits the system

A “rate quote” is really a snapshot of global capital markets at that moment in time.

Why Working With a Mortgage Broker Matters

A mortgage broker:

• Tracks multiple indices simultaneously

• Understands secondary market behavior

• Knows when spreads are tightening or widening

• Matches the right capital source to the borrower’s strategy

Rates are not just numbers—they are expressions of risk, liquidity, and timing.

Final Takeaway

Interest rates are not arbitrary. They are the outcome of:

• Global capital flows

• Investor demand

• Risk modeling

• Market structure

Borrowers who understand this framework make better financing decisions—and avoid surprises at closing.

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© 2023-2024 Bill Rapp, Medallion Funds LLC, Director of Capital Advisory