MBA (7/25/2008 ) Murray, Michael
Commercial real estate activity was constrained in a number of Federal Reserve districts as financing continued tightening, according to the Federal Reserve's Beige Book.
Commercial lending activity in the Richmond district was generally stable—loan demand ranged from steady to slightly up across Virginia and the Carolinas—but activity weakened somewhat in the Washington, D.C. and Charleston, W.Va. markets, the Beige Book said.
Contacts in Washington, D.C., Charlottesville, Va. and Charlotte, N.C. reported further credit tightening, especially for projects in real estate-related industries. Credit quality showed signs of deterioration in Washington, D.C., Virginia and the Carolinas, where lenders reported an uptick in client bankruptcies and weaker financial statements.
The availability of financing continued to tighten for new commercial projects in the Chicago district, and an industry contact in the New York district said new hotel development has "virtually ground to a halt." The pipeline of existing development is "larger than ever"—close to 15,000 rooms, the contact said, but a number of the projects are having trouble getting adequate financing.
Sentiment in the Boston district was "decidedly morose" among commercial real estate contacts this cycle, with the exception of a small mutual bank that continued with robust demand for its small-scale commercial property loans, the Beige Book said.
However, despite enjoying brisk business and high commercial mortgage interest rates, a small Boston mutual bank reported that it could run up against lending capacity constraints before year's end, and lending officers at the bank were instructed to adopt a "more selective" stance.
"Compared with the last report, contacts [in Boston] are less optimistic that market conditions will improve by year's end," the Beige Book said. "One commercial broker is cautioning his clients to be prepared for a long period of stagnation in commercial property values and leasing demand."
Contacts in the Philadelphia district anticipated that markets would continue softening while economic conditions remain unsettled. One contact said "there's too much uncertainty, tenants adopt the do-nothing strategy" and negotiate short-term lease extensions rather than look for new or expanded space.
Commercial contractors in the Atlanta district also anticipated further softening through the remainder of the year with a weak 2009. Contractors in the Cleveland district do not foresee any dramatic downturn in business, but several contractors said lending standards are becoming tighter despite available financing.
Most developers in the Kansas City district expect declines in current prices and rental rates to continue into the near future. Several contacts in the district reported sluggish new construction due to increasing costs and scarce financing options, and some expect the sluggishness to continue or worsen in the near term.
Commercial real estate respondents in the Dallas district noted a continued decline in investment deals getting done, particularly for larger projects. There were reports of a general drying up of liquidity in the market and a flight of capital out of real estate, the Beige Book reported.
On the upside, however, higher quality assets did not see a major deterioration in value in the Dallas district.
Contacts in the San Francisco district noted a steep reduction in the total value of commercial construction permits in San Diego and an ongoing reduction in rental demand for commercial real estate in San Francisco.
Wednesday, July 30, 2008
Existing Home Sales Drop
MBA (7/25/2008 ) Velz, Orawin
Total existing home sales fell 2.6 percent in June to a seasonally-adjusted annualized rate of 4.86 million, as the 3.2 percent drop in single-family home sales outweighed the 1.7 percent increase in condo sales.
This marked the slowest pace of total existing home sales since the inception of the series in January 1999. Single-family existing home sales posted the lowest level since January 1998.
Sales of single-family homes during the first half of this year were down 17.6 percent from those during the same period last year. The decline in condo sales have been more pronounced, with year-to-date condo sales 25.5 percent lower than those last year.
Existing home sales decreased in three regions: 6.6 percent in the Northeast; 3.5 percent in the Midwest; and 3.1 percent in the Northeast. The West posted an increase of 1.0 percent, the fourth consecutive monthly increase. Foreclosure or distressed sales, which accounted for nearly a third of the national market, according to the National Association of Realtors, helped support sales in the West over the past several months.
The share varied significantly by state. For example, according to a report by DataQuick released on July 16, foreclosure sales accounted for 41.1 percent of Southern California existing home sales in June. The share was only 7.3 percent in June 2007.
The West has experienced the highest foreclosure rate and suffered the largest price decline in the nation, as foreclosed homes are usually sold at a deep discount. While the median price for total existing homes for the nation fell 6.1 percent in June from a year ago, the decline was 17.2 percent in the West. Since February, the region has posted double-digit year-over-year home price declines, which helped lure buyers back into the market.
The number of total homes available for sale was little changed in June from May and was up 2.8 percent from June 2007. (The data are not seasonally adjusted.) A slower sales pace and a flat inventory pushed up the months’ supply of total existing homes to 11.1 months in June from 10.8 months in May and from 9.1 months a year ago.
A separate report showed that housing inventory remained a big problem. In the second quarter, the homeowner vacancy rate—the share of units typically occupied by owners that are for sale and vacant—edged down to 2.8 percent from a record 2.9 percent in the first quarter. High homeowner vacancy rates put downward pressure on home prices because sellers of vacant homes (who may be paying another mortgage elsewhere or who may be trying to sell foreclosed homes) are more likely to slash price to make a sale than sellers who still live in their homes.
The Treasury markets rallied and yields moved lower as investors sought safe havens from stock markets. Stocks tumbled in response to downbeat earnings and home sales data. The yield on the 10-year Treasury note stayed around 4.04 percent by mid-Thursday afternoon, 13 basis points lower than the rate on Wednesday.
Total existing home sales fell 2.6 percent in June to a seasonally-adjusted annualized rate of 4.86 million, as the 3.2 percent drop in single-family home sales outweighed the 1.7 percent increase in condo sales.
This marked the slowest pace of total existing home sales since the inception of the series in January 1999. Single-family existing home sales posted the lowest level since January 1998.
Sales of single-family homes during the first half of this year were down 17.6 percent from those during the same period last year. The decline in condo sales have been more pronounced, with year-to-date condo sales 25.5 percent lower than those last year.
Existing home sales decreased in three regions: 6.6 percent in the Northeast; 3.5 percent in the Midwest; and 3.1 percent in the Northeast. The West posted an increase of 1.0 percent, the fourth consecutive monthly increase. Foreclosure or distressed sales, which accounted for nearly a third of the national market, according to the National Association of Realtors, helped support sales in the West over the past several months.
The share varied significantly by state. For example, according to a report by DataQuick released on July 16, foreclosure sales accounted for 41.1 percent of Southern California existing home sales in June. The share was only 7.3 percent in June 2007.
The West has experienced the highest foreclosure rate and suffered the largest price decline in the nation, as foreclosed homes are usually sold at a deep discount. While the median price for total existing homes for the nation fell 6.1 percent in June from a year ago, the decline was 17.2 percent in the West. Since February, the region has posted double-digit year-over-year home price declines, which helped lure buyers back into the market.
The number of total homes available for sale was little changed in June from May and was up 2.8 percent from June 2007. (The data are not seasonally adjusted.) A slower sales pace and a flat inventory pushed up the months’ supply of total existing homes to 11.1 months in June from 10.8 months in May and from 9.1 months a year ago.
A separate report showed that housing inventory remained a big problem. In the second quarter, the homeowner vacancy rate—the share of units typically occupied by owners that are for sale and vacant—edged down to 2.8 percent from a record 2.9 percent in the first quarter. High homeowner vacancy rates put downward pressure on home prices because sellers of vacant homes (who may be paying another mortgage elsewhere or who may be trying to sell foreclosed homes) are more likely to slash price to make a sale than sellers who still live in their homes.
The Treasury markets rallied and yields moved lower as investors sought safe havens from stock markets. Stocks tumbled in response to downbeat earnings and home sales data. The yield on the 10-year Treasury note stayed around 4.04 percent by mid-Thursday afternoon, 13 basis points lower than the rate on Wednesday.
State Shuts Loan Firm for Alleged Fraud
Chicago Tribune (07/25/08)
Illinois authorities have closed down First Chicago Mortgage Co., a loan business that allegedly issued more than $6.6 million in mortgages to home buyers based on false job and income data. Gov. Rod Blagojevich convened a mortgage fraud task force earlier in the year after receiving numerous complaints from people who had taken out mortgages via First Chicago. The Illinois Department of Financial and Professional Regulation examined the firm's files and found that 14 loan applications falsely listed borrowers as working for Advanced Auto Repair and getting paid a substantial salary. A half-dozen other loans also contained serious misrepresentations and even forgeries.
Illinois authorities have closed down First Chicago Mortgage Co., a loan business that allegedly issued more than $6.6 million in mortgages to home buyers based on false job and income data. Gov. Rod Blagojevich convened a mortgage fraud task force earlier in the year after receiving numerous complaints from people who had taken out mortgages via First Chicago. The Illinois Department of Financial and Professional Regulation examined the firm's files and found that 14 loan applications falsely listed borrowers as working for Advanced Auto Repair and getting paid a substantial salary. A half-dozen other loans also contained serious misrepresentations and even forgeries.
Three Mortgage Lenders Under Federal Investigation
St. Louis Post-Dispatch (07/25/08); Schmitt, Richard B.
A federal grand jury in Los Angeles has started investigating Countrywide Financial Corp., IndyMac Bancorp Inc. and New Century Financial Corp.--three of the country's biggest subprime mortgage lenders--seeking everything from bank records to past e-mail correspondence. The subpoenas follow interviews that federal investigators conducted with employees and others knowledgeable about the lending operations of the California institutions, all three of which crumbled after making a long string of bad loans. The probes are part of a Justice Department campaign that until now has centered on smaller operators that defrauded homeowners and mortgage lenders. The subpoenas are proof that the U.S. government is beginning to scrutinize the nation's larger lenders to determine whether they were complicit in the billions of dollars that have been lost in the mortgage boom going bust.
A federal grand jury in Los Angeles has started investigating Countrywide Financial Corp., IndyMac Bancorp Inc. and New Century Financial Corp.--three of the country's biggest subprime mortgage lenders--seeking everything from bank records to past e-mail correspondence. The subpoenas follow interviews that federal investigators conducted with employees and others knowledgeable about the lending operations of the California institutions, all three of which crumbled after making a long string of bad loans. The probes are part of a Justice Department campaign that until now has centered on smaller operators that defrauded homeowners and mortgage lenders. The subpoenas are proof that the U.S. government is beginning to scrutinize the nation's larger lenders to determine whether they were complicit in the billions of dollars that have been lost in the mortgage boom going bust.
State Program Preventing Foreclosures
Deseret Morning News (UT) (07/25/08); Thalman, James
Utah Housing Corp. reports that foreclosures among participants in its first-time buyer assistance program declined by 52 percent in the fiscal year that ended June 30. Foreclosures were up 141 percent statewide during the same period, according to Utah Housing. The agency has helped about 10,000 moderate-income Utahns become homeowners. Although participants benefit from the program's below-market interest-rate loans, administrators tout their efforts to lend responsibly and allow borrowers buy only what they can actually afford.
Utah Housing Corp. reports that foreclosures among participants in its first-time buyer assistance program declined by 52 percent in the fiscal year that ended June 30. Foreclosures were up 141 percent statewide during the same period, according to Utah Housing. The agency has helped about 10,000 moderate-income Utahns become homeowners. Although participants benefit from the program's below-market interest-rate loans, administrators tout their efforts to lend responsibly and allow borrowers buy only what they can actually afford.
Fund Manager Sees $1 Trillion in Write-Downs
Chicago Tribune (07/25/08)
Bill Gross--manager of PIMCO Total Return, the biggest bond fund in the world--expects $1 trillion in write-downs by financial firms as a result of the U.S. mortgage crisis. Given that about $468 billion in write-downs and losses have been posted so far by such firms as Citigroup Inc., UBS AG and Merrill Lynch & Co., observers note that losses have not yet reached the halfway mark. According to Gross, "The problem with writing off $1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth." He believes the $300 billion housing bill approved by the House would bolster the markets but not the government's rescue plan for the government-sponsored enterprises, as they already have begun to shrink their balance sheets.
Bill Gross--manager of PIMCO Total Return, the biggest bond fund in the world--expects $1 trillion in write-downs by financial firms as a result of the U.S. mortgage crisis. Given that about $468 billion in write-downs and losses have been posted so far by such firms as Citigroup Inc., UBS AG and Merrill Lynch & Co., observers note that losses have not yet reached the halfway mark. According to Gross, "The problem with writing off $1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth." He believes the $300 billion housing bill approved by the House would bolster the markets but not the government's rescue plan for the government-sponsored enterprises, as they already have begun to shrink their balance sheets.
Frank Calls for Foreclosure Freeze
Washington Post (07/25/08) P. D2
Loan servicers will consider a call by Rep. Barney Frank, D-Mass., to avoid initiating proceedings against delinquent borrowers until a new foreclosure-prevention program takes effect, according to Mortgage Bankers Association lobbyist Erick Gustafson. A provision of the rescue package that the House passed this week, the program would provide as many as 400,000 struggling borrowers with more affordable loans backed by the federal government. It would become effective on Oct. 1 if the housing bill is passed by the Senate and signed by President Bush. Frank, chairman of the House Financial Services Committee, previously had said the program would take effect immediately.
Loan servicers will consider a call by Rep. Barney Frank, D-Mass., to avoid initiating proceedings against delinquent borrowers until a new foreclosure-prevention program takes effect, according to Mortgage Bankers Association lobbyist Erick Gustafson. A provision of the rescue package that the House passed this week, the program would provide as many as 400,000 struggling borrowers with more affordable loans backed by the federal government. It would become effective on Oct. 1 if the housing bill is passed by the Senate and signed by President Bush. Frank, chairman of the House Financial Services Committee, previously had said the program would take effect immediately.
Mortgage Rates Rose in Week
Wall Street Journal (07/25/08) P. C6
Freddie Mac reports a more than 0.25-percentage point gain in the 30-year fixed mortgage rate to 6.63 percent during the week ended July 24 from the prior week, marking the highest level since it reached 6.68 percent last August. The 15-year fixed mortgage rate also increased, climbing to 6.18 percent from 5.78 percent. Meanwhile, the five-year hybrid adjustable mortgage rate rose to 6.16 percent from 5.80 percent; and the one-year ARM surged to 5.49 percent from 5.10 percent. Freddie Mac chief economist Frank Nothaft attributes the jump to "market concerns about rising inflation, further weakness in the housing market and greater probability that the Federal Reserve will raise short-term rates this year."
Freddie Mac reports a more than 0.25-percentage point gain in the 30-year fixed mortgage rate to 6.63 percent during the week ended July 24 from the prior week, marking the highest level since it reached 6.68 percent last August. The 15-year fixed mortgage rate also increased, climbing to 6.18 percent from 5.78 percent. Meanwhile, the five-year hybrid adjustable mortgage rate rose to 6.16 percent from 5.80 percent; and the one-year ARM surged to 5.49 percent from 5.10 percent. Freddie Mac chief economist Frank Nothaft attributes the jump to "market concerns about rising inflation, further weakness in the housing market and greater probability that the Federal Reserve will raise short-term rates this year."
2Q Home Vacancies Set a Record
American Banker (07/25/08)
The Census Bureau says the 18.6 million homes sitting unoccupied nationwide during the second quarter set a record attributable to the housing slump and rising foreclosure rate. Year-over-year, the number of vacant dwellings was up 6.9 percent, and 2.8 percent of these vacant homes were nonrentals. The report also shows 4 million rentals standing empty during the second quarter and a jump in vacant homes in the "other" category--including foreclosures and those empty while undergoing improvements--to 3.2 million from 3 million in 2007.
The Census Bureau says the 18.6 million homes sitting unoccupied nationwide during the second quarter set a record attributable to the housing slump and rising foreclosure rate. Year-over-year, the number of vacant dwellings was up 6.9 percent, and 2.8 percent of these vacant homes were nonrentals. The report also shows 4 million rentals standing empty during the second quarter and a jump in vacant homes in the "other" category--including foreclosures and those empty while undergoing improvements--to 3.2 million from 3 million in 2007.
Drop in June Home Sales Far Steeper Than Expected
San Jose Mercury News (CA) (07/25/08) ; Crutsinger, Martin
The National Association of Realtors (NAR) reports that existing-home sales slipped 2.6 percent in June to an annual pace of 4.86 million, a more than 10-year low. The month-to-month decrease exceeded analysts' expectations of a 1-percent decline. Year-over-year, resales were down 15.5 percent, and the median price slid 6.1 percent over the 12-month period to $215,100. Meanwhile, NAR reports a 0.2-percent jump in inventory to 4.49 million, or an 11.1-month supply.
The National Association of Realtors (NAR) reports that existing-home sales slipped 2.6 percent in June to an annual pace of 4.86 million, a more than 10-year low. The month-to-month decrease exceeded analysts' expectations of a 1-percent decline. Year-over-year, resales were down 15.5 percent, and the median price slid 6.1 percent over the 12-month period to $215,100. Meanwhile, NAR reports a 0.2-percent jump in inventory to 4.49 million, or an 11.1-month supply.
Economic Variables Continue Pressure on Retail
MBA (7/24/2008 ) Murray, Michael
Changing variables—cautious consumer spending and unknown tenant positions—will present major challenges for shopping center owners and pressure on retail properties for the remainder of this year and into 2009, industry analysts said.
“With market conditions eroding, the balance of power between tenants and landlords is shifting,” according to a report from New York-based Cushman & Wakefield. The report, Changing Tides: Outlook for the Retail Sector, said few deals closing have yet to reflect any major pricing correction.
Nationally, retail prices were off by 5.5 percent from their peak in the first quarter of 2007 while brokers reported a 10 percent to 20 percent gap in buyer and seller pricing expectations, enhancing a stalemate between the parties.
“After years of strong rent growth and ever-lower cap rates, shopping center owners are feeling the heat of a weakening market. The national vacancy rate for neighborhood and community shopping centers in the first quarter rose to the highest level since 1996. Unstable market conditions have strengthened the bargaining position of retail tenants, yet they face many challenges of their own as gloomy consumers curb their spending,” the report said.
Fitch Ratings, New York, said the retail sector remained under pressure as overall delinquencies mildly increased, but retail showed a net delinquency increase of $70.5 million.
“An increase in retail bankruptcies and a continued decline in consumer disposable income are evident, though they have yet to impact retail performance,’ said Susan Merrick, managing director at Fitch.
Declining housing markets in California and Arizona, however, caused sales to deteriorate for the Hayward, Calif.-based Mervyn’s department store chain—operating 177 stores in seven states—and an article in the Wall Street Journal said the company could file for bankruptcy.
“If Mervyn's faces liquidation, malls already downtrodden from closings such as Linens 'n Things and Sharper Image would suffer even more,” Realpoint LLC, Horsham, Pa., said in a recent report.
Realpoint found 525 Mervyn’s loans with a combined $1.8 billion property-level loan balance in 36 CMBS transactions. The overwhelming majority of Mervyn’s loans were in seven transactions with 25 or more loans each, the report said.
Realpoint said Mervyn’s occupied 100 percent of the space in the collateral securing 30 percent of the loans by balance, or 94 percent of the locations by loan count, but none of the properties are less than 80 percent occupied. More than 50 percent of the loans are on collateral in California and all are current.
In an earlier report this month, Realpoint said that Starbucks closing 600 stores would have a “minimal” impact on CMBS because the stores occupy a small gross leaseable area (GLA).
