It's a buyer's market, and many are trying to take full advantage of it by demanding major home repairs, warranties on home appliances, and even tax rebates.
By Les Christie, CNNMoney.com staff writer
August 29, 2008: 3:50 AM EDT
NEW YORK (CNNMoney.com) -- A rock-bottom price just isn't enough for buyers these days - it's a starting point. If the furnace is out of date, they'll demand a new one. Cracked driveways have to be repaved, and dirty carpeting torn out and replaced. All at the seller's expense.
Buyers are in the driver's seat and they know it. They're using that leverage to pry more concessions out of desperate sellers than they ever dreamed of during the bubble.
"'Now it's my turn,' is the attitude," said Mike Byrd, a real estate agent with SLO Home Store in San Luis Obispo, Calif. "Some buyers are really putting the screws on."
In New England, buyers are demanding that sellers pay to fill up a home's heating oil tank. In California, sellers are forking over closing costs. Nearly everywhere, buyers are insisting that sellers purchase a home service contract providing a one year warranty on all of a home's appliances.
New central air-conditioning systems, a year of condo association fees and even two weeks in Hawaii are just a few of the incentives that sellers are having to employ these days, according to Byrd.
And buyers are getting it all in writing.
"[During the boom] buyers usually accepted the property as-is, and we even occasionally offered to pay the seller's state and county transfer taxes," said Washington D.C. based agent John Sullivan, who is also president elect of the National Association of Exclusive Buyer's Agents. "No more."
Upon closer inspection
It used to be that sales contracts had clauses that made a purchase contingent upon whether a home passed inspection, if a buyer was able to get a mortgage, or even if they could sell their own house.
Those safeguards fell by the wayside during the bubble; if a buyer balked, the seller just moved on to the next highest bidder. Buyers who signed deals without these protections and had to back out often lost their deposits.
But lately, buyers have expanded the number of clauses they put into contracts, according to Benjamin Clark, an agent in Salt Lake City with Homebuyer Representation.
"Some of these items include availability of high speed Internet, cost and availability of homeowners insurance," he said. "They cover environmental aspects of the home and neighborhood, as well as local services and amenities."
Instead of a single inspector, the home inspection now includes specialists in radon, lead-based paint, roofs and masonry, as well as fireplaces. Sellers must fix any flaw or pay for the buyer to correct it.
"Sellers are much more flexible on issues that come up on the home inspection - and I mean big ticket items like roofs and furnaces," said Ed Bartlett of Spokane Home Buyers in Washington State. "And this is after they have already been flexible on the price."
A detailed inspection was a lifesaver for clients of Clark's, who were buying a six-bedroom, four-bath rambling ranch in Bountiful, Utah, that was listed $344,900.
After the buyers got the price down several thousand dollars and signed a contract, the home inspectors went to work. They turned up some minor issues, which the sellers agreed to fix, including $875 for some electric work, $150 for plumbing, $242 for a new kitchen faucet and $735 for chimney pointing and repair.
But bigger problems emerged. "There were termites," said Clark, "and masonry issues. The deck needed to be demolished." Based on these findings, he got the price down to $324,000.
For some buyers, the negotiations don't stop right up until the closing.
Don Plourde, a Coldwell Banker broker in Waterville, Maine, recently had a client squeeze a last minute concession out of a seller on a three bedroom starter home that needed some work. The asking price was very low - just $75,000 - but even so, the buyer was able to negotiate that down to $72,500.
But just before the closing, the buyer demanded that the seller leave behind three quarters of a tank of heating oil - 200 gallons worth $800 - for free. The seller caved.
"He just wanted to move on," said Plourde.
Free closing
These days, sellers almost always pay the closing costs instead of the buyers, according to John Rygiol, an Exclusive Home Buyer Brokerage agent in Orange County, Calif.
"It's hard to ask for that after already getting a price reduction," said the agent, who recently got a seller to pony up $10,000 for closing. "But it's a buyer's market and sellers are attuned to that."
Even local taxes are on the table these days, according to Adele Hrovat, the owner of The Buyer's Realty of Las Vegas. She got the bank that was selling a four-bedroom, three-bath, house to pay an $11,000 tax assessment on top of $6,000 in closing costs. And that was after the price was slashed from $489,900 to $399,000.
With the housing market bad as it is - slow sales, dropping prices and inventories rising - sellers are going to have to stay flexible.
"We're finding that buyers make an offer and if it's not accepted, they just go on to the next seller," said Don Plourde.
Friday, August 29, 2008
Recycled with Style - Discards Find Attractive Uses
by Joanne Kempinger Demski
Gardeners aren’t just planting posies these days. They’re crafting spaces that reflect their personal style, all the while keeping a close eye on their budget.
One way is by using recycled items as containers and accents. Even plants can get a new life, with the help of patient gardeners.
Rusty metal watering cans, broken chairs, plastic suitcases from years ago, discarded bowling balls and more are finding a new life.
“I think it’s a trend and it’s a way to have a one-of-a-kind garden. If people can find something unique-something that’s not normally used as a garden container-that adds to the fun in a garden and an element of surprise,” says Barbara Henderson, an artist who specializes in fused glass and mosaics.
Gardeners aren’t just planting posies these days. They’re crafting spaces that reflect their personal style, all the while keeping a close eye on their budget.
One way is by using recycled items as containers and accents. Even plants can get a new life, with the help of patient gardeners.
Rusty metal watering cans, broken chairs, plastic suitcases from years ago, discarded bowling balls and more are finding a new life.
“I think it’s a trend and it’s a way to have a one-of-a-kind garden. If people can find something unique-something that’s not normally used as a garden container-that adds to the fun in a garden and an element of surprise,” says Barbara Henderson, an artist who specializes in fused glass and mosaics.
Looking for a great deal? Foreclosure properties are a definite maybe Average consumers should proceed with caution and knowledge
by Heather Clark
Buying foreclosure properties has long been the domain of savvy and cash-ready real estate investors. But what about the average consumer looking for a place to call home?
More than 900,000 households are in the foreclosure process, up 71 percent from a year ago, according to survey released in March by the Mortgage Bankers Association. California and Florida are hardest hit. By the end of 2007, they accounted for 30 percent of all foreclosure starts in the United States, despite representing only 21 percent of the mortgage market.
With so many homeowners in the process of — or scrambling to avoid — foreclosure, is now the time to scoop up a home at a bargain price?
Buying foreclosure properties has long been the domain of savvy and cash-ready real estate investors. But what about the average consumer looking for a place to call home?
More than 900,000 households are in the foreclosure process, up 71 percent from a year ago, according to survey released in March by the Mortgage Bankers Association. California and Florida are hardest hit. By the end of 2007, they accounted for 30 percent of all foreclosure starts in the United States, despite representing only 21 percent of the mortgage market.
With so many homeowners in the process of — or scrambling to avoid — foreclosure, is now the time to scoop up a home at a bargain price?
U.S. Economy: Confidence Increases, House-Price Decline Slows
by Timothy