Analysts at Property & Portfolio Research Inc., Boston, reported retail around the country facing pricing pressures and rising vacancies, particularly in the Midwest.
In Ohio, oversupply and waning demand will send Cincinnati retail vacancies up 170 basis points in the next year from its first quarter 18.4 percent economic vacancy rate—without recovery until 2012, said Stephanie Hession, analyst at PPR.
Columbus, Ohio retail vacancies were up 30 basis points to 17.1 percent by the end of the first quarter, and PPR forecasts the economic vacancy rate for Indianapolis retail to increase 140 basis points in the next year.
"The one-two punch of major deliveries and slowing retail sales will knock down near-term fundamentals" in Indianapolis, said Jeff Myers, analyst at PPR.
Shaw Lupton, PPR analyst in Milwaukee, said a weak economy, softening retail demand and the tail end of a wave of new supply all pose serious threats.
“As consumers slam the brakes on spending in 2008, economic vacancies are expected to worsen considerably,” Lupton said.
Richmond, Philadelphia and Portland averaged 6 percent to 9 percent in retail economic vacancies, but Salt Lake City and San Diego face greater pressures, analysts said.
PPR analyst Aaron Jodka forecast the Salt Lake City market to post its worst total returns ever as value losses continue.
In San Diego, retail deal volume totaled $177 million in the first quarter, below the market's quarterly average of $237.3 million since 2004.
"A correction in pricing of retail properties in San Diego is imminent. San Diego's retail property values have grown fast over the past few years, but values are now facing mounting downward pressures," said Matthew Mowell, analyst at PPR.
Changing variables—cautious consumer spending and unknown tenant positions—will present major challenges for shopping center owners and pressure on retail properties for the remainder of this year and into 2009, industry analysts said.
“With market conditions eroding, the balance of power between tenants and landlords is shifting,” according to a report from New York-based Cushman & Wakefield. The report, Changing Tides: Outlook for the Retail Sector, said few deals closing have yet to reflect any major pricing correction.
Nationally, retail prices were off by 5.5 percent from their peak in the first quarter of 2007 while brokers reported a 10 percent to 20 percent gap in buyer and seller pricing expectations, enhancing a stalemate between the parties.
“After years of strong rent growth and ever-lower cap rates, shopping center owners are feeling the heat of a weakening market. The national vacancy rate for neighborhood and community shopping centers in the first quarter rose to the highest level since 1996. Unstable market conditions have strengthened the bargaining position of retail tenants, yet they face many challenges of their own as gloomy consumers curb their spending,” the report said.
Fitch Ratings, New York, said the retail sector remained under pressure as overall delinquencies mildly increased, but retail showed a net delinquency increase of $70.5 million.
“An increase in retail bankruptcies and a continued decline in consumer disposable income are evident, though they have yet to impact retail performance,’ said Susan Merrick, managing director at Fitch.
Declining housing markets in California and Arizona, however, caused sales to deteriorate for the Hayward, Calif.-based Mervyn’s department store chain—operating 177 stores in seven states—and an article in the Wall Street Journal said the company could file for bankruptcy.
“If Mervyn's faces liquidation, malls already downtrodden from closings such as Linens 'n Things and Sharper Image would suffer even more,” Realpoint LLC, Horsham, Pa., said in a recent report.
Realpoint found 525 Mervyn’s loans with a combined $1.8 billion property-level loan balance in 36 CMBS transactions. The overwhelming majority of Mervyn’s loans were in seven transactions with 25 or more loans each, the report said.
Realpoint said Mervyn’s occupied 100 percent of the space in the collateral securing 30 percent of the loans by balance, or 94 percent of the locations by loan count, but none of the properties are less than 80 percent occupied. More than 50 percent of the loans are on collateral in California and all are current.
In an earlier report this month, Realpoint said that Starbucks closing 600 stores would have a “minimal” impact on CMBS because the stores occupy a small gross leaseable area (GLA).
Analysts at Property & Portfolio Research Inc., Boston, reported retail around the country facing pricing pressures and rising vacancies, particularly in the Midwest.
In Ohio, oversupply and waning demand will send Cincinnati retail vacancies up 170 basis points in the next year from its first quarter 18.4 percent economic vacancy rate—without recovery until 2012, said Stephanie Hession, analyst at PPR.
Columbus, Ohio retail vacancies were up 30 basis points to 17.1 percent by the end of the first quarter, and PPR forecasts the economic vacancy rate for Indianapolis retail to increase 140 basis points in the next year.
"The one-two punch of major deliveries and slowing retail sales will knock down near-term fundamentals" in Indianapolis, said Jeff Myers, analyst at PPR.
Shaw Lupton, PPR analyst in Milwaukee, said a weak economy, softening retail demand and the tail end of a wave of new supply all pose serious threats.
“As consumers slam the brakes on spending in 2008, economic vacancies are expected to worsen considerably,” Lupton said.
Richmond, Philadelphia and Portland averaged 6 percent to 9 percent in retail economic vacancies, but Salt Lake City and San Diego face greater pressures, analysts said.
PPR analyst Aaron Jodka forecast the Salt Lake City market to post its worst total returns ever as value losses continue.
In San Diego, retail deal volume totaled $177 million in the first quarter, below the market's quarterly average of $237.3 million since 2004.
"A correction in pricing of retail properties in San Diego is imminent. San Diego's retail property values have grown fast over the past few years, but values are now facing mounting downward pressures," said Matthew Mowell, analyst at PPR.
Small Businesses Overconfident About Cyber Security
MBA (7/24/2008 ) Palaparty, Vijay
Findings in a McAfee survey reveal predominant belief among small businesses that they are too small to be of any value to cyber criminals.
“Small businesses need to understand how to best protect their business,” said Darrell Rodenbaugh, senior vice president of the mid-market segment at McAfee Inc., Santa Clara, Calif. “North America’s 7.4 million small- and medium-sized businesses are operating in an increasingly competitive environment and tough economic climate. They are becoming more reliant on the internet to grow and succeed but are in denial about security threats.”
The report, Does Size Matter? The Security Challenge of the SMB, revealed that 52 percent of small businesses do not think they are well-known enough to be on a cyber criminal’s radar. Forty-six percent believe they do not have information that would be of value to cyber criminals; 45 percent said they are not a valuable enough target.
“Almost any small business, even the very small ones with fewer than five employees, will at the least have some stored records of confidential customer and employee information that would be of use to a cyber criminal,” said Rick Jackson, director of North American small business at McAfee.
The report also revealed that 20 percent of small businesses feel very protected against cyber crime and another 68 percent have some form of protection in place. However, one in five small businesses has little to no protection. Furthermore, among the small businesses that reported adequate protection, 50 percent said they trust the default settings on their IT equipment; 43 percent said they typically accept default settings.
”Simply using the default settings is a dangerous practice,” Jackson said. “It gives SMBs a false sense of security as they think they are protected. Using the recommended settings isn’t enough, given the complexity and ever changing security threats. Default settings are freely available to cyber criminals, which means that it doesn’t take them long to find ways to crack the security settings gaps and infiltrate business systems and networks, without owners even knowing their confidential data is compromised.”
“Time constraints are definitely a contributory factor to SMBs security,” Rodenbaugh said. “In focus groups, SMBs have told us that they don’t have enough time and they would rather not do anything rather than give it to someone else to do. One of the most effective options for an SMB is to buy security-as-a-service.”
Thirty-nine percent of small businesses reported spending just one hour per week on managing IT security threats.
“SMBs are the least protected and the most exposed,” Jackson said. ”Many small businesses are aware that they need to protect themselves against IT security threats but they don’t have the time to invest in managing all the emerging threats, keeping systems updated nor the IT budgets to buy and maintain complicated, expensive security solutions. It’s a constant challenge to balance the resources available in comparison with the perceived threat.”
One in five small businesses, however, acknowledged that an IT security attack could put them out of business.
“Cyber criminals don’t discriminate and to them, size doesn’t matter,” said Jeff Green, senior vice president of McAfee Avert Labs. ”In fact, high profile attacks are becoming less frequent because they are often detected more quickly, and attackers are favoring stealth attacks that quietly infiltrate systems. Attackers often assume that smaller businesses will not have technology to identify their attacks and therefore regard them as easy pickings.”
“We encourage small and medium sized businesses to look closely at their most valuable assets—what matters to them most—and ensure that those assets are protected,” Rodenbaugh said. “For one business it might be protecting their customer database, for another it might be safeguarding intellectual property and ideas and yet for another it might be securing their financial information. For an SMB, the best choice is to choose one solution that covers the most likely threats to their business.”
Findings in a McAfee survey reveal predominant belief among small businesses that they are too small to be of any value to cyber criminals.
“Small businesses need to understand how to best protect their business,” said Darrell Rodenbaugh, senior vice president of the mid-market segment at McAfee Inc., Santa Clara, Calif. “North America’s 7.4 million small- and medium-sized businesses are operating in an increasingly competitive environment and tough economic climate. They are becoming more reliant on the internet to grow and succeed but are in denial about security threats.”
The report, Does Size Matter? The Security Challenge of the SMB, revealed that 52 percent of small businesses do not think they are well-known enough to be on a cyber criminal’s radar. Forty-six percent believe they do not have information that would be of value to cyber criminals; 45 percent said they are not a valuable enough target.
“Almost any small business, even the very small ones with fewer than five employees, will at the least have some stored records of confidential customer and employee information that would be of use to a cyber criminal,” said Rick Jackson, director of North American small business at McAfee.
The report also revealed that 20 percent of small businesses feel very protected against cyber crime and another 68 percent have some form of protection in place. However, one in five small businesses has little to no protection. Furthermore, among the small businesses that reported adequate protection, 50 percent said they trust the default settings on their IT equipment; 43 percent said they typically accept default settings.
”Simply using the default settings is a dangerous practice,” Jackson said. “It gives SMBs a false sense of security as they think they are protected. Using the recommended settings isn’t enough, given the complexity and ever changing security threats. Default settings are freely available to cyber criminals, which means that it doesn’t take them long to find ways to crack the security settings gaps and infiltrate business systems and networks, without owners even knowing their confidential data is compromised.”
“Time constraints are definitely a contributory factor to SMBs security,” Rodenbaugh said. “In focus groups, SMBs have told us that they don’t have enough time and they would rather not do anything rather than give it to someone else to do. One of the most effective options for an SMB is to buy security-as-a-service.”
Thirty-nine percent of small businesses reported spending just one hour per week on managing IT security threats.
“SMBs are the least protected and the most exposed,” Jackson said. ”Many small businesses are aware that they need to protect themselves against IT security threats but they don’t have the time to invest in managing all the emerging threats, keeping systems updated nor the IT budgets to buy and maintain complicated, expensive security solutions. It’s a constant challenge to balance the resources available in comparison with the perceived threat.”
One in five small businesses, however, acknowledged that an IT security attack could put them out of business.
“Cyber criminals don’t discriminate and to them, size doesn’t matter,” said Jeff Green, senior vice president of McAfee Avert Labs. ”In fact, high profile attacks are becoming less frequent because they are often detected more quickly, and attackers are favoring stealth attacks that quietly infiltrate systems. Attackers often assume that smaller businesses will not have technology to identify their attacks and therefore regard them as easy pickings.”
“We encourage small and medium sized businesses to look closely at their most valuable assets—what matters to them most—and ensure that those assets are protected,” Rodenbaugh said. “For one business it might be protecting their customer database, for another it might be safeguarding intellectual property and ideas and yet for another it might be securing their financial information. For an SMB, the best choice is to choose one solution that covers the most likely threats to their business.”
Beige Book: Economic Activity Continues to Slow
MBA (7/24/2008 ) Sorohan, Mike
The Beige Book released yesterday by the Federal Reserve Board confirmed what many of us already know—that the pace of economic activity continues to slow.
Key highlights of the report:
• Consumer spending—a critical component to economic growth—was “sluggish or slowing” in nearly all districts, despite getting a boost from economic stimulus checks.
• Residential real estate markets declined or were still weak across most of the country.
• Manufacturing activity declined in many districts, although demand for exports remained generally high.
• Commercial real estate activity also slowed or remained sluggish in a majority of districts, although a few districts noted slight improvement.
• Banking loan growth generally reported as restrained, with residential real estate lending and consumer lending showing more weakness than commercial lending.
• Demand for services remained mixed across districts, with strength in the IT and health care industries offsetting some weakness in other service sectors.
• The energy sector continued to strengthen, boosted by rising petroleum prices.
• Overall price pressures reported as elevated or increasing. Input prices continued to rise, particularly for fuel, other petroleum-based materials, metals, food and chemicals. Retail price inflation varied, with some districts reporting increases but others noting some stability, at least for the present. Wage pressures were generally limited in most districts, as labor market demand was soft except for highly skilled workers and in the energy sector.
• Tourist activity was mixed, with residents in several districts choosing to vacation closer to home because of high gasoline prices.
The Book said the outlook for retail activity was generally downbeat. Automobile sales were almost uniformly weak across districts, with sales especially poor for large vehicles such as trucks, SUVs and some minivans, with demand increasing for small fuel-efficient and foreign cars.
Residential real estate markets declined or remained weak across most of the country, the Book said. Boston, Philadelphia, Richmond, Atlanta and St. Louis districts reported declining sales; Cleveland reported flat to declining sales, while sales remained sluggish in Kansas City and New York districts, particularly at the high end, and were below year-ago levels in the Minneapolis district.
The Book reported inventories of unsold homes or condos as higher or excessive in several districts, although Dallas noted a continued decline in inventories, especially at the low end. Home prices continued to decline in most districts as they reported increased use of incentives and discounting. The San Francisco district noted particularly sharp declines in home prices in areas of California, Arizona and Nevada that have experienced large increases in foreclosures. Atlanta reported home price drops across the board.
On a positive housing note, the Book reported home prices as holding up in the Dallas district and little changed in the Kansas City district. However, difficulties obtaining mortgage financing were reported in the New York and Chicago districts. All districts reporting on single-family construction said activity continued to decline and builders in the Philadelphia district noted a rising number of cancellations. The decline in new construction accelerated in some areas of the Chicago district.
The Book noted loan growth as generally “restrained” across the country, with residential real estate lending and consumer lending showing more weakness than commercial lending. Overall loan demand weakened in the New York, Kansas City and San Francisco districts, and as sluggish in the Philadelphia district. St. Louis reported slightly positive overall loan demand. A number of districts reported sluggish growth or slowing demand for residential real estate loans; San Francisco described demand for such loans as very weak.
Consumer loan demand was reported to have declined in the New York, Chicago and Kansas City districts and grew more slowly in the Philadelphia district. Reports on business lending were generally more upbeat. However, slight to moderate declines in business lending were reported in the New York, Kansas City and San Francisco districts. On the funding side, Dallas described competition for deposits as “very tough,” but Cleveland indicated that core deposits at smaller banks as stable to increasing as a result of a flight to safety by investors.
Most districts reported a further tightening of credit standards, especially for residential real estate and construction loans. Dallas reported that lenders were tightening non-price terms and boosting loan spreads in response to increases in their cost of capital. Tighter standards for construction loans were reported in the Atlanta and Chicago districts and San Francisco indicated that credit standards remained quite restrictive for both residential real estate and construction loans. Tighter standards for business loans were reported in three districts, but banks in the Atlanta district were reported to be competing more intensely for business customers with good credit histories. Kansas City and Boston reported that tightened standards were especially prevalent on commercial real estate loans.
Districts that commented on bank loan quality reported some deterioration, including in the Philadelphia, Richmond and San Francisco districts. New York reported increased delinquencies on consumer and residential real estate loans and San Francisco indicated that declines in loan quality were greatest for real estate loans and construction loans. In the Dallas district, contacts had not yet observed a significant decline in loan quality but expected deterioration in coming months, especially for residential real estate and consumer loans.
All reporting districts characterized overall price pressures as elevated or increasing. Input prices continued to rise, particularly for fuel, other petroleum-based materials, metals, food and chemicals. Most districts reported labor markets as unchanged or slightly weaker compared with the last survey period, and that wage pressures were generally modest. Demand for labor remained high for skilled workers in most industries.
The Beige Book released yesterday by the Federal Reserve Board confirmed what many of us already know—that the pace of economic activity continues to slow.
Key highlights of the report:
• Consumer spending—a critical component to economic growth—was “sluggish or slowing” in nearly all districts, despite getting a boost from economic stimulus checks.
• Residential real estate markets declined or were still weak across most of the country.
• Manufacturing activity declined in many districts, although demand for exports remained generally high.
• Commercial real estate activity also slowed or remained sluggish in a majority of districts, although a few districts noted slight improvement.
• Banking loan growth generally reported as restrained, with residential real estate lending and consumer lending showing more weakness than commercial lending.
• Demand for services remained mixed across districts, with strength in the IT and health care industries offsetting some weakness in other service sectors.
• The energy sector continued to strengthen, boosted by rising petroleum prices.
• Overall price pressures reported as elevated or increasing. Input prices continued to rise, particularly for fuel, other petroleum-based materials, metals, food and chemicals. Retail price inflation varied, with some districts reporting increases but others noting some stability, at least for the present. Wage pressures were generally limited in most districts, as labor market demand was soft except for highly skilled workers and in the energy sector.
• Tourist activity was mixed, with residents in several districts choosing to vacation closer to home because of high gasoline prices.
The Book said the outlook for retail activity was generally downbeat. Automobile sales were almost uniformly weak across districts, with sales especially poor for large vehicles such as trucks, SUVs and some minivans, with demand increasing for small fuel-efficient and foreign cars.
Residential real estate markets declined or remained weak across most of the country, the Book said. Boston, Philadelphia, Richmond, Atlanta and St. Louis districts reported declining sales; Cleveland reported flat to declining sales, while sales remained sluggish in Kansas City and New York districts, particularly at the high end, and were below year-ago levels in the Minneapolis district.
The Book reported inventories of unsold homes or condos as higher or excessive in several districts, although Dallas noted a continued decline in inventories, especially at the low end. Home prices continued to decline in most districts as they reported increased use of incentives and discounting. The San Francisco district noted particularly sharp declines in home prices in areas of California, Arizona and Nevada that have experienced large increases in foreclosures. Atlanta reported home price drops across the board.
On a positive housing note, the Book reported home prices as holding up in the Dallas district and little changed in the Kansas City district. However, difficulties obtaining mortgage financing were reported in the New York and Chicago districts. All districts reporting on single-family construction said activity continued to decline and builders in the Philadelphia district noted a rising number of cancellations. The decline in new construction accelerated in some areas of the Chicago district.
The Book noted loan growth as generally “restrained” across the country, with residential real estate lending and consumer lending showing more weakness than commercial lending. Overall loan demand weakened in the New York, Kansas City and San Francisco districts, and as sluggish in the Philadelphia district. St. Louis reported slightly positive overall loan demand. A number of districts reported sluggish growth or slowing demand for residential real estate loans; San Francisco described demand for such loans as very weak.
Consumer loan demand was reported to have declined in the New York, Chicago and Kansas City districts and grew more slowly in the Philadelphia district. Reports on business lending were generally more upbeat. However, slight to moderate declines in business lending were reported in the New York, Kansas City and San Francisco districts. On the funding side, Dallas described competition for deposits as “very tough,” but Cleveland indicated that core deposits at smaller banks as stable to increasing as a result of a flight to safety by investors.
Most districts reported a further tightening of credit standards, especially for residential real estate and construction loans. Dallas reported that lenders were tightening non-price terms and boosting loan spreads in response to increases in their cost of capital. Tighter standards for construction loans were reported in the Atlanta and Chicago districts and San Francisco indicated that credit standards remained quite restrictive for both residential real estate and construction loans. Tighter standards for business loans were reported in three districts, but banks in the Atlanta district were reported to be competing more intensely for business customers with good credit histories. Kansas City and Boston reported that tightened standards were especially prevalent on commercial real estate loans.
Districts that commented on bank loan quality reported some deterioration, including in the Philadelphia, Richmond and San Francisco districts. New York reported increased delinquencies on consumer and residential real estate loans and San Francisco indicated that declines in loan quality were greatest for real estate loans and construction loans. In the Dallas district, contacts had not yet observed a significant decline in loan quality but expected deterioration in coming months, especially for residential real estate and consumer loans.
All reporting districts characterized overall price pressures as elevated or increasing. Input prices continued to rise, particularly for fuel, other petroleum-based materials, metals, food and chemicals. Most districts reported labor markets as unchanged or slightly weaker compared with the last survey period, and that wage pressures were generally modest. Demand for labor remained high for skilled workers in most industries.
Fannie Mae Sells $3 Billion U.S. in Notes
Toronto Star (07/24/08)
Fannie Mae's weekly auction resulted in the sale of $3 billion worth of short-term notes. According to Stone & McCarthy Research Associates, the $2 billion in three-month notes sold at a 2.62-percent yield equates to a spread of 101 basis points more than U.S. Treasuries and 16 basis points under the three-month London interbank offered rate (Libor). Meanwhile, the $1 billion worth of six-month notes sold at a 2.82-percent yield exceeded Treasurys by 88 basis points and fell under Libor by 31 basis points.
Fannie Mae's weekly auction resulted in the sale of $3 billion worth of short-term notes. According to Stone & McCarthy Research Associates, the $2 billion in three-month notes sold at a 2.62-percent yield equates to a spread of 101 basis points more than U.S. Treasuries and 16 basis points under the three-month London interbank offered rate (Libor). Meanwhile, the $1 billion worth of six-month notes sold at a 2.82-percent yield exceeded Treasurys by 88 basis points and fell under Libor by 31 basis points.
San Diego Sues Bank of America to Halt Foreclosures
Reuters (07/24/08); Graham, Marty
Bank of America and its Countrywide unit have been sued by the city of San Diego in an attempt to keep the mortgage lenders from foreclosing on local homes. Filed in San Diego County Superior Court by City Attorney Michael Aguirre, the suit alleges that homeowners were defrauded with subprime loans that did not comply with Countrywide's policies. San Diego County has lost 20,000 homes to foreclosure so far this year, but some analysts believe the number could rise to 40,000 for 2008. "We would like to see San Diego become a foreclosure sanctuary," said Aguirre, who expects to file similar suits against Washington Mutual, Wells Fargo and Wachovia to get lenders to negotiate with borrowers.
Bank of America and its Countrywide unit have been sued by the city of San Diego in an attempt to keep the mortgage lenders from foreclosing on local homes. Filed in San Diego County Superior Court by City Attorney Michael Aguirre, the suit alleges that homeowners were defrauded with subprime loans that did not comply with Countrywide's policies. San Diego County has lost 20,000 homes to foreclosure so far this year, but some analysts believe the number could rise to 40,000 for 2008. "We would like to see San Diego become a foreclosure sanctuary," said Aguirre, who expects to file similar suits against Washington Mutual, Wells Fargo and Wachovia to get lenders to negotiate with borrowers.
Title Insurer Fidelity National's Net Sinks 92 Pct
Reuters (07/24/08); Stempel, Jonathan
Fidelity National Financial Inc., parent company to one of the country's biggest title insurers, blames the housing slump and mortgage crisis for pushing its second-quarter profit down 92 percent to 3 cents a share from 38 cents a share in the 2007 second quarter. Reuters Estimates reports that analysts had anticipated revenue of 13 cents per share. Fidelity National additionally reports a 25-percent drop in closed title orders to 307,500 for the April-through-June period, a 26-percent decrease in opened title orders to 462,600 and a 23-percent decline in title and escrow premiums and fees to $1.04 billion.
Fidelity National Financial Inc., parent company to one of the country's biggest title insurers, blames the housing slump and mortgage crisis for pushing its second-quarter profit down 92 percent to 3 cents a share from 38 cents a share in the 2007 second quarter. Reuters Estimates reports that analysts had anticipated revenue of 13 cents per share. Fidelity National additionally reports a 25-percent drop in closed title orders to 307,500 for the April-through-June period, a 26-percent decrease in opened title orders to 462,600 and a 23-percent decline in title and escrow premiums and fees to $1.04 billion.
Lenders Stick Listing Agents With REO Liabilities
Inman News (07/24/08); Carter, Matt
At the recent Inman Real Estate Connect San Francisco, real estate attorney Harold Justman discussed the increased popularity of listing real estate owned properties and urged real estate agents and brokers to proceed with caution. He noted that lenders are having listing contracts drafted by attorneys that make agents and brokers responsible for property management, disclosure of property defects and other liabilities. Justman said, "Your E and O (errors and omission) policy may not cover property management, because it is a high-risk, high-claim activity." He pointed out that agents could gain a lot of listings from lenders; but legal fees will wipe out their commissions if they are sued, making it important for them to have an attorney review listing contracts before signing.
At the recent Inman Real Estate Connect San Francisco, real estate attorney Harold Justman discussed the increased popularity of listing real estate owned properties and urged real estate agents and brokers to proceed with caution. He noted that lenders are having listing contracts drafted by attorneys that make agents and brokers responsible for property management, disclosure of property defects and other liabilities. Justman said, "Your E and O (errors and omission) policy may not cover property management, because it is a high-risk, high-claim activity." He pointed out that agents could gain a lot of listings from lenders; but legal fees will wipe out their commissions if they are sued, making it important for them to have an attorney review listing contracts before signing.
Fed Snapshot of U.S. Economy Isn't a Pretty Picture
Wall Street Journal (07/24/08) P. A16; Evans, Kelly
The Federal Reserve's latest "beige book" report shows ongoing deterioration in the housing market in the majority of its 12 districts. The report indicates a drop in home sales and prices, along with a substantial boost in inventory. Additionally, mortgages are becoming more elusive in New York and Chicago, according to the Federal Reserve banks in those regions.
The Federal Reserve's latest "beige book" report shows ongoing deterioration in the housing market in the majority of its 12 districts. The report indicates a drop in home sales and prices, along with a substantial boost in inventory. Additionally, mortgages are becoming more elusive in New York and Chicago, according to the Federal Reserve banks in those regions.
U.S. Mortgage Applications Fall
Investor's Business Daily (07/24/08) P. A2
The Mortgage Bankers Association confirms that its home loan applications index declined 6.2 percent during the week ended July 18 to 489.6, as 30-year mortgage rates rose to an average of 6.59 percent--the highest in a year. Demand for loans to purchase homes was down 6.7 percent, and refinancing requests were off 5.6 percent. The nation's financial woes have produced rising interest rates, while mounting mortgage defaults have forced more and more banks to tighten lending standards, thus deepening the housing slump.
The Mortgage Bankers Association confirms that its home loan applications index declined 6.2 percent during the week ended July 18 to 489.6, as 30-year mortgage rates rose to an average of 6.59 percent--the highest in a year. Demand for loans to purchase homes was down 6.7 percent, and refinancing requests were off 5.6 percent. The nation's financial woes have produced rising interest rates, while mounting mortgage defaults have forced more and more banks to tighten lending standards, thus deepening the housing slump.
Bonds Backed by Fannie, Freddie Rally
Wall Street Journal Asia (07/24/08) P. C3; Natarajan, Prabha
Mortgage bonds guaranteed by Fannie Mae and Freddie Mac are rallying as Capitol Hill legislators draw closer to approval of a housing bill that includes a bailout of the two government-sponsored enterprises. However, the market continues to face its share of challenges, most notably a reduced role for both GSEs as they look to bolster their bottom lines. The absence of Fannie Mae and Freddie Mac as buyers of the mortgage bonds they guarantee for their own investment portfolios is an unintended consequence of the turmoil engulfing them. Risk premiums on these bonds, known as agency bonds, widened sharply in recent sessions amid concerns that the GSEs could scale back their purchases.
Mortgage bonds guaranteed by Fannie Mae and Freddie Mac are rallying as Capitol Hill legislators draw closer to approval of a housing bill that includes a bailout of the two government-sponsored enterprises. However, the market continues to face its share of challenges, most notably a reduced role for both GSEs as they look to bolster their bottom lines. The absence of Fannie Mae and Freddie Mac as buyers of the mortgage bonds they guarantee for their own investment portfolios is an unintended consequence of the turmoil engulfing them. Risk premiums on these bonds, known as agency bonds, widened sharply in recent sessions amid concerns that the GSEs could scale back their purchases.
U.S. Senate to Take Up Fannie-Freddie Bill After House Approval
Bloomberg (07/24/08); Faler, Brian
Treasury Secretary Henry Paulson believes the Senate will pass a housing bill to prop up the housing market and give President Bush an opportunity to sign a relief plan this week. On July 23, the House passed a sweeping package that would assist borrowers at risk of foreclosure, fund purchases of foreclosed homes and allow the government to invest in and lend to Fannie Mae and Freddie Mac in order to restore confidence in the mortgage finance giants. Some Republicans expressed concern that the bill puts taxpayer funds in jeopardy and does not overhaul Fannie Mae and Freddie Mac. President Bush will sign the bill, according to the White House.
Treasury Secretary Henry Paulson believes the Senate will pass a housing bill to prop up the housing market and give President Bush an opportunity to sign a relief plan this week. On July 23, the House passed a sweeping package that would assist borrowers at risk of foreclosure, fund purchases of foreclosed homes and allow the government to invest in and lend to Fannie Mae and Freddie Mac in order to restore confidence in the mortgage finance giants. Some Republicans expressed concern that the bill puts taxpayer funds in jeopardy and does not overhaul Fannie Mae and Freddie Mac. President Bush will sign the bill, according to the White House.
Friday, July 25, 2008
In Credit Crunch, TICs Follow Market Lead
MBA (7/23/2008 ) Murray, Michael
The credit crisis continues to take its toll on tenancy-in-common (TIC) structures as popularity wanes from previous years because of less available capital for debt financing.
In 2007, 34 percent of real estate executives said TIC investment structures were becoming more common in their markets, but that sentiment dropped nearly one-quarter to its current 12 percent of executives that find TIC structures popular, based on The Emerging Issues and Current Trends in the U.S. Real Estate Market 2008 Real Estate Survey from Grant Thornton LLP, Chicago.
“This fractional interest in real estate is likely down because liquidity and debt capital are harder to find,” the report said.
The amount of investor equity placed in TIC properties increased 13 percent in 2006 to $3.6 billion of equity placed, and the first quarter of 2007 reported $900 million of equity placed with a 2007 forecast of $4.5 billion for the industry as a whole. Securitized TIC sponsors—those that sell TICs as securities in accordance with the Securities and Exchange Commission regulations—raised $760 million in the first quarter and $875 million in the second quarter, reports Omni Consulting and Research, Salt Lake City, Utah.
However, $875 million of equity raised in the second quarter of 2007 was down from peak levels reached in the latter half of 2005 and early 2006—including three consecutive quarters at more than $1 billion.
Kaleb Keller, assistant vice president at George Smith Partners Inc., Los Angeles, said TIC volume "declined dramatically," although some lenders continue to look at transactions.
"There are also a number of regional banks that are looking at TIC transactions and various CMBS players that are considering them," Keller said. “Whether those transactions are getting done or not is a different story. I'm not sure about that, but I do know there are people considering TIC deals [as] solid even in today's market."
The Tenant-in-Common Association (TICA) defines TIC investments as the purchase of undivided fractional interest structures which allow investors to purchase an interest in a significant real estate asset—usually "proven" retail or multifamily properties. TIC investors own, control and perhaps invest in a larger property than they could obtain individually.
With a percentage of ownership—title and deed—an investor could also receive passive rental income and tax benefits of traditional real estate. In the past few years, TIC structures followed the overall commercial real estate market as they increased in volume, peaked in 2006 and then declined during the second half of 2007.
The survey said the TIC industry spawned from easy access to debt capital and in its ability to defer large capital gains taxes among taxpayers.
“With financing harder to come by for tenancy-in-common structures, this investment structure is less attractive than it was just a few years ago,” the Grant Thornton report said.
Keller said most industry players remain concerned about the overall market, and the TIC industry will recover as the market recovers.
"The underwriting parameters have tightened up so much that it just makes a number of deals that might have been feasible a year ago, just a lot less feasible today—particularly with the cost of debt and the scrutiny that deals are undergoing today," Keller said.
"I don't see the TIC industry just dying and going away," he added. "I think that there will probably be a resurgence in TICs as the market comes back."
The credit crisis continues to take its toll on tenancy-in-common (TIC) structures as popularity wanes from previous years because of less available capital for debt financing.
In 2007, 34 percent of real estate executives said TIC investment structures were becoming more common in their markets, but that sentiment dropped nearly one-quarter to its current 12 percent of executives that find TIC structures popular, based on The Emerging Issues and Current Trends in the U.S. Real Estate Market 2008 Real Estate Survey from Grant Thornton LLP, Chicago.
“This fractional interest in real estate is likely down because liquidity and debt capital are harder to find,” the report said.
The amount of investor equity placed in TIC properties increased 13 percent in 2006 to $3.6 billion of equity placed, and the first quarter of 2007 reported $900 million of equity placed with a 2007 forecast of $4.5 billion for the industry as a whole. Securitized TIC sponsors—those that sell TICs as securities in accordance with the Securities and Exchange Commission regulations—raised $760 million in the first quarter and $875 million in the second quarter, reports Omni Consulting and Research, Salt Lake City, Utah.
However, $875 million of equity raised in the second quarter of 2007 was down from peak levels reached in the latter half of 2005 and early 2006—including three consecutive quarters at more than $1 billion.
Kaleb Keller, assistant vice president at George Smith Partners Inc., Los Angeles, said TIC volume "declined dramatically," although some lenders continue to look at transactions.
"There are also a number of regional banks that are looking at TIC transactions and various CMBS players that are considering them," Keller said. “Whether those transactions are getting done or not is a different story. I'm not sure about that, but I do know there are people considering TIC deals [as] solid even in today's market."
The Tenant-in-Common Association (TICA) defines TIC investments as the purchase of undivided fractional interest structures which allow investors to purchase an interest in a significant real estate asset—usually "proven" retail or multifamily properties. TIC investors own, control and perhaps invest in a larger property than they could obtain individually.
With a percentage of ownership—title and deed—an investor could also receive passive rental income and tax benefits of traditional real estate. In the past few years, TIC structures followed the overall commercial real estate market as they increased in volume, peaked in 2006 and then declined during the second half of 2007.
The survey said the TIC industry spawned from easy access to debt capital and in its ability to defer large capital gains taxes among taxpayers.
“With financing harder to come by for tenancy-in-common structures, this investment structure is less attractive than it was just a few years ago,” the Grant Thornton report said.
Keller said most industry players remain concerned about the overall market, and the TIC industry will recover as the market recovers.
"The underwriting parameters have tightened up so much that it just makes a number of deals that might have been feasible a year ago, just a lot less feasible today—particularly with the cost of debt and the scrutiny that deals are undergoing today," Keller said.
"I don't see the TIC industry just dying and going away," he added. "I think that there will probably be a resurgence in TICs as the market comes back."
MBA Commends FHA on Housing Tax Credit Program
MBA (7/23/2008 ) Vasquez, Jason
HUD yesterday issued Mortgagee Letter 2008-19, which streamlines processing of FHA multifamily insurance applications with Low Income Housing Tax Credits. The Mortgage Bankers Association commended HUD, saying the letter incorporates important changes to FHA processing that will provide flexibility and cut costs.
MBA Chairman Kieran Quinn, CMB, said the changes will enhance FHA insurance as a “very competitive financing vehicle for affordable rental properties with low income housing tax credits.”
“I want to thank FHA Commissioner Brian Montgomery and John Garvin, his senior advisor and deputy assistant secretary for multifamily housing programs, for taking a leadership role on this issue. This will assist the tax credit market by removing some of the impediments to financing with FHA insurance as well as eliminating unnecessary costs in the program,” Quinn said. “This is a major step forward in modernizing and enhancing FHA processes and will make it much easier to combine tax credits with FHA insurance, producing more affordable housing at a lower cost.”
A key feature of the streamlined process permits deferred submission of full plans and specifications, which HUD said would better align the FHA process with the tax credit process and allow borrowers to lock rates earlier. Another significant change is that 20 percent of the tax credit equity (reduced from 100 percent) must be funded at the time of HUD’s initial endorsement, with the remainder allowed to be paid in over the development period—as is the case for most conventional financing.
“This provision alone will significantly increase the tax credit proceeds for these properties and will allow many more projects to be feasible,” Quinn said. “Investors will pay more for the tax credits if they can phase in the purchase price over time. This is critical for the feasibility of many of these projects and will bring new entrants into the FHA-insured market.”
Other changes permit firm commitments to be conditioned, under certain defined circumstances, upon HUD-2530 approval. This approval must be received prior to initial endorsement, but the ability to condition firm commitments will provide timing flexibility to transactions and will improve borrowers’ chances of obtaining favorable rate locks and equity pricing. In addition, the Mortgagee Letter requires the designation of a LIHTC Coordinator in each Multifamily Hub and Program Center to work with credit allocation agencies and developers to better synchronize tax credit funding cycles with FHA’s application process.
The Mortgagee Letter became effective yesterday and should immediately have an impact on properties being financed, Quinn said.
“There are, however, a number of legislative impediments to using FHA insurance with tax credits that need to be resolved,” Quinn said. “Most of those issues were addressed in the House version of the omnibus housing bill. We are hopeful that Congress will include those provisions in its final version of a housing bill this year.”
With the changes outlined in the Mortgagee Letter, along with the legislative changes under consideration, a number of affordable rental properties that have not been able to find financing at terms that would allow the development to move forward will now be built, Quinn said.
“This is an extremely challenging time for the tax credit program,” Quinn said. “At the same time that there are fewer sources of financing, investors are demanding higher returns and interest rates are higher. With these adverse market conditions, it has become more difficult to make these developments work. FHA should be commended for understanding the need for the FHA multifamily programs in this market and stepping in to improve their product.”
HUD yesterday issued Mortgagee Letter 2008-19, which streamlines processing of FHA multifamily insurance applications with Low Income Housing Tax Credits. The Mortgage Bankers Association commended HUD, saying the letter incorporates important changes to FHA processing that will provide flexibility and cut costs.
MBA Chairman Kieran Quinn, CMB, said the changes will enhance FHA insurance as a “very competitive financing vehicle for affordable rental properties with low income housing tax credits.”
“I want to thank FHA Commissioner Brian Montgomery and John Garvin, his senior advisor and deputy assistant secretary for multifamily housing programs, for taking a leadership role on this issue. This will assist the tax credit market by removing some of the impediments to financing with FHA insurance as well as eliminating unnecessary costs in the program,” Quinn said. “This is a major step forward in modernizing and enhancing FHA processes and will make it much easier to combine tax credits with FHA insurance, producing more affordable housing at a lower cost.”
A key feature of the streamlined process permits deferred submission of full plans and specifications, which HUD said would better align the FHA process with the tax credit process and allow borrowers to lock rates earlier. Another significant change is that 20 percent of the tax credit equity (reduced from 100 percent) must be funded at the time of HUD’s initial endorsement, with the remainder allowed to be paid in over the development period—as is the case for most conventional financing.
“This provision alone will significantly increase the tax credit proceeds for these properties and will allow many more projects to be feasible,” Quinn said. “Investors will pay more for the tax credits if they can phase in the purchase price over time. This is critical for the feasibility of many of these projects and will bring new entrants into the FHA-insured market.”
Other changes permit firm commitments to be conditioned, under certain defined circumstances, upon HUD-2530 approval. This approval must be received prior to initial endorsement, but the ability to condition firm commitments will provide timing flexibility to transactions and will improve borrowers’ chances of obtaining favorable rate locks and equity pricing. In addition, the Mortgagee Letter requires the designation of a LIHTC Coordinator in each Multifamily Hub and Program Center to work with credit allocation agencies and developers to better synchronize tax credit funding cycles with FHA’s application process.
The Mortgagee Letter became effective yesterday and should immediately have an impact on properties being financed, Quinn said.
“There are, however, a number of legislative impediments to using FHA insurance with tax credits that need to be resolved,” Quinn said. “Most of those issues were addressed in the House version of the omnibus housing bill. We are hopeful that Congress will include those provisions in its final version of a housing bill this year.”
With the changes outlined in the Mortgagee Letter, along with the legislative changes under consideration, a number of affordable rental properties that have not been able to find financing at terms that would allow the development to move forward will now be built, Quinn said.
“This is an extremely challenging time for the tax credit program,” Quinn said. “At the same time that there are fewer sources of financing, investors are demanding higher returns and interest rates are higher. With these adverse market conditions, it has become more difficult to make these developments work. FHA should be commended for understanding the need for the FHA multifamily programs in this market and stepping in to improve their product.”
Mortgage Applications Slip in MBA Weekly Survey
MBA (7/23/2008 ) Kemp, Carolyn
Mortgage applications fell for the first time in a month as key interest rates bumped up, according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending July 18.
The Market Composite Index fell to 489.6, a decrease of 6.2 percent on a seasonally adjusted basis from 522.2 one week earlier. On an unadjusted basis, the Index decreased by 6.1 percent compared with the previous week and was down by 19.6 percent compared with the same week one year earlier. The four-week moving average, however, based on previous weeks’ activity, rose by 1.4 percent to 500.7 from 493.7.
The seasonally adjusted Refinance Index decreased by 5.6 percent to 1392.7 from 1474.9 the previous week. The four-week moving average continued to rise, however, by 3.4 percent to 1379.0 from 1333.9. The refinance share of mortgage activity increased to 39.4 percent of total applications from 39.2 percent the previous week.
The seasonally adjusted Purchase Index decreased by 6.7 percent to 335.6 from 359.7 one week earlier. The Conventional Purchase Index decreased by 6.3 percent while the Government Purchase Index (largely FHA) decreased by 7.7 percent. The four-week moving average, however, rose by 0.2 percent to 351.0 from 350.5.
The average contract interest rate for 30-year fixed-rate mortgages increased to 6.59 percent from 6.22 percent, with points decreasing to 1.05 from 1.21 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
The average contract interest rate for 15-year fixed-rate mortgages increased to 6.10 percent from 5.74 percent, with points decreasing to 1.11 from 1.13 (including the origination fee) for 80 percent LTV loans.
The average contract interest rate for one-year adjustable-rate mortgages remained unchanged at 7.16 percent, with points decreasing to 0.29 from 0.36 (including the origination fee) for 80 percent LTV loans. The ARM share of activity decreased to 8.5 percent from 9.1 percent of total applications from the previous week.
The survey covers 50 percent of all U.S. retail residential mortgage originations and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.
Mortgage applications fell for the first time in a month as key interest rates bumped up, according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending July 18.
The Market Composite Index fell to 489.6, a decrease of 6.2 percent on a seasonally adjusted basis from 522.2 one week earlier. On an unadjusted basis, the Index decreased by 6.1 percent compared with the previous week and was down by 19.6 percent compared with the same week one year earlier. The four-week moving average, however, based on previous weeks’ activity, rose by 1.4 percent to 500.7 from 493.7.
The seasonally adjusted Refinance Index decreased by 5.6 percent to 1392.7 from 1474.9 the previous week. The four-week moving average continued to rise, however, by 3.4 percent to 1379.0 from 1333.9. The refinance share of mortgage activity increased to 39.4 percent of total applications from 39.2 percent the previous week.
The seasonally adjusted Purchase Index decreased by 6.7 percent to 335.6 from 359.7 one week earlier. The Conventional Purchase Index decreased by 6.3 percent while the Government Purchase Index (largely FHA) decreased by 7.7 percent. The four-week moving average, however, rose by 0.2 percent to 351.0 from 350.5.
The average contract interest rate for 30-year fixed-rate mortgages increased to 6.59 percent from 6.22 percent, with points decreasing to 1.05 from 1.21 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
The average contract interest rate for 15-year fixed-rate mortgages increased to 6.10 percent from 5.74 percent, with points decreasing to 1.11 from 1.13 (including the origination fee) for 80 percent LTV loans.
The average contract interest rate for one-year adjustable-rate mortgages remained unchanged at 7.16 percent, with points decreasing to 0.29 from 0.36 (including the origination fee) for 80 percent LTV loans. The ARM share of activity decreased to 8.5 percent from 9.1 percent of total applications from the previous week.
The survey covers 50 percent of all U.S. retail residential mortgage originations and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.
Outsourcing Activity Reaches 10-Year High
MBA (7/23/2008 ) Palaparty, Vijay
During the first half of this year, the outsourcing industry experienced the highest level of activity in more than 10 years, according to the latest index from TPI, Houston, a sourcing data and advisory firm.
Europe, the Middle East and Africa markets saw a 58 percent increase in total contract value from the same period last year, outpacing the Americas and Asia Pacific markets.
Despite a slowdown in the more widely known markets, EquaTerra, Houston, reported a 38 percent increase in overall outsourcing demand for the second quarter in its Advisor and BPO/ITO Service Provider Pulse Survey 2Q08. Down 12 percent from the first quarter, overall outsourcing activity was reported up 8 percent over the second quarter of 2007.
“It appears that since the fourth quarter of 2007 and continuing today, corporate attitude towards cost reduction has had a new sense of urgency,” said Peter Allen, partner and managing director at TPI. “Companies across industry segments are expressing their concerns regarding uncertain business conditions by taking steps to reduce operational costs, and the outsourcing industry is benefiting. We see little to disrupt this outsourcing upswing as we head into the third quarter, and we may even be looking towards a record year in 2008 for outsourcing in terms of TCV.”
TPI said the shift from the Americas and Asia Pacific markets to the Europe/Middle East/Africa (EMEA) markets results from greater average contract size rather than an increase in the number of contracts; 10 out of 13 mega deals—contracts in which the TCV is $1 billion or greater—made in the first half of the year were awarded in EMEA.
“Finishing as one of the strongest first halves in more than a decade is attributed to the 282 contracts valued at nearly $49 billion in TCV, and nearly $10 billion in ACV [annualized contract value] that were awarded in the first half of 2008, yielding a brisk year-over-year increase of 24 percent by TCV and 36 percent in ACV,” Allen said.
EquaTerra reported that outsourcing service providers said their second quarter pipeline for BPO and ITO deals would rise 10 percent to 52 percent, a 14 percent increase over last quarter. Projections for next quarter were slightly less optimistic. Forty-five percent of providers expect continued growth in demand, down from 50 percent last quarter.
“Outsourcing efforts with short-term return on investment or that deliver quick cost savings are going forward, often at an accelerated pace,” said Stan Lepeak, managing director of research for EquaTerra. “Not surprisingly, efforts focused on complex process transformation or that require significant upfront investment are more likely to be slowed or on hold.”
EquaTerra also reported that supply and demand increased for knowledge process outsourcing functions such as engineering, research and development, financial modeling and analytics and legal process work. The market also experienced growth in areas like document services, facilities and real estate management and logistics services.
"Services supply chains have steadily become both more diverse and more widely distributed, with large organizations forming hundreds of different relationships with hundreds of different service providers worldwide," Lepeak said. "Ongoing globalization is accelerating that process and adding new layers of complexity."
He also said that organizations are also seeking ways to weather the economic downturn and counter lower-cost global competition, increasing interest in outsourcing’s flexible cost and operating models.
During the first half of this year, the outsourcing industry experienced the highest level of activity in more than 10 years, according to the latest index from TPI, Houston, a sourcing data and advisory firm.
Europe, the Middle East and Africa markets saw a 58 percent increase in total contract value from the same period last year, outpacing the Americas and Asia Pacific markets.
Despite a slowdown in the more widely known markets, EquaTerra, Houston, reported a 38 percent increase in overall outsourcing demand for the second quarter in its Advisor and BPO/ITO Service Provider Pulse Survey 2Q08. Down 12 percent from the first quarter, overall outsourcing activity was reported up 8 percent over the second quarter of 2007.
“It appears that since the fourth quarter of 2007 and continuing today, corporate attitude towards cost reduction has had a new sense of urgency,” said Peter Allen, partner and managing director at TPI. “Companies across industry segments are expressing their concerns regarding uncertain business conditions by taking steps to reduce operational costs, and the outsourcing industry is benefiting. We see little to disrupt this outsourcing upswing as we head into the third quarter, and we may even be looking towards a record year in 2008 for outsourcing in terms of TCV.”
TPI said the shift from the Americas and Asia Pacific markets to the Europe/Middle East/Africa (EMEA) markets results from greater average contract size rather than an increase in the number of contracts; 10 out of 13 mega deals—contracts in which the TCV is $1 billion or greater—made in the first half of the year were awarded in EMEA.
“Finishing as one of the strongest first halves in more than a decade is attributed to the 282 contracts valued at nearly $49 billion in TCV, and nearly $10 billion in ACV [annualized contract value] that were awarded in the first half of 2008, yielding a brisk year-over-year increase of 24 percent by TCV and 36 percent in ACV,” Allen said.
EquaTerra reported that outsourcing service providers said their second quarter pipeline for BPO and ITO deals would rise 10 percent to 52 percent, a 14 percent increase over last quarter. Projections for next quarter were slightly less optimistic. Forty-five percent of providers expect continued growth in demand, down from 50 percent last quarter.
“Outsourcing efforts with short-term return on investment or that deliver quick cost savings are going forward, often at an accelerated pace,” said Stan Lepeak, managing director of research for EquaTerra. “Not surprisingly, efforts focused on complex process transformation or that require significant upfront investment are more likely to be slowed or on hold.”
EquaTerra also reported that supply and demand increased for knowledge process outsourcing functions such as engineering, research and development, financial modeling and analytics and legal process work. The market also experienced growth in areas like document services, facilities and real estate management and logistics services.
"Services supply chains have steadily become both more diverse and more widely distributed, with large organizations forming hundreds of different relationships with hundreds of different service providers worldwide," Lepeak said. "Ongoing globalization is accelerating that process and adding new layers of complexity."
He also said that organizations are also seeking ways to weather the economic downturn and counter lower-cost global competition, increasing interest in outsourcing’s flexible cost and operating models.
As House Prepares to Vote, MBA Urges Passage of Housing Bill
MBA (7/23/2008 ) Sorohan, Mike
With the House expected to take up an omnibus housing bill as early as this afternoon, the Mortgage Bankers Association sent a letter yesterday to House and Senate leadership urging both chambers to move quickly in passing the legislation.
The letter from MBA Chairman Kieran Quinn, CMB, said Congress should look beyond minor stumbling blocks that threaten to impede the bill’s passage and instead focus on the bigger picture—passing the bill.
“Recognizing that crucial reforms are needed to stabilize and set the course for a recovery of the housing market, the Mortgage Bankers Association urges Congress to finish the omnibus housing legislation before August,” Quinn wrote. “This legislation would make important contributions to the current market situation.”
The housing bill includes a number of provisions supported by MBA:
• GSE Reform. The bill would reform regulation of Fannie Mae and Freddie Mac, which Quinn said would ensure that “these shareholder-owned companies continue to operate in a safe and sound manner, engage in activities consistent with their charter purposes, and are subject to reasonable affordable housing goals that do not distort the market.”
• FHA Modernization. MBA said improving FHA, which has had an important historic role in expanding homeownership opportunities, would ensure that the agency once again becomes a leader in the mortgage market. “Using FHA to help families who are in trouble through a new FHA re-financing program has the potential to help keep hundreds of thousands of people facing financial trouble in their homes,” Quinn said. “The impact of this program will be positive not only for the homeowners who benefit, but for our communities and the larger housing market as well.”
• Tax-Exempt Revenue Bonds. The bill would allow state housing finance authorities to develop and implement refinance programs for troubled borrowers using tax-advantaged mortgage revenue bonds. “Providing tax incentives to bring new home buyers into the market will help clear out some of the inventory of unsold housing currently on the market,” Quinn said.
• Additional Support for the GSEs. The legislation would implement a proposal announced by Treasury Secretary Henry Paulson, Jr. to provide additional support for Fannie Mae and Freddie Mac through temporary expansion of the government’s explicit guarantee of GSE debt. “This will help ensure the smooth functioning of our markets by helping attract private capital to support the GSEs’ public mission,” Quinn said.
“MBA strongly supports the passage of this legislation and urges Congress to quickly send this bill to the President for his signature,” Quinn added.
The letter went to Senate Majority Leader Harry Reid, D-Nev.; Senate Minority Leader Mitch McConnell, R-Ky.; House Majority Leader Steny Hoyer, D-Md.; and House Minority Leader John Boehner, R-Ohio.
With the House expected to take up an omnibus housing bill as early as this afternoon, the Mortgage Bankers Association sent a letter yesterday to House and Senate leadership urging both chambers to move quickly in passing the legislation.
The letter from MBA Chairman Kieran Quinn, CMB, said Congress should look beyond minor stumbling blocks that threaten to impede the bill’s passage and instead focus on the bigger picture—passing the bill.
“Recognizing that crucial reforms are needed to stabilize and set the course for a recovery of the housing market, the Mortgage Bankers Association urges Congress to finish the omnibus housing legislation before August,” Quinn wrote. “This legislation would make important contributions to the current market situation.”
The housing bill includes a number of provisions supported by MBA:
• GSE Reform. The bill would reform regulation of Fannie Mae and Freddie Mac, which Quinn said would ensure that “these shareholder-owned companies continue to operate in a safe and sound manner, engage in activities consistent with their charter purposes, and are subject to reasonable affordable housing goals that do not distort the market.”
• FHA Modernization. MBA said improving FHA, which has had an important historic role in expanding homeownership opportunities, would ensure that the agency once again becomes a leader in the mortgage market. “Using FHA to help families who are in trouble through a new FHA re-financing program has the potential to help keep hundreds of thousands of people facing financial trouble in their homes,” Quinn said. “The impact of this program will be positive not only for the homeowners who benefit, but for our communities and the larger housing market as well.”
• Tax-Exempt Revenue Bonds. The bill would allow state housing finance authorities to develop and implement refinance programs for troubled borrowers using tax-advantaged mortgage revenue bonds. “Providing tax incentives to bring new home buyers into the market will help clear out some of the inventory of unsold housing currently on the market,” Quinn said.
• Additional Support for the GSEs. The legislation would implement a proposal announced by Treasury Secretary Henry Paulson, Jr. to provide additional support for Fannie Mae and Freddie Mac through temporary expansion of the government’s explicit guarantee of GSE debt. “This will help ensure the smooth functioning of our markets by helping attract private capital to support the GSEs’ public mission,” Quinn said.
“MBA strongly supports the passage of this legislation and urges Congress to quickly send this bill to the President for his signature,” Quinn added.
The letter went to Senate Majority Leader Harry Reid, D-Nev.; Senate Minority Leader Mitch McConnell, R-Ky.; House Majority Leader Steny Hoyer, D-Md.; and House Minority Leader John Boehner, R-Ohio.
Plots & Ploys: Price Is Right?
Wall Street Journal (07/23/08) P. C12; Simon, Ruth; Wei, Lingling; Corkery, Michael
The major rating and research firms are sending mixed messages regarding the current state of the nation's commercial property sector. A Moody's Investors Service index shows that prices of apartment, office and retail properties dipped 5.7 percent during May from a year earlier and have logged three straight months of declines. However, Standard & Poor's latest commercial real estate indexes show that prices are up 3.1 percent from a year earlier. The disparity may be caused by different methodologies; S&P results include one-off building sales, while Moody's researchers look at repeat sales of the same building, resulting in a smaller sample size.
The major rating and research firms are sending mixed messages regarding the current state of the nation's commercial property sector. A Moody's Investors Service index shows that prices of apartment, office and retail properties dipped 5.7 percent during May from a year earlier and have logged three straight months of declines. However, Standard & Poor's latest commercial real estate indexes show that prices are up 3.1 percent from a year earlier. The disparity may be caused by different methodologies; S&P results include one-off building sales, while Moody's researchers look at repeat sales of the same building, resulting in a smaller sample size.
Plots & Ploys: Bad Construction Loans Mount
Wall Street Journal (07/23/08) P. C12; Simon, Ruth; Wei, Lingling; Corkery, Michael
Foresight Analytics LLC reports that bad construction loans continued to weigh down banks' balance sheets during this year's April-through-June period as residential development loans failed in increasingly larger numbers. The California-based firm estimates that construction-loan delinquencies among all property types topped 9 percent in the second quarter, an increase from 7.2 percent in the first three months of this year and 2.4 percent in the same period a year ago. Among loans to single-family home builders, nearly 12 percent were at least 30 days past due versus just 3.1 percent in the second quarter of 2007. Foresight Analytics partner Matthew Anderson notes that the bad news is spreading to nonresidential projects, as the nation's weakening economy has put pressure on developers of such property types as shopping malls.
Foresight Analytics LLC reports that bad construction loans continued to weigh down banks' balance sheets during this year's April-through-June period as residential development loans failed in increasingly larger numbers. The California-based firm estimates that construction-loan delinquencies among all property types topped 9 percent in the second quarter, an increase from 7.2 percent in the first three months of this year and 2.4 percent in the same period a year ago. Among loans to single-family home builders, nearly 12 percent were at least 30 days past due versus just 3.1 percent in the second quarter of 2007. Foresight Analytics partner Matthew Anderson notes that the bad news is spreading to nonresidential projects, as the nation's weakening economy has put pressure on developers of such property types as shopping malls.
Builders Sue Banks That Pull Financing as Construction Projects Lie Unfinished
Wall Street Journal (07/23/08) P. C1; Corkery, Michael
A wave of lender-liability lawsuits are on the horizon, say experts, noting that more lenders are pulling construction loans, halting projects and enforcing personal guarantees signed by builders to obtain funding. Sacramento, Calif.-based real estate attorney Michael Hackard says lenders increasingly will face litigation from builders that insist they did not act in good faith and pushed them toward bankruptcy. Unlike the real estate bust of the 1990s, experts say lenders are less likely to take over construction projects and offer management advice so they can move forward and are more likely to simply yank funding.
A wave of lender-liability lawsuits are on the horizon, say experts, noting that more lenders are pulling construction loans, halting projects and enforcing personal guarantees signed by builders to obtain funding. Sacramento, Calif.-based real estate attorney Michael Hackard says lenders increasingly will face litigation from builders that insist they did not act in good faith and pushed them toward bankruptcy. Unlike the real estate bust of the 1990s, experts say lenders are less likely to take over construction projects and offer management advice so they can move forward and are more likely to simply yank funding.
Plots & Ploys: Equal-Opportunity Crisis
Wall Street Journal (07/23/08) P. C12; Simon, Ruth; Wei, Lingling; Corkery, Michael
As it turns out, a large percentage of subprime mortgage victims are not poor or minority, as has been the consensus opinion. A new ComplianceTech study shows that middle- and upper-income borrowers accounted for more than 66 percent of high-rate mortgages issued in 2006 and that more than 55 percent of such loans were made to white consumers. The study, which analyzed data filed under the Home Mortgage Disclosure Act, did still report that subprime mortgages account for a disproportionate percentage of the loans given to low-income and minority homeowners. However, the findings suggest that elected officials and lenders should consider more broadly who is being hurt by rising delinquencies when seeking solutions to the mortgage debacle.
As it turns out, a large percentage of subprime mortgage victims are not poor or minority, as has been the consensus opinion. A new ComplianceTech study shows that middle- and upper-income borrowers accounted for more than 66 percent of high-rate mortgages issued in 2006 and that more than 55 percent of such loans were made to white consumers. The study, which analyzed data filed under the Home Mortgage Disclosure Act, did still report that subprime mortgages account for a disproportionate percentage of the loans given to low-income and minority homeowners. However, the findings suggest that elected officials and lenders should consider more broadly who is being hurt by rising delinquencies when seeking solutions to the mortgage debacle.
Wachovia and Washington Mutual Post Billions in Mortgage Losses
Los Angeles Times (07/23/08); Reckard, E. Scott
Wachovia Corp. and Washington Mutual Inc. announced record second-quarter losses tied to the mortgage crisis, indicating that the fallout is now affecting loans to prime borrowers. Wachovia lost $8.9 billion in the second quarter, mainly due to its $122 billion portfolio of option adjustable-rate mortgages (ARMs), with $3.3 billion of the $5.6 billion reserved for loan losses set aside for these mortgages. Washington Mutual, also indicating problems with option ARMs, posted a $3.3 billion loss for the quarter. Its loan loss reserves total $5.9 billion.
Wachovia Corp. and Washington Mutual Inc. announced record second-quarter losses tied to the mortgage crisis, indicating that the fallout is now affecting loans to prime borrowers. Wachovia lost $8.9 billion in the second quarter, mainly due to its $122 billion portfolio of option adjustable-rate mortgages (ARMs), with $3.3 billion of the $5.6 billion reserved for loan losses set aside for these mortgages. Washington Mutual, also indicating problems with option ARMs, posted a $3.3 billion loss for the quarter. Its loan loss reserves total $5.9 billion.
White House Pushes 'Covered' Mortgages
Wall Street Journal (07/23/08) P. C5; Aneiro, Michael
Both Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke believe that covered bonds popular in Europe could expand mortgage availability, reduce loan costs and bolster the housing market in the United States. Some experts believe covered bonds could be a tough sell among banks because they would be required to originate the mortgages, issue the bonds and hold the loans in their portfolios; but investors favor covered bonds because they are more transparent and provide safeguards not offered by traditional U.S. mortgage-backed securities. However, analysts contend that covered bonds would need an identity in the United States, having been designated as a separate asset class in Europe. Additionally, the Federal Deposit Insurance Corp. initial cap on covered bond issuance to 4 percent of banks' liabilities would put a damper on liquidity and necessitate higher yields to keep investor interest.
Both Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke believe that covered bonds popular in Europe could expand mortgage availability, reduce loan costs and bolster the housing market in the United States. Some experts believe covered bonds could be a tough sell among banks because they would be required to originate the mortgages, issue the bonds and hold the loans in their portfolios; but investors favor covered bonds because they are more transparent and provide safeguards not offered by traditional U.S. mortgage-backed securities. However, analysts contend that covered bonds would need an identity in the United States, having been designated as a separate asset class in Europe. Additionally, the Federal Deposit Insurance Corp. initial cap on covered bond issuance to 4 percent of banks' liabilities would put a damper on liquidity and necessitate higher yields to keep investor interest.
Mortgage Lobby Replaces President
Washington Post (07/23/08) P. D3; Birnbaum, Jeffrey H.
The president of the Mortgage Bankers Association--one of the most powerful lobby groups in the nation's capital and a key player in the housing bill now winding its way through Congress--has announced plans to step down at the end of the year, following more than seven years at the helm. California Housing Finance Agency Chairman and former MBA chairman John Courson has been tapped to replace Jonathan Kempner and will additionally assume the role of COO, beginning on Aug. 1. A decrease in mortgage originations has triggered a decline in the group's membership, 2008 revenue, and payroll; but MBA Chairman Kieran Quinn, CMB, notes that the association's finances remain in the black. Quinn says Courson is a good choice for president, given that he has been involved with the organization for more than 10 years and has more than 40 years experience in the mortgage industry.
The president of the Mortgage Bankers Association--one of the most powerful lobby groups in the nation's capital and a key player in the housing bill now winding its way through Congress--has announced plans to step down at the end of the year, following more than seven years at the helm. California Housing Finance Agency Chairman and former MBA chairman John Courson has been tapped to replace Jonathan Kempner and will additionally assume the role of COO, beginning on Aug. 1. A decrease in mortgage originations has triggered a decline in the group's membership, 2008 revenue, and payroll; but MBA Chairman Kieran Quinn, CMB, notes that the association's finances remain in the black. Quinn says Courson is a good choice for president, given that he has been involved with the organization for more than 10 years and has more than 40 years experience in the mortgage industry.
Loan Giants' Woes Push Rates Up
Mercury News (07/23/08) Bajaj, Vikas
HSH Associates reports that mortgage rates are nearing their highest levels in five years. As of July 22, the average interest rate for 30-year fixed loans rose to 6.71 percent, compared to 6.44 percent on July 18; and the average rate for jumbo loans was 7.8 percent, the highest since December 2000, according to the publisher of consumer rates. Concern about the ability of Fannie Mae and Freddie Mac to support the housing market are behind the increase in borrowing costs. Bond investors are pushing interest rates on mortgage-backed securities higher, and the added cost is being passed on to borrowers through the mortgage markets.
HSH Associates reports that mortgage rates are nearing their highest levels in five years. As of July 22, the average interest rate for 30-year fixed loans rose to 6.71 percent, compared to 6.44 percent on July 18; and the average rate for jumbo loans was 7.8 percent, the highest since December 2000, according to the publisher of consumer rates. Concern about the ability of Fannie Mae and Freddie Mac to support the housing market are behind the increase in borrowing costs. Bond investors are pushing interest rates on mortgage-backed securities higher, and the added cost is being passed on to borrowers through the mortgage markets.
A Fannie-Freddie Rescue Could Cost $25B
New York Newsday (07/23/08)
Taxpayers might have to pay as much as $25 billion to prop up Fannie Mae and Freddie Mac, according to Peter Orszag, the top budget analyst for Congress. Orszag warns that inaction on a temporary lifeline for the mortgage finance giants could also be costly, given that the financial markets are already assuming that the measure will pass. "It is arguable that if it were not enacted at this point, that the consequences could be quite severe," says Orszag, director of the Congressional Budget Office. Congress is expected to vote this week on a rescue plan to lend Fannie Mae and Freddie Mac money or buy stock, and the financial markets believe it will be approved.
Taxpayers might have to pay as much as $25 billion to prop up Fannie Mae and Freddie Mac, according to Peter Orszag, the top budget analyst for Congress. Orszag warns that inaction on a temporary lifeline for the mortgage finance giants could also be costly, given that the financial markets are already assuming that the measure will pass. "It is arguable that if it were not enacted at this point, that the consequences could be quite severe," says Orszag, director of the Congressional Budget Office. Congress is expected to vote this week on a rescue plan to lend Fannie Mae and Freddie Mac money or buy stock, and the financial markets believe it will be approved.
Lawmakers Reach Deal on Big Housing Package
Wall Street Journal (07/23/08) P. A3; Crittenden, Michael R.; Paletta, Damian
A volley of intense negotiations between legislative leaders in the House and Senate has netted a compromise housing package that is expected to pass this week. To arrive at a bill palatable to both chambers of Congress, the language allows Fannie Mae and Freddie Mac to buy home loans of up to $625,000 in high-cost U.S. markets--a figure that is below what many House Democrats had sought, but above what Senate politicians had preferred. Despite that and other concessions, lawmakers refused to scrap a $4 billion initiative to give municipal governments the authority to purchase and rehabilitate foreclosed homes, even though the provision has elicited a vow from the White House to veto the plan. "Nobody in America will agree with everything that is in this bill," conceded House Financial Services Committee Chairman Barney Frank, D-Mass. "But I think enough people in America will find it acceptable, so it will go to the president's desk to be signed."
A volley of intense negotiations between legislative leaders in the House and Senate has netted a compromise housing package that is expected to pass this week. To arrive at a bill palatable to both chambers of Congress, the language allows Fannie Mae and Freddie Mac to buy home loans of up to $625,000 in high-cost U.S. markets--a figure that is below what many House Democrats had sought, but above what Senate politicians had preferred. Despite that and other concessions, lawmakers refused to scrap a $4 billion initiative to give municipal governments the authority to purchase and rehabilitate foreclosed homes, even though the provision has elicited a vow from the White House to veto the plan. "Nobody in America will agree with everything that is in this bill," conceded House Financial Services Committee Chairman Barney Frank, D-Mass. "But I think enough people in America will find it acceptable, so it will go to the president's desk to be signed."
New Multifamily Slows with Current Fundamentals
MBA (7/22/2008 ) Murray, Michael
Difficulty in financing new multifamily housing developments could affect construction activity as slowdowns occur in property fundamentals.
Gleb Nechayev, senior economist at CB Richard Ellis/Torto Wheaton Research, Boston, said the credit crunch is beginning to affect multi-housing construction activity as financing new development becomes more difficult.
“The reason there is a credit crunch is because of the housing bust, but it is also impacting the fundamentals. For example, there is much less demand for condominiums,” Nechayev said. "While the housing bust and the ensuing credit crunch have not affected multi-housing completions yet, it is only a matter of time before they do."
CBRE/TWR said year-to-date permits would fall below 300,000—a 20 percent drop from the pace of recent years—and completions would decline by a similar magnitude after the first half of 2009, if New York City were excluded from equation. New York City has "an unprecedented surge in apartment and condominium activity," Nechayev noted, largely in part to a rush to obtain permits before a July 1 change in multifamily zoning requirements.
Multi-housing permits issued year-to-date hit 326,000 units, compared to more than 370,000 during the first half of 2007.
Fitch Ratings, New York, said multifamily properties continued to represent a disproportionate number of delinquencies, accounting for 57 percent of all delinquencies last month while representing only 14.6 percent of the Fitch-rated universe. Fitch said nearly $1.3 billion of delinquent multifamily loans remained outstanding, giving the sector a delinquency index of 1.77 percent.
"The loans up for refinance right now are, for the most part, loans originated in 1998. They have some positive things going for them—a relatively high interest rate and amortization so the loan is paid down to the extent that refinance is possible," said Britt Johnson, senior director in CMBS research at Fitch. "We have seen that it isn't as easy as it was to refinance last year. Borrowers are not necessarily refinancing on their maturity date. They may be refinancing two or three months down the road because it takes them a little bit longer to find financing. But they are ultimately finding it."
RBS Greenwich, Greenwich, Conn., and Intex Solutions Inc. reported that as of May, multifamily properties represented more than half of all fixed-rate CMBS delinquencies. Cumulative losses across the 1995 through May 2007 vintages totaled just 0.46 percent, or $3.3 billion through 2,100 disposed loans, RBS Greenwich said.
“It’s not just the credit crunch, but it’s the combination of the economic environment that brought the credit crunch out," Nechayev said. "The credit crunch itself is catching up with the fundamentals that are contributing to slower construction this year."
Despite overall low commercial mortgage delinquencies at Citigroup Global Markets, New York, a block of loans on Texas multifamily properties related to a single borrower continue to affect multifamily delinquencies. The multifamily delinquencies represented 1.51 percent of all its commercial loans last month—down from 1.65 percent in May.
"There are definitely alot of multifamily delinquent loans in Texas, and that's not something new," Johnson said.
Texas, as well as Florida, Michigan and Ohio, had multifamily weaknesses "for many months," but other delinquencies are more specific to certain borrowers and in finding credit to refinance, Johnson added. "A borrower may have a portfolio in a certain market and he or she became delinquent on all of their assets," she said. It is not necessarily a weakness in that market. It is specific to a certain borrower."
Citigroup reported commercial mortgage delinquencies fell two basis points overall but are up five basis points since the end of the year.
"For now, commercial fundamentals appear to be slowing, and we are cautious on the retail and hotel sectors at this stage of the economic cycle,” said Citigroup's research report. “If an economic slowdown is prolonged we expect to see rising delinquency rates from these low levels, possibly in the 1 [percent] to 1.5 percent range over the next 18 to 24 months. We should also say that just natural pool seasoning with only limited issuance should take the overall rate into the mid-60 basis point range by year end.”
“The national apartment vacancy rate is still climbing, primarily due to weak or negative net absorption in a few markets that have a glut of single-family homes and condominiums that were purchased by individual investors who are now either foreclosing or desperately trying to sell or rent the units,” Nechayev said. “In the near term, this trend will prevail, exacerbated by the recent job losses and further price declines.”
Nearly three-quarters of all multifamily markets declined by three points in the Red-Yellow-Green report released this month by Moody's Investors Service, New York. However, 75 percent of multifamily markets also remained solidly within a green range—or a strong market score.
Multifamily property prices increased 2.7 percent from May to June but dropped 3.4 percent overall from last year, said Moody's/REAL Commercial Property Price Indices (CPPI). The CPPI reported apartment property prices in the top 10 metropolitan statistical areas (MSAs) down 2.2 percent for the year after a 1.2 percent increase from May.
“Next year, supply pressure should finally begin to ease in most markets, yet it looks like the improvement in national occupancy will likely be quite modest, in part because of sluggish demand in a handful of large markets,” Nechayev said.
Difficulty in financing new multifamily housing developments could affect construction activity as slowdowns occur in property fundamentals.
Gleb Nechayev, senior economist at CB Richard Ellis/Torto Wheaton Research, Boston, said the credit crunch is beginning to affect multi-housing construction activity as financing new development becomes more difficult.
“The reason there is a credit crunch is because of the housing bust, but it is also impacting the fundamentals. For example, there is much less demand for condominiums,” Nechayev said. "While the housing bust and the ensuing credit crunch have not affected multi-housing completions yet, it is only a matter of time before they do."
CBRE/TWR said year-to-date permits would fall below 300,000—a 20 percent drop from the pace of recent years—and completions would decline by a similar magnitude after the first half of 2009, if New York City were excluded from equation. New York City has "an unprecedented surge in apartment and condominium activity," Nechayev noted, largely in part to a rush to obtain permits before a July 1 change in multifamily zoning requirements.
Multi-housing permits issued year-to-date hit 326,000 units, compared to more than 370,000 during the first half of 2007.
Fitch Ratings, New York, said multifamily properties continued to represent a disproportionate number of delinquencies, accounting for 57 percent of all delinquencies last month while representing only 14.6 percent of the Fitch-rated universe. Fitch said nearly $1.3 billion of delinquent multifamily loans remained outstanding, giving the sector a delinquency index of 1.77 percent.
"The loans up for refinance right now are, for the most part, loans originated in 1998. They have some positive things going for them—a relatively high interest rate and amortization so the loan is paid down to the extent that refinance is possible," said Britt Johnson, senior director in CMBS research at Fitch. "We have seen that it isn't as easy as it was to refinance last year. Borrowers are not necessarily refinancing on their maturity date. They may be refinancing two or three months down the road because it takes them a little bit longer to find financing. But they are ultimately finding it."
RBS Greenwich, Greenwich, Conn., and Intex Solutions Inc. reported that as of May, multifamily properties represented more than half of all fixed-rate CMBS delinquencies. Cumulative losses across the 1995 through May 2007 vintages totaled just 0.46 percent, or $3.3 billion through 2,100 disposed loans, RBS Greenwich said.
“It’s not just the credit crunch, but it’s the combination of the economic environment that brought the credit crunch out," Nechayev said. "The credit crunch itself is catching up with the fundamentals that are contributing to slower construction this year."
Despite overall low commercial mortgage delinquencies at Citigroup Global Markets, New York, a block of loans on Texas multifamily properties related to a single borrower continue to affect multifamily delinquencies. The multifamily delinquencies represented 1.51 percent of all its commercial loans last month—down from 1.65 percent in May.
"There are definitely alot of multifamily delinquent loans in Texas, and that's not something new," Johnson said.
Texas, as well as Florida, Michigan and Ohio, had multifamily weaknesses "for many months," but other delinquencies are more specific to certain borrowers and in finding credit to refinance, Johnson added. "A borrower may have a portfolio in a certain market and he or she became delinquent on all of their assets," she said. It is not necessarily a weakness in that market. It is specific to a certain borrower."
Citigroup reported commercial mortgage delinquencies fell two basis points overall but are up five basis points since the end of the year.
"For now, commercial fundamentals appear to be slowing, and we are cautious on the retail and hotel sectors at this stage of the economic cycle,” said Citigroup's research report. “If an economic slowdown is prolonged we expect to see rising delinquency rates from these low levels, possibly in the 1 [percent] to 1.5 percent range over the next 18 to 24 months. We should also say that just natural pool seasoning with only limited issuance should take the overall rate into the mid-60 basis point range by year end.”
“The national apartment vacancy rate is still climbing, primarily due to weak or negative net absorption in a few markets that have a glut of single-family homes and condominiums that were purchased by individual investors who are now either foreclosing or desperately trying to sell or rent the units,” Nechayev said. “In the near term, this trend will prevail, exacerbated by the recent job losses and further price declines.”
Nearly three-quarters of all multifamily markets declined by three points in the Red-Yellow-Green report released this month by Moody's Investors Service, New York. However, 75 percent of multifamily markets also remained solidly within a green range—or a strong market score.
Multifamily property prices increased 2.7 percent from May to June but dropped 3.4 percent overall from last year, said Moody's/REAL Commercial Property Price Indices (CPPI). The CPPI reported apartment property prices in the top 10 metropolitan statistical areas (MSAs) down 2.2 percent for the year after a 1.2 percent increase from May.
“Next year, supply pressure should finally begin to ease in most markets, yet it looks like the improvement in national occupancy will likely be quite modest, in part because of sluggish demand in a handful of large markets,” Nechayev said.
Residential Briefs
MBA (7/22/2008 ) Palaparty, Vijay
HOPE NOW, NeighborWorks America to Hold Homeownership Preservation Event
The HOPE NOW Alliance, of which the Mortgage Bankers Association is a founding member, will hold a Homeownership Preservation Event at Gillette Stadium in Foxborough, Mass., outside of Boston, on Tuesday, Aug. 12.
The event will take place from 1:00-8:00 p.m. ET. Homeowners will have the opportunity to meet with their lender face-to-face to discuss workout options to avoid foreclosure and receive information and assistance on homeownership preservation. Parking is free and public transportation will be provided.
The event is co-sponsored with Neighborworks America; the New England Patriots Charitable Foundation and the Federal Reserve Bank of Boston.
FHA Announces Lender Training Conference
The Federal Housing Administration will hold its FHA National Lending Training Conference Aug. 27-28 at the Philadelphia Marriott Downtown.
The focus of the “Back to Basics” conference will be to explain recent changes made to ensure that the FHA mortgage product remains competitive. Changes include consolidating forms and procedures, reducing paperwork for lenders and buyers and aligning FHA mortgage criteria and documentation requirements with those used elsewhere in the industry.
FHA will also hold a Lender Training session Aug. 5-7 in Portland, Ore. The session covers FHA processing, documentation requirements, FHA underwriting with hands-on case studies, mortgage calculations, underwriter responsibilities, automated underwriting, underwriting the FHA appraisal and energy-efficiency product and services
More information can be found at: http://www.hud.gov/offices/hsg/sfh/events/sor080508.pdf.
Simplifile Partners with eFileCabinet, Computer Systems Inc.
Simplifile LC and eFileCabinet, companies based in Provo, Utah, integrated Simplifile eRecording Services into eFileCabinet’s electronic document management software.
Integration of the systems allows documents electronically captured and managed by eFileCabinet to be transmitted to Simplifile eRecording Services for submission to recording jurisdictions on the Simplifile network. The documents are then received by the target county, reviewed, recorded and returned via Simplifile for archiving and retrieval.
Simplifile also formed an alliance with Computer Systems Inc., Fishers, Ind., to integrate and cooperatively marketing its eRecording with CSI’s Title 1 land record system. The companies will integrate their eRecording and indexing and archiving systems, allowing documents electronically filed by Simplifile submitter customers to be received, reviewed, recorded and returned to those same submitters by counties using CSI’s Title 1 system. The accord also provides for Simplifile and CSI to cooperatively market the alliance and resulting services to their mutual customers.
Cogent Road Launches Padded Credit Score Detection
Cogent Road, San Diego, a provider of internet-based applications for the mortgage industry, launched an automated tool for detecting if a credit score has been artificially inflated due to questionable or untrustworthy authorized user accounts within the borrower’s profile. The tool is available at no cost to Cogent Road’s existing Funding Suite clients.
The tool examines credit reports to detect the probability that a borrower’s credit score is being artificially manipulated based on a different individual’s payment history. Using comparative algorithms, the detection tool analyzes borrower’s credit profile to detect whether or not authorized user tradelines are consistent with his or her historical payment pattern. It can also differentiate the bona fide authorized user relations that occur in joint credit applications,
Calyx Software Network Adds Mortgage Service Providers
Calyx Software, San Jose, a provider of loan marketing, originating and processing software, expanded its Calyx Network with a network interface update. The July Calyx Network Interface update contains new connections to five mortgage service providers. The Calyx Network allows users of Calyx Software’s Point loan origination software to connect with lenders and mortgage service providers, automating data exchange and streamlining the loan origination process.
Wolters Kluwer Launches Red Flags Tool Kit
Wolters Kluwer Financial Services will offer banks, savings associations and credit unions a tool kit to help them build and implement an identity theft prevention program that meets the Fair and Accurate Credit Transactions Act’s new Red Flag Rules.
To help financial institutions meet the rules’ mandatory compliance deadline of Nov. 1, the kits offers policy development through the company’s PRINGLE Policies & Audit Procedures software; Red Flags forms and checklists for assessing the impact and risk related to the new requirements as well as tracking Red Flag responses; and employee training via instructional videos and a self-directed learning module on Red Flag Rules from the Wolters Kluwer Financial Services’ Compliance University course library.
Lydian Forms FHA/VA Loan Processing Subsidiary
Lydian Data Services, Boca Raton, Fla., a provider of outsourcing services for mortgage lending operations, established Lydian Data Government Services, Philadelphia, a new integrated subsidiary to provide mortgage processing, closing, post-closing and quality control services for FHA and VA loans.
The subsidiary will also offer consulting services to help originators become approved by FHA and training services to help lenders familiarize their Realtors, loan officers and brokers with government lending programs. Lydian combines back office loan fulfillment services, allowing lenders to outsource their processes.
ServiceLink Upgrades iClose
ServiceLink, Pittsburgh, Pa., a provider of origination and default services and the national mortgage services platform of Fidelity National Financial, Jacksonville, upgraded its iClose web-based closing product. iClose offers a method for borrowers to close their loans in an online virtual meeting room. They schedule a date and time and a ServiceLink closing agent guide them through their paperwork using an online interface.
iClose requires a borrower to sign only one document, a Limited Power of Attorney that is notarized and returned to ServiceLink. The remainder of the process is online and the transaction and phone conversation is recorded and archived to ensure security and. A secure server and security protocol are used to safeguard information provided by borrowers during registration, authentication and the closing process.
Peoples Bank Selects Metavante Technology
Metavante Corp., Milwaukee, a provider of banking and payments technology, announced that Peoples Bank, Muster, Ind., selected its consumer and mortgage Loan Origination Studio products, in addition to licensing its Internet Direct offering. Peoples Bank operates nine banking centers in Northwest Indiana and has $650 million in assets.
Peoples Bank will use Metavante’s products in conjunction with its Internet Direct solution to streamline its loan origination platform. Metavante’s LOS systems interface with Metavante’s IBS banking technology, enabling Peoples Bank to access existing customer relationship data when creating new loan applications as well as submitting closed loan data to its core system for booking.
Kirtland Federal Credit Union Adopts FICS Technology
Kirtland Federal Credit Union, Albuquerque, adopted residential loan origination and servicing mortgage technology from Financial Industry Computer Systems Inc., Dallas. With FICS’ systems, Kirtland will have one server, enabling monitoring of the entire loan portfolio for servicing and maintenance. Loan officers in multiple branches will also be able to simultaneously work on loans as well.
HOPE NOW, NeighborWorks America to Hold Homeownership Preservation Event
The HOPE NOW Alliance, of which the Mortgage Bankers Association is a founding member, will hold a Homeownership Preservation Event at Gillette Stadium in Foxborough, Mass., outside of Boston, on Tuesday, Aug. 12.
The event will take place from 1:00-8:00 p.m. ET. Homeowners will have the opportunity to meet with their lender face-to-face to discuss workout options to avoid foreclosure and receive information and assistance on homeownership preservation. Parking is free and public transportation will be provided.
The event is co-sponsored with Neighborworks America; the New England Patriots Charitable Foundation and the Federal Reserve Bank of Boston.
FHA Announces Lender Training Conference
The Federal Housing Administration will hold its FHA National Lending Training Conference Aug. 27-28 at the Philadelphia Marriott Downtown.
The focus of the “Back to Basics” conference will be to explain recent changes made to ensure that the FHA mortgage product remains competitive. Changes include consolidating forms and procedures, reducing paperwork for lenders and buyers and aligning FHA mortgage criteria and documentation requirements with those used elsewhere in the industry.
FHA will also hold a Lender Training session Aug. 5-7 in Portland, Ore. The session covers FHA processing, documentation requirements, FHA underwriting with hands-on case studies, mortgage calculations, underwriter responsibilities, automated underwriting, underwriting the FHA appraisal and energy-efficiency product and services
More information can be found at: http://www.hud.gov/offices/hsg/sfh/events/sor080508.pdf.
Simplifile Partners with eFileCabinet, Computer Systems Inc.
Simplifile LC and eFileCabinet, companies based in Provo, Utah, integrated Simplifile eRecording Services into eFileCabinet’s electronic document management software.
Integration of the systems allows documents electronically captured and managed by eFileCabinet to be transmitted to Simplifile eRecording Services for submission to recording jurisdictions on the Simplifile network. The documents are then received by the target county, reviewed, recorded and returned via Simplifile for archiving and retrieval.
Simplifile also formed an alliance with Computer Systems Inc., Fishers, Ind., to integrate and cooperatively marketing its eRecording with CSI’s Title 1 land record system. The companies will integrate their eRecording and indexing and archiving systems, allowing documents electronically filed by Simplifile submitter customers to be received, reviewed, recorded and returned to those same submitters by counties using CSI’s Title 1 system. The accord also provides for Simplifile and CSI to cooperatively market the alliance and resulting services to their mutual customers.
Cogent Road Launches Padded Credit Score Detection
Cogent Road, San Diego, a provider of internet-based applications for the mortgage industry, launched an automated tool for detecting if a credit score has been artificially inflated due to questionable or untrustworthy authorized user accounts within the borrower’s profile. The tool is available at no cost to Cogent Road’s existing Funding Suite clients.
The tool examines credit reports to detect the probability that a borrower’s credit score is being artificially manipulated based on a different individual’s payment history. Using comparative algorithms, the detection tool analyzes borrower’s credit profile to detect whether or not authorized user tradelines are consistent with his or her historical payment pattern. It can also differentiate the bona fide authorized user relations that occur in joint credit applications,
Calyx Software Network Adds Mortgage Service Providers
Calyx Software, San Jose, a provider of loan marketing, originating and processing software, expanded its Calyx Network with a network interface update. The July Calyx Network Interface update contains new connections to five mortgage service providers. The Calyx Network allows users of Calyx Software’s Point loan origination software to connect with lenders and mortgage service providers, automating data exchange and streamlining the loan origination process.
Wolters Kluwer Launches Red Flags Tool Kit
Wolters Kluwer Financial Services will offer banks, savings associations and credit unions a tool kit to help them build and implement an identity theft prevention program that meets the Fair and Accurate Credit Transactions Act’s new Red Flag Rules.
To help financial institutions meet the rules’ mandatory compliance deadline of Nov. 1, the kits offers policy development through the company’s PRINGLE Policies & Audit Procedures software; Red Flags forms and checklists for assessing the impact and risk related to the new requirements as well as tracking Red Flag responses; and employee training via instructional videos and a self-directed learning module on Red Flag Rules from the Wolters Kluwer Financial Services’ Compliance University course library.
Lydian Forms FHA/VA Loan Processing Subsidiary
Lydian Data Services, Boca Raton, Fla., a provider of outsourcing services for mortgage lending operations, established Lydian Data Government Services, Philadelphia, a new integrated subsidiary to provide mortgage processing, closing, post-closing and quality control services for FHA and VA loans.
The subsidiary will also offer consulting services to help originators become approved by FHA and training services to help lenders familiarize their Realtors, loan officers and brokers with government lending programs. Lydian combines back office loan fulfillment services, allowing lenders to outsource their processes.
ServiceLink Upgrades iClose
ServiceLink, Pittsburgh, Pa., a provider of origination and default services and the national mortgage services platform of Fidelity National Financial, Jacksonville, upgraded its iClose web-based closing product. iClose offers a method for borrowers to close their loans in an online virtual meeting room. They schedule a date and time and a ServiceLink closing agent guide them through their paperwork using an online interface.
iClose requires a borrower to sign only one document, a Limited Power of Attorney that is notarized and returned to ServiceLink. The remainder of the process is online and the transaction and phone conversation is recorded and archived to ensure security and. A secure server and security protocol are used to safeguard information provided by borrowers during registration, authentication and the closing process.
Peoples Bank Selects Metavante Technology
Metavante Corp., Milwaukee, a provider of banking and payments technology, announced that Peoples Bank, Muster, Ind., selected its consumer and mortgage Loan Origination Studio products, in addition to licensing its Internet Direct offering. Peoples Bank operates nine banking centers in Northwest Indiana and has $650 million in assets.
Peoples Bank will use Metavante’s products in conjunction with its Internet Direct solution to streamline its loan origination platform. Metavante’s LOS systems interface with Metavante’s IBS banking technology, enabling Peoples Bank to access existing customer relationship data when creating new loan applications as well as submitting closed loan data to its core system for booking.
Kirtland Federal Credit Union Adopts FICS Technology
Kirtland Federal Credit Union, Albuquerque, adopted residential loan origination and servicing mortgage technology from Financial Industry Computer Systems Inc., Dallas. With FICS’ systems, Kirtland will have one server, enabling monitoring of the entire loan portfolio for servicing and maintenance. Loan officers in multiple branches will also be able to simultaneously work on loans as well.
Leading Indicator Index Declines
MBA (7/22/2008 ) Velz, Orawin
The Conference Board’s index of leading indicators—a gauge of future business activity three to six months ahead—edged down 0.1 percent in June.
May’s figure was revised downward to a decline of 0.2 percent from a 0.1 percent increase. The index has reached the lowest level since November 2004. According to The Conference Board, the economy has shown no sign of strength, given the financial crisis and the housing slump, high gasoline and food prices, weak consumer confidence and a weak dollar.
The index of leading indicators is designed to forecast economic activity and turning points in the business cycle based on 10 economic components. Four of the 10 components increased during the month; these included housing permits and the yield spread. Six negative contributors included declining stock prices, higher unemployment claims and a drop in the money supply.
A rush to obtain residential building permits in June ahead of a change in building codes in New York in July helped temper the decline in the index. Housing permits added almost one-third of a percentage point to growth in the index in June. Permits will likely contract and act as a negative contributor to the index in the coming months.
Overall, the index of leading indicators supported other recent economic reports and Federal Reserve Board Chairman Ben Bernanke’s testimony last week that there are significant downside risks to economic growth.
The Conference Board’s index of leading indicators—a gauge of future business activity three to six months ahead—edged down 0.1 percent in June.
May’s figure was revised downward to a decline of 0.2 percent from a 0.1 percent increase. The index has reached the lowest level since November 2004. According to The Conference Board, the economy has shown no sign of strength, given the financial crisis and the housing slump, high gasoline and food prices, weak consumer confidence and a weak dollar.
The index of leading indicators is designed to forecast economic activity and turning points in the business cycle based on 10 economic components. Four of the 10 components increased during the month; these included housing permits and the yield spread. Six negative contributors included declining stock prices, higher unemployment claims and a drop in the money supply.
A rush to obtain residential building permits in June ahead of a change in building codes in New York in July helped temper the decline in the index. Housing permits added almost one-third of a percentage point to growth in the index in June. Permits will likely contract and act as a negative contributor to the index in the coming months.
Overall, the index of leading indicators supported other recent economic reports and Federal Reserve Board Chairman Ben Bernanke’s testimony last week that there are significant downside risks to economic growth.
FDIC Sued Over Subprime Loans
Washington Post (07/22/08) P. D2
Beal Bank has filed suit against the Federal Deposit Insurance Corp. (FDIC), accusing the regulator of violating guidelines when it assumed control of Superior Bank's subprime mortgage business in 2001. In litigation filed by Beal in 2002, the company claims "defective" loans accounted for approximately 25 percent of the 5,315 subprime mortgages that it purchased from the FDIC. A document filed in court by Beal states, "The loans sold to Beal, including the loans originated by the FDIC itself, violated Old Superior and New Superior's underwriting guidelines and almost every consumer protection and fair lending law, regulation and standard."
Beal Bank has filed suit against the Federal Deposit Insurance Corp. (FDIC), accusing the regulator of violating guidelines when it assumed control of Superior Bank's subprime mortgage business in 2001. In litigation filed by Beal in 2002, the company claims "defective" loans accounted for approximately 25 percent of the 5,315 subprime mortgages that it purchased from the FDIC. A document filed in court by Beal states, "The loans sold to Beal, including the loans originated by the FDIC itself, violated Old Superior and New Superior's underwriting guidelines and almost every consumer protection and fair lending law, regulation and standard."
State Agency Will Lend to 1st-Time Home Buyers
San Francisco Chronicle (07/22/08); Said, Carolyn
Wells Fargo, HomeEq, CitiMortgage and Fannie Mae will price their foreclosed properties in California at 12 percent below market value as part of a state initiative that targets prospective homeowners with modest means. The California Housing Finance Agency (CalHFA) will offer 30-year loans at a fixed interest rate of 5.5 percent to first-time home buyers who purchase the foreclosed properties through the Community Stabilization Home Loan Program. "This is a starting point to try to get some of these foreclosures off the market in some of the hardest-hit communities in the state," says CalHFA marketing director Ken Giebel. CalHFA expects more lenders to join the program.
Wells Fargo, HomeEq, CitiMortgage and Fannie Mae will price their foreclosed properties in California at 12 percent below market value as part of a state initiative that targets prospective homeowners with modest means. The California Housing Finance Agency (CalHFA) will offer 30-year loans at a fixed interest rate of 5.5 percent to first-time home buyers who purchase the foreclosed properties through the Community Stabilization Home Loan Program. "This is a starting point to try to get some of these foreclosures off the market in some of the hardest-hit communities in the state," says CalHFA marketing director Ken Giebel. CalHFA expects more lenders to join the program.
$2.1M Set to Mitigate Foreclosures
American Banker (07/22/08) P. 5; Sloan, Steven
Nearly a dozen nonprofit groups in the Federal Home Loan Bank of Cincinnati's district--which covers Ohio, Kentucky and Tennessee--will receive grants totaling $2.1 million as part of its Preserving the American Dream program. The initiative offers qualified homeowners up to $3,500 for foreclosure-prevention counseling or other strategies to avoid foreclosure.
Nearly a dozen nonprofit groups in the Federal Home Loan Bank of Cincinnati's district--which covers Ohio, Kentucky and Tennessee--will receive grants totaling $2.1 million as part of its Preserving the American Dream program. The initiative offers qualified homeowners up to $3,500 for foreclosure-prevention counseling or other strategies to avoid foreclosure.
Bank Losses Hurt Less
Winston-Salem Journal (NC) (07/22/08)
Bank of America Corp.'s second-quarter earnings managed to top Wall Street analysts' consensus estimates, as losses in its struggling mortgage operations were countered by solid performances in other parts of the company. Four of the country's five largest banks--Bank of America, Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co.--have now posted better-than-expected results. Bank of America noted that credit quality continued to weaken during the April-through-June period, especially in markets that registered the most substantial declines in home prices. The Charlotte-based bank more than tripled the amount it allocated for bad loans to $5.83 billion from $1.81 billion a year earlier, largely for consumer and commercial portfolios directly tied to the housing market--including residential mortgages and homebuilding.
Bank of America Corp.'s second-quarter earnings managed to top Wall Street analysts' consensus estimates, as losses in its struggling mortgage operations were countered by solid performances in other parts of the company. Four of the country's five largest banks--Bank of America, Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co.--have now posted better-than-expected results. Bank of America noted that credit quality continued to weaken during the April-through-June period, especially in markets that registered the most substantial declines in home prices. The Charlotte-based bank more than tripled the amount it allocated for bad loans to $5.83 billion from $1.81 billion a year earlier, largely for consumer and commercial portfolios directly tied to the housing market--including residential mortgages and homebuilding.
Wachovia to Stop Buying Loans From Mortgage Brokers
Los Angeles Times (07/22/08)
Beginning on July 25, Wachovia Corp. will no longer approve mortgages made by mortgage brokers--which, along with other third parties, accounted for 40 percent of the bank's loan volume last year. The company announced the change as part of its plans to recover from losses sustained by Golden West Financial Corp., which it acquired for $24 billion in 2006. In June, Wachovia announced that it would cease writing option adjustable-rate mortgages, which made up $120 billion of Golden West's portfolio.
Beginning on July 25, Wachovia Corp. will no longer approve mortgages made by mortgage brokers--which, along with other third parties, accounted for 40 percent of the bank's loan volume last year. The company announced the change as part of its plans to recover from losses sustained by Golden West Financial Corp., which it acquired for $24 billion in 2006. In June, Wachovia announced that it would cease writing option adjustable-rate mortgages, which made up $120 billion of Golden West's portfolio.
Fannie, Freddie May Record More Losses, Ofheo Says
Bloomberg (07/22/08); Kopecki, Dawn
The Office of Federal Housing Enterprise Oversight (OFHEO) states that Fannie Mae and Freddie Mac may have to take more writedowns after increasing their purchases of non-guaranteed subprime and Alt-A mortgage securities around the same time that other investors were migrating to less risky investments. According to the regulator of the two government-sponsored enterprises, the value of $217 billion of the non-agency securities is declining as other financial companies write down their holdings. Privately issued securities backed by subprime mortgages comprised 9.2 percent of the two GSEs' combined portfolio, while Alt-A accounted for roughly 5.8 percent. OFHEO states that wagering big on private-label securities in 2004 and 2005 "significantly increased their exposure to fair value losses from changes in market prices."
The Office of Federal Housing Enterprise Oversight (OFHEO) states that Fannie Mae and Freddie Mac may have to take more writedowns after increasing their purchases of non-guaranteed subprime and Alt-A mortgage securities around the same time that other investors were migrating to less risky investments. According to the regulator of the two government-sponsored enterprises, the value of $217 billion of the non-agency securities is declining as other financial companies write down their holdings. Privately issued securities backed by subprime mortgages comprised 9.2 percent of the two GSEs' combined portfolio, while Alt-A accounted for roughly 5.8 percent. OFHEO states that wagering big on private-label securities in 2004 and 2005 "significantly increased their exposure to fair value losses from changes in market prices."
Congress Is Set to Limit Down-Payment Assistance
Washington Post (07/22/08) P. D1; ElBoghdady, Dina
Congress is expected to pass a broad housing package this week that includes language banning seller-funded downpayment-assistance programs. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, says the his chamber will cede to the Senate's effort to end this type of aid--which the Bush administration has wanted to do for years. The Federal Housing Administration says borrowers who obtain down-payment assistance from sellers go into foreclosure at nearly three times the rate of borrowers who pay out of their own pockets. Over the past decade, more than 500,000 people bought homes using a government-insured loan and a seller-funded down payment, including about 79,000 in 2007.
Congress is expected to pass a broad housing package this week that includes language banning seller-funded downpayment-assistance programs. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, says the his chamber will cede to the Senate's effort to end this type of aid--which the Bush administration has wanted to do for years. The Federal Housing Administration says borrowers who obtain down-payment assistance from sellers go into foreclosure at nearly three times the rate of borrowers who pay out of their own pockets. Over the past decade, more than 500,000 people bought homes using a government-insured loan and a seller-funded down payment, including about 79,000 in 2007.
As Bush Prods Congress, U.S. Combs 2 Mortgage Financers
New York Times (07/22/08) P. A1; Labaton, Stephen
As Congress prepares to vote on legislation that would institute a rescue plan for Fannie Mae and Freddie Mac, Treasury Secretary Henry Paulson Jr. announced that bank examiners from the Federal Reserve and the Comptroller of the Currency are reviewing the government-sponsored enterprises' books. Paulson insisted that the GSEs are sufficiently capitalized and said he hopes the examination will bolster the market's confidence. He emphasized how important it is for Congress to pass the housing bill soon, but the Bush administration reiterated that it would veto the measure if a provision giving states $4 billion in block grants to snap up foreclosed properties is not removed.
As Congress prepares to vote on legislation that would institute a rescue plan for Fannie Mae and Freddie Mac, Treasury Secretary Henry Paulson Jr. announced that bank examiners from the Federal Reserve and the Comptroller of the Currency are reviewing the government-sponsored enterprises' books. Paulson insisted that the GSEs are sufficiently capitalized and said he hopes the examination will bolster the market's confidence. He emphasized how important it is for Congress to pass the housing bill soon, but the Bush administration reiterated that it would veto the measure if a provision giving states $4 billion in block grants to snap up foreclosed properties is not removed.
Mortgage Action Alliance Newsletter
Volume III | Issue 20 | July 21, 2008
Market and political fallout surrounding Fannie Mae and Freddie Mac, as well as the failure of IndyMac, continued to dominate Washington last week. Recently, the Treasury and Federal Reserve produced a backstop plan to help the GSEs weather the current storm. Congress, which was close to completing work on the omnibus housing package, has now paused completion of that bill as it considers the backstop package. We expect the final package to be on the House floor this Wednesday, and to be considered by the Senate before August 1st. But of course, nothing is certain in this business, particularly during a time of such significant market turmoil.
The best news from last week appears to be that the consumer impact of the situation is minimal. Rate locks continue to be honored, closings are occurring and applications are being taken. The dislocation in the market, at least at this point, continues to be felt on Wall Street, not Main Street.
Last week was a significant week for a number of reasons, including the Fed's adoption of the final HOEPA rules. While the rule doesn't go into effect for another year, it will have a significant impact on the future legislative and regulatory landscape.
Treasury Introduces GSE Backstop Proposal - Slows Progress on Housing Legislation
In an attempt to stabilize Fannie Mae and Freddie Mac during extraordinary market volatility, the Treasury Department proposed a plan that would temporarily extend an unspecified line of credit to the government-sponsored enterprises (GSEs) by authorizing the Treasury Department to buy stock and other obligations in Fannie Mae and Freddie Mac. The plan would also provide additional oversight authority of the two companies by the Federal Reserve Board (FRB). The proposal serves to provide a backstop to restore confidence in the GSEs. These backstop measures would support the capital the GSEs are required to hold as protection in dire circumstances, not a taxpayer-funded bailout of the GSEs. &n bsp;
Efforts are being made to combine the GSE backstop plan with the existing omnibus housing package. Treasury Secretary Henry Paulson worked with Congressional leadership to garner support for inclusion of the plan in the final package. Closed-door negotiations over provisions of the housing bill are under consideration between House Financial Services Committee Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Christopher Dodd (D-CT). These discussions aim to resolve existing conflicts to facilitate quick passage. The House will vote on the bill this week and turn it over to Senate for final consideration. MBA remains optimistic that the legislation will reach the President prior to August.
FRB Releases Final HOEPA Rules
On Monday, July 14, the Federal Reserve Board (FRB) adopted final rules under the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA), amending Regulation Z. Under HOEPA, the Board has authority to prohibit acts or practices in connection with mortgage lending that the Board finds unfair, deceptive or designed to evade HOEPA and with respect to mortgage refinancings associated with abusive lending practices or otherwise not in the best interest of the borrower. Generally, the rules: (1) prohibit certain acts or practices for "higher priced" or subprime mortgage loans and loans that meet HOEPA's cost triggers; (2) prohibit other acts or practices for all closed-end credit transactions secured by a consumer's principal dwelling; (3) prohibit certain misleading or deceptive advertising practices in connection with closed-end mortgages; and (4) require earlier consumer disclosures for closed end mortgages secured by a principal dwelling. Notably, the rule changes the definitions for determining what constitutes a "higher priced or subprime loan" receiving greater regulation. First lien mortgages are "higher priced" if they are 1.5 percentage points above the average prime offer rate issued by Freddie Mac. Second lien loans are "higher priced" if they are 3.5 percentage points over the same index. Please find MBA's summary attached.
MBA Reiterates Support over Housing Provisions
On Thursday, July 17, MBA sent a letter to House Financial Services Chairman Barney Frank (D-MA), Ranking Member Spencer Bachus (R-PA), Senate Banking Committee Chairman Christopher Dodd (D-CT), and Ranking Member Richard Shelby (R-AL) reiterating support for key provisions of the House-passed version of the housing bill that will facilitate the use of FHA multifamily insurance with the Low Income Housing Tax Credit (LIHTC) program. As previously expressed in a letter dated on July 2, the changes outlined in the bill will lower costs and expedite processing to allow the development and rehabilitation of affordable rental housing at a time when it is needed most. Please find both letters attached as one document.
Ginnie Mae Releases Memo on FHASecure Expansion
On Friday, July 11, Ginnie Mae released an all participants memorandum (APM) that replaces AMP-07-14 and updates the applicable "M FS" Ginnie Mae II multiple issuer pooling requirements. FHASecure mortgages that have the following characteristics are eligible for inclusion in "M FS" pools only: (1) fixed rate loans originated following FHA Mortgagee Letter 2008-13 to borrowers that refinanced after becoming delinquent and (2) fixed rate refinance loans to borrowers that have taken out new subordinate liens. All other FHASecure mortgages may be placed into other pool types depending on Ginnie Mae's pooling requirements.
MBA Makes Recommendations to President's Council on Financial Literacy
On Tuesday, July 15, MBA President and CEO Jonathan Kempner wrote to the Underserved Committee of the President's Advisory Council on Financial Literacy recommending the report should provide a broad set of guiding principles that emphasize greater transparency and financial literacy. In addition to encouraging these principles, MBA made several recommendations, including: FHA modernization, GSE reform legislation, limiting the use of low-documentation loans, increasing transparency across the board, and requiring greater responsibility and accountability of mortgage lenders and brokers.
FDIC Releases Policy Statement on Covered Bonds Consistent with MBA Recommendations
On Tuesday, July 15, the Federal Deposit Insurance Corporation (FDIC) released its final policy statement regarding the treatment of covered bonds in the event of a bank failure. The statement provides guidance on how FDIC can expedite access to collateral pledged for certain covered bonds to bondholders should FDIC terminate the bond transaction. Covered bonds initially originated in Europe and are non-deposit obligation bonds of the issuing bank secured by a pledge of loans that remain on a bank's balance sheet. The final rule maintains limits on a bank's covered bond transactions to no more than four percent of its total liabilities. Additionally, while the definition of "secured liabilities" includes Federal Home Loan Bank (FHLB) advances, the policy does not impose a cap on FHLB advances and has no effect on a bank's deposit insurance assessments. This specific component of the policy is consistent with MBA's recommendations delivered to FDIC in a comment letter on June 23 (attached). It is important to note that FDIC did hint at revisiting the issue of secured liabilities in the future.
In other news, the FDIC Board also approved final guidance on the supervisory review process (Pillar 2 of 3) for banks implementing Basel II framework, the new advanced capital adequacy framework. The final guidance details how to assess overall capital adequacy for banks using Basel II.
SEC Issues Emergency Order to Enhance Investor Protections Against Naked Short Selling
On Tuesday, July 15, the Securities and Exchange Commission (SEC) issued an emergency order intended to enhance investor protections against "naked" short selling in the securities of Fannie Mae, Freddie Mac, and other primary dealers at commercial and investment banks. The order goes into effect on July 21 for an eight day period, expiring on July 29. Anyone effecting a short sale in the securities referenced during this period is required to borrow the securities and deliver them at settlement. By issuing the order, SEC Chairman Christopher Cox "aims to stop unlawful manipulation" that has threatened the stability of financial institutions.
FHA Commissioner Participates in CampusMBA's Live Online Conference
On Tuesday, July 15, Federal Housing Administration (FHA) Commissioner Brian Montgomery addressed a record number of MBA members and others during a CampusMBA Live Online Conference with FHA staff. The Commissioner's participation came the day after implementation of FHA's risk-based premium structure. In his comments, the Commissioner noted that FHA appreciates the efforts lenders have undertaken to update their systems in order to facilitate the new premium structure. FHA is fully aware of the potential problems that could arise should the housing bill pass into law and implement a one-year moratorium on the risk-based pricing structure. FHA is devising ways to address this issue.
MBA Submits comments to IRS on REMIC Single-Family Changes
On Tuesday, July 15, MBA and the Consumer Mortgage Coalition submitted comments to the Internal Revenue Service (IRS) concerning Revenue Procedure 2008-28, which establishes standards for when modifications to loans in pools would not compromise the real estate mortgage investment conduit (REMIC) tax status of the pool (attached). The letter applauded the IRS's ruling and suggested comments on how to improve the revenue procedure. Of note, MBA suggested the IRS not establish a threshold for the number of loans that can be delinquent in a pool upon their contribution date as IRS's 10 percent threshold is lower than the 50 percent standard established by the SEC's requirement under Regulation AB. MBA also suggested that if a date is selected for measuring delinquency levels, that date should be based on the "cut-off date" rather than the "start-up date" of that security. Finally, the IRS should eliminate the sunset date of 2010.
ASF Launches Project RESTART
On Wednesday, July 16, the American Securitization Forum (ASF) launched Project RESTART (residential securitization transparency and reporting), an industry-developed initiative to help rebuild investor confidence in mortgage and asset-backed securities, restore capital flows to the markets, and increase the availability of affordable credit. Project RESTART is a collaborative effort of behalf of investors, issuers, originators, credit rating agencies, and servicers to restore confidence in the markets by implementing steps that will eventually lead to accepted industry standards. Currently, only a proposal on the ASF RMBS Disclosure Package (phase one) has been released, which standardizes and expands existing disclosure to investors and credit rating agencies. MBA has been discussing the proposal with ASF and Treasury and plans to submit comments on phase one before the August 22 deadline.
Congressional Hearings: Update
On Tuesday, July 15, the Senate Banking Committee held two hearings pertinent to the state of the market. The first hearing, entitled "The Semiannual Monetary Policy Report to the Congress," heard testimony from FRB Chairman Ben Bernanke. While Chairman Bernanke refrained from using the term recession to describe the economy, he reported that the housing market continues to decline, economic growth is slow and the FRB will continue to monitor inflation.
The second hearing, entitled "Recent Market Developments and Regulatory Responses to Them," took place immediately after the first hearing. The Banking Committee once again heard testimony from FRB Chairman Ben Bernanke, in addition to Treasury Secretary Henry Paulson and SEC Chairman Christopher Cox. During this hearing, the Committee heard discussions on Fannie Mae and Freddie Mac, the Treasury's backstop GSE proposal, and the consequences of IndyMac's failure. Secretary Paulson explained the need to implement the Treasury's proposal, which Chairman Bernanke endorsed. He also defended the FRB's decision to open the credit window to the GSEs.
On Thursday, July 17, the House Financial Services Committee held its own hearing on monetary policy, entitled the "Humphrey Hawkins Hearing on Monetary Policy." Chairman Bernanke provided testimony.
This week, the House Financial Services Committee will hold a hearing on mortgage servicing practices, where MBA is expected to provide testimony.
Market and political fallout surrounding Fannie Mae and Freddie Mac, as well as the failure of IndyMac, continued to dominate Washington last week. Recently, the Treasury and Federal Reserve produced a backstop plan to help the GSEs weather the current storm. Congress, which was close to completing work on the omnibus housing package, has now paused completion of that bill as it considers the backstop package. We expect the final package to be on the House floor this Wednesday, and to be considered by the Senate before August 1st. But of course, nothing is certain in this business, particularly during a time of such significant market turmoil.
The best news from last week appears to be that the consumer impact of the situation is minimal. Rate locks continue to be honored, closings are occurring and applications are being taken. The dislocation in the market, at least at this point, continues to be felt on Wall Street, not Main Street.
Last week was a significant week for a number of reasons, including the Fed's adoption of the final HOEPA rules. While the rule doesn't go into effect for another year, it will have a significant impact on the future legislative and regulatory landscape.
Treasury Introduces GSE Backstop Proposal - Slows Progress on Housing Legislation
In an attempt to stabilize Fannie Mae and Freddie Mac during extraordinary market volatility, the Treasury Department proposed a plan that would temporarily extend an unspecified line of credit to the government-sponsored enterprises (GSEs) by authorizing the Treasury Department to buy stock and other obligations in Fannie Mae and Freddie Mac. The plan would also provide additional oversight authority of the two companies by the Federal Reserve Board (FRB). The proposal serves to provide a backstop to restore confidence in the GSEs. These backstop measures would support the capital the GSEs are required to hold as protection in dire circumstances, not a taxpayer-funded bailout of the GSEs. &n bsp;
Efforts are being made to combine the GSE backstop plan with the existing omnibus housing package. Treasury Secretary Henry Paulson worked with Congressional leadership to garner support for inclusion of the plan in the final package. Closed-door negotiations over provisions of the housing bill are under consideration between House Financial Services Committee Chairman Barney Frank (D-MA) and Senate Banking Committee Chairman Christopher Dodd (D-CT). These discussions aim to resolve existing conflicts to facilitate quick passage. The House will vote on the bill this week and turn it over to Senate for final consideration. MBA remains optimistic that the legislation will reach the President prior to August.
FRB Releases Final HOEPA Rules
On Monday, July 14, the Federal Reserve Board (FRB) adopted final rules under the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA), amending Regulation Z. Under HOEPA, the Board has authority to prohibit acts or practices in connection with mortgage lending that the Board finds unfair, deceptive or designed to evade HOEPA and with respect to mortgage refinancings associated with abusive lending practices or otherwise not in the best interest of the borrower. Generally, the rules: (1) prohibit certain acts or practices for "higher priced" or subprime mortgage loans and loans that meet HOEPA's cost triggers; (2) prohibit other acts or practices for all closed-end credit transactions secured by a consumer's principal dwelling; (3) prohibit certain misleading or deceptive advertising practices in connection with closed-end mortgages; and (4) require earlier consumer disclosures for closed end mortgages secured by a principal dwelling. Notably, the rule changes the definitions for determining what constitutes a "higher priced or subprime loan" receiving greater regulation. First lien mortgages are "higher priced" if they are 1.5 percentage points above the average prime offer rate issued by Freddie Mac. Second lien loans are "higher priced" if they are 3.5 percentage points over the same index. Please find MBA's summary attached.
MBA Reiterates Support over Housing Provisions
On Thursday, July 17, MBA sent a letter to House Financial Services Chairman Barney Frank (D-MA), Ranking Member Spencer Bachus (R-PA), Senate Banking Committee Chairman Christopher Dodd (D-CT), and Ranking Member Richard Shelby (R-AL) reiterating support for key provisions of the House-passed version of the housing bill that will facilitate the use of FHA multifamily insurance with the Low Income Housing Tax Credit (LIHTC) program. As previously expressed in a letter dated on July 2, the changes outlined in the bill will lower costs and expedite processing to allow the development and rehabilitation of affordable rental housing at a time when it is needed most. Please find both letters attached as one document.
Ginnie Mae Releases Memo on FHASecure Expansion
On Friday, July 11, Ginnie Mae released an all participants memorandum (APM) that replaces AMP-07-14 and updates the applicable "M FS" Ginnie Mae II multiple issuer pooling requirements. FHASecure mortgages that have the following characteristics are eligible for inclusion in "M FS" pools only: (1) fixed rate loans originated following FHA Mortgagee Letter 2008-13 to borrowers that refinanced after becoming delinquent and (2) fixed rate refinance loans to borrowers that have taken out new subordinate liens. All other FHASecure mortgages may be placed into other pool types depending on Ginnie Mae's pooling requirements.
MBA Makes Recommendations to President's Council on Financial Literacy
On Tuesday, July 15, MBA President and CEO Jonathan Kempner wrote to the Underserved Committee of the President's Advisory Council on Financial Literacy recommending the report should provide a broad set of guiding principles that emphasize greater transparency and financial literacy. In addition to encouraging these principles, MBA made several recommendations, including: FHA modernization, GSE reform legislation, limiting the use of low-documentation loans, increasing transparency across the board, and requiring greater responsibility and accountability of mortgage lenders and brokers.
FDIC Releases Policy Statement on Covered Bonds Consistent with MBA Recommendations
On Tuesday, July 15, the Federal Deposit Insurance Corporation (FDIC) released its final policy statement regarding the treatment of covered bonds in the event of a bank failure. The statement provides guidance on how FDIC can expedite access to collateral pledged for certain covered bonds to bondholders should FDIC terminate the bond transaction. Covered bonds initially originated in Europe and are non-deposit obligation bonds of the issuing bank secured by a pledge of loans that remain on a bank's balance sheet. The final rule maintains limits on a bank's covered bond transactions to no more than four percent of its total liabilities. Additionally, while the definition of "secured liabilities" includes Federal Home Loan Bank (FHLB) advances, the policy does not impose a cap on FHLB advances and has no effect on a bank's deposit insurance assessments. This specific component of the policy is consistent with MBA's recommendations delivered to FDIC in a comment letter on June 23 (attached). It is important to note that FDIC did hint at revisiting the issue of secured liabilities in the future.
In other news, the FDIC Board also approved final guidance on the supervisory review process (Pillar 2 of 3) for banks implementing Basel II framework, the new advanced capital adequacy framework. The final guidance details how to assess overall capital adequacy for banks using Basel II.
SEC Issues Emergency Order to Enhance Investor Protections Against Naked Short Selling
On Tuesday, July 15, the Securities and Exchange Commission (SEC) issued an emergency order intended to enhance investor protections against "naked" short selling in the securities of Fannie Mae, Freddie Mac, and other primary dealers at commercial and investment banks. The order goes into effect on July 21 for an eight day period, expiring on July 29. Anyone effecting a short sale in the securities referenced during this period is required to borrow the securities and deliver them at settlement. By issuing the order, SEC Chairman Christopher Cox "aims to stop unlawful manipulation" that has threatened the stability of financial institutions.
FHA Commissioner Participates in CampusMBA's Live Online Conference
On Tuesday, July 15, Federal Housing Administration (FHA) Commissioner Brian Montgomery addressed a record number of MBA members and others during a CampusMBA Live Online Conference with FHA staff. The Commissioner's participation came the day after implementation of FHA's risk-based premium structure. In his comments, the Commissioner noted that FHA appreciates the efforts lenders have undertaken to update their systems in order to facilitate the new premium structure. FHA is fully aware of the potential problems that could arise should the housing bill pass into law and implement a one-year moratorium on the risk-based pricing structure. FHA is devising ways to address this issue.
MBA Submits comments to IRS on REMIC Single-Family Changes
On Tuesday, July 15, MBA and the Consumer Mortgage Coalition submitted comments to the Internal Revenue Service (IRS) concerning Revenue Procedure 2008-28, which establishes standards for when modifications to loans in pools would not compromise the real estate mortgage investment conduit (REMIC) tax status of the pool (attached). The letter applauded the IRS's ruling and suggested comments on how to improve the revenue procedure. Of note, MBA suggested the IRS not establish a threshold for the number of loans that can be delinquent in a pool upon their contribution date as IRS's 10 percent threshold is lower than the 50 percent standard established by the SEC's requirement under Regulation AB. MBA also suggested that if a date is selected for measuring delinquency levels, that date should be based on the "cut-off date" rather than the "start-up date" of that security. Finally, the IRS should eliminate the sunset date of 2010.
ASF Launches Project RESTART
On Wednesday, July 16, the American Securitization Forum (ASF) launched Project RESTART (residential securitization transparency and reporting), an industry-developed initiative to help rebuild investor confidence in mortgage and asset-backed securities, restore capital flows to the markets, and increase the availability of affordable credit. Project RESTART is a collaborative effort of behalf of investors, issuers, originators, credit rating agencies, and servicers to restore confidence in the markets by implementing steps that will eventually lead to accepted industry standards. Currently, only a proposal on the ASF RMBS Disclosure Package (phase one) has been released, which standardizes and expands existing disclosure to investors and credit rating agencies. MBA has been discussing the proposal with ASF and Treasury and plans to submit comments on phase one before the August 22 deadline.
Congressional Hearings: Update
On Tuesday, July 15, the Senate Banking Committee held two hearings pertinent to the state of the market. The first hearing, entitled "The Semiannual Monetary Policy Report to the Congress," heard testimony from FRB Chairman Ben Bernanke. While Chairman Bernanke refrained from using the term recession to describe the economy, he reported that the housing market continues to decline, economic growth is slow and the FRB will continue to monitor inflation.
The second hearing, entitled "Recent Market Developments and Regulatory Responses to Them," took place immediately after the first hearing. The Banking Committee once again heard testimony from FRB Chairman Ben Bernanke, in addition to Treasury Secretary Henry Paulson and SEC Chairman Christopher Cox. During this hearing, the Committee heard discussions on Fannie Mae and Freddie Mac, the Treasury's backstop GSE proposal, and the consequences of IndyMac's failure. Secretary Paulson explained the need to implement the Treasury's proposal, which Chairman Bernanke endorsed. He also defended the FRB's decision to open the credit window to the GSEs.
On Thursday, July 17, the House Financial Services Committee held its own hearing on monetary policy, entitled the "Humphrey Hawkins Hearing on Monetary Policy." Chairman Bernanke provided testimony.
This week, the House Financial Services Committee will hold a hearing on mortgage servicing practices, where MBA is expected to provide testimony.
Soft Economy Slows 2008 IT Budget Growth
MBA (7/21/2008 ) Palaparty, Vijay
IT operational budgets will scale back this year because of slow economic growth, according to a report from Computer Electronics Inc., Irvine, Calif.
the report said median IT operational budgets will only grow 4 percent this year, a decline from last year’s 5 percent growth.
“It does not take an outright recession for organizations to pull back on IT spending,” said Frank Scavo, president of Consumer Economics, and IT research and advisory firm. “IT spending and staffing levels are not generally falling, just as the U.S. economy is not yet technically in a recession. Statistics indicate a decidedly cautious mood among respondents this year in contrast to optimistic tone in last year’s survey.”
The report, IT Spending, Staffing and Technology Trends, said 25 percent of IT executives do not plan to spend all the money allocated in their IT budgets. Twelve percent of executives plan to spend more and 63 percent expect to spend a similar amount as last year.
IT spending as a percentage of revenue declined to 1.5 percent this year from 1.8 percent in 2007. “Corporate revenues are generally still growing,” the report said. “If IT spending as a percentage of revenue is declining, it might be because corporate revenues are growing faster than IT spending. In other words, IT spending is increasing, but not as fast corporate revenues.”
Banking and finance organizations were reported to lag behind in IT spending increases, with only 2.5 percent growth. “Banking and finance organizations are suffering from the meltdown in the credit markets and a downturn in new home purchases,” Scavo said.
Though IT operational budgets will increase, the report revealed that IT capital spending growth fell to zero this year. Last year, IT capital budgets grew at a 4 percent rate to fund long-term investments in IT infrastructure, equipment or major systems.
“As organizations are placing a lower priority on new system development, it is natural that IT capital spending would show slower growth,” Scavo said. “It is also logical that spending cuts would fall harder on capital spending, much of which represents new initiatives that can be deferred, than on operational spending, which largely comprises ongoing maintenance and other spending that is non-discretionary.”
Improving service levels was the top priority cited by organizations in the survey. Better management of risks by improving disaster recovery capabilities; increasing IT security; reducing ongoing IT maintenance and support costs; and improving of our IT staff skills followed on the list.
“These top five are all related to the basic mission of the IT organization: serving users while managing risks and costs,” the report said. “They differ somewhat from the top five last year, when developing new systems ranked number one and reducing the cost of ongoing support did not even make the top five. This shift in priorities shows a general softening in the focus on new systems and tighter attention on cost control.”
This year, 39 percent of organizations reported adding IT staff and 24 percent reported staff cuts. Last year, 52 percent added staff while only 16 percent made any cuts.
"Business executives are unwilling to significantly augment full-time IT employee headcounts," Scavo said. "Instead, companies of all sizes are turning to outsourcing as an ongoing strategy to handle fluctuations in the need for IT personnel."
IT operational budgets will scale back this year because of slow economic growth, according to a report from Computer Electronics Inc., Irvine, Calif.
the report said median IT operational budgets will only grow 4 percent this year, a decline from last year’s 5 percent growth.
“It does not take an outright recession for organizations to pull back on IT spending,” said Frank Scavo, president of Consumer Economics, and IT research and advisory firm. “IT spending and staffing levels are not generally falling, just as the U.S. economy is not yet technically in a recession. Statistics indicate a decidedly cautious mood among respondents this year in contrast to optimistic tone in last year’s survey.”
The report, IT Spending, Staffing and Technology Trends, said 25 percent of IT executives do not plan to spend all the money allocated in their IT budgets. Twelve percent of executives plan to spend more and 63 percent expect to spend a similar amount as last year.
IT spending as a percentage of revenue declined to 1.5 percent this year from 1.8 percent in 2007. “Corporate revenues are generally still growing,” the report said. “If IT spending as a percentage of revenue is declining, it might be because corporate revenues are growing faster than IT spending. In other words, IT spending is increasing, but not as fast corporate revenues.”
Banking and finance organizations were reported to lag behind in IT spending increases, with only 2.5 percent growth. “Banking and finance organizations are suffering from the meltdown in the credit markets and a downturn in new home purchases,” Scavo said.
Though IT operational budgets will increase, the report revealed that IT capital spending growth fell to zero this year. Last year, IT capital budgets grew at a 4 percent rate to fund long-term investments in IT infrastructure, equipment or major systems.
“As organizations are placing a lower priority on new system development, it is natural that IT capital spending would show slower growth,” Scavo said. “It is also logical that spending cuts would fall harder on capital spending, much of which represents new initiatives that can be deferred, than on operational spending, which largely comprises ongoing maintenance and other spending that is non-discretionary.”
Improving service levels was the top priority cited by organizations in the survey. Better management of risks by improving disaster recovery capabilities; increasing IT security; reducing ongoing IT maintenance and support costs; and improving of our IT staff skills followed on the list.
“These top five are all related to the basic mission of the IT organization: serving users while managing risks and costs,” the report said. “They differ somewhat from the top five last year, when developing new systems ranked number one and reducing the cost of ongoing support did not even make the top five. This shift in priorities shows a general softening in the focus on new systems and tighter attention on cost control.”
This year, 39 percent of organizations reported adding IT staff and 24 percent reported staff cuts. Last year, 52 percent added staff while only 16 percent made any cuts.
"Business executives are unwilling to significantly augment full-time IT employee headcounts," Scavo said. "Instead, companies of all sizes are turning to outsourcing as an ongoing strategy to handle fluctuations in the need for IT personnel."
Spotlight on Oil
MBA (7/21/2008 ) Velz, Orawin
Oil and other energy prices played a major role last week. The June Consumer Price Index surged 1.1 percent, posting a year-over-year gain of 4.9 percent, the biggest since May 1991.
The Producer Price Index jumped 1.8 percent in June from the previous month and 9.1 percent from last June, the largest year-over-year gain since June 1981. Energy prices were the main culprit for both strong retail and wholesale headline inflation.
The effect of rising energy prices was also evident in June retail sales, which rose only 0.1 percent, despite a 4.6 percent jump in sales at gasoline stations as gas prices soared. For the second quarter, retail sales grew 2.6 percent, the slowest quarterly pace since the fourth quarter of 2002. The published retail sales data from the Commerce Department are adjusted for seasonal factors but not for inflation. Using the goods component of the CPI to adjust for inflation, retail sales declined in the second quarter.
A separate report last week from the Bureau of the Labor Statistics showed that incomes are not keeping up with prices. Inflation-adjusted average weekly earnings fell 0.9 percent in June from May and were down 2.4 percent from last June. Manufactures also reported sharp increases in the prices they paid for inputs, according to the Philadelphia Federal Reserve manufacturing survey, which showed that the price-paid index rose to its highest level since 1980.
On Wednesday, the Fed released the minutes from the Federal Open Market Committee (FOMC) meeting on June 24-25, which showed that some members believed that downside risks to growth had diminished while the upside risks to inflation had increased. These members argued that a rate hike “would be appropriate very soon.”
In his semiannual Monetary Policy Report to Congress on Tuesday and Wednesday, Fed Chairman Ben Bernanke confirmed the inflation view in the FOMC minutes, noting that upside inflation risks have “intensified,” given elevated energy and commodity prices and the declining dollar. Bernanke was especially concerned that potential pickup in inflation expectations may lead to wage increases during the “wage- and price-setting process.”
However, Bernanke did not reiterate the view in the FOMC statement that downside risks to growth have diminished. Instead, he argued that there are “significant” downside risks to growth outlook, due to the possibility of higher energy prices, tighter credit market and a deeper housing decline.
Good news for the week was the sharp drop in crude oil futures: about $16 in three days, bringing the price below $130 a barrel on Thursday for the first time in more than a month. Crude rebounded slightly on Friday, hovering around $130 a barrel. Declining crude prices spurred some hopes that headline inflation will moderate in the coming months, making it easier for the Fed to keep interest rates on hold for some time. Fed funds futures showed about a 40 percent chance of a 25 basis-point increase in the target rate in September.
Finally, housing news continued to be downbeat. Single-family housing starts declined in June to the lowest level since January 1991. The surge in multifamily starts reflected a rush to start building activity before more stringent local building code changes took effect in New York. Home builders were more pessimistic in July in the face of weakening job markets, rising energy prices and declining home prices, according to the National Association of Home Builders/Wells Fargo Housing Market Index, which declined to a record low in the 22-year history of the survey.
Stock markets rose and lifted major averages from bear market territory, driven by gains on financial stocks including Wells Fargo, JPMorgan Chase & Co. and Citigroup, which released better-than-expect financial reports. In addition, declining crude oil futures extended the equity market rallies. Treasury prices declined and yields rose as investors’ risk appetite increased, making the safety of government bonds less attractive. The yield on the 10-year Treasury note stayed around 4.06 percent by mid-Friday afternoon, 10 basis points higher than the rate on the previous Friday and the highest rate in three weeks.
Oil and other energy prices played a major role last week. The June Consumer Price Index surged 1.1 percent, posting a year-over-year gain of 4.9 percent, the biggest since May 1991.
The Producer Price Index jumped 1.8 percent in June from the previous month and 9.1 percent from last June, the largest year-over-year gain since June 1981. Energy prices were the main culprit for both strong retail and wholesale headline inflation.
The effect of rising energy prices was also evident in June retail sales, which rose only 0.1 percent, despite a 4.6 percent jump in sales at gasoline stations as gas prices soared. For the second quarter, retail sales grew 2.6 percent, the slowest quarterly pace since the fourth quarter of 2002. The published retail sales data from the Commerce Department are adjusted for seasonal factors but not for inflation. Using the goods component of the CPI to adjust for inflation, retail sales declined in the second quarter.
A separate report last week from the Bureau of the Labor Statistics showed that incomes are not keeping up with prices. Inflation-adjusted average weekly earnings fell 0.9 percent in June from May and were down 2.4 percent from last June. Manufactures also reported sharp increases in the prices they paid for inputs, according to the Philadelphia Federal Reserve manufacturing survey, which showed that the price-paid index rose to its highest level since 1980.
On Wednesday, the Fed released the minutes from the Federal Open Market Committee (FOMC) meeting on June 24-25, which showed that some members believed that downside risks to growth had diminished while the upside risks to inflation had increased. These members argued that a rate hike “would be appropriate very soon.”
In his semiannual Monetary Policy Report to Congress on Tuesday and Wednesday, Fed Chairman Ben Bernanke confirmed the inflation view in the FOMC minutes, noting that upside inflation risks have “intensified,” given elevated energy and commodity prices and the declining dollar. Bernanke was especially concerned that potential pickup in inflation expectations may lead to wage increases during the “wage- and price-setting process.”
However, Bernanke did not reiterate the view in the FOMC statement that downside risks to growth have diminished. Instead, he argued that there are “significant” downside risks to growth outlook, due to the possibility of higher energy prices, tighter credit market and a deeper housing decline.
Good news for the week was the sharp drop in crude oil futures: about $16 in three days, bringing the price below $130 a barrel on Thursday for the first time in more than a month. Crude rebounded slightly on Friday, hovering around $130 a barrel. Declining crude prices spurred some hopes that headline inflation will moderate in the coming months, making it easier for the Fed to keep interest rates on hold for some time. Fed funds futures showed about a 40 percent chance of a 25 basis-point increase in the target rate in September.
Finally, housing news continued to be downbeat. Single-family housing starts declined in June to the lowest level since January 1991. The surge in multifamily starts reflected a rush to start building activity before more stringent local building code changes took effect in New York. Home builders were more pessimistic in July in the face of weakening job markets, rising energy prices and declining home prices, according to the National Association of Home Builders/Wells Fargo Housing Market Index, which declined to a record low in the 22-year history of the survey.
Stock markets rose and lifted major averages from bear market territory, driven by gains on financial stocks including Wells Fargo, JPMorgan Chase & Co. and Citigroup, which released better-than-expect financial reports. In addition, declining crude oil futures extended the equity market rallies. Treasury prices declined and yields rose as investors’ risk appetite increased, making the safety of government bonds less attractive. The yield on the 10-year Treasury note stayed around 4.06 percent by mid-Friday afternoon, 10 basis points higher than the rate on the previous Friday and the highest rate in three weeks.
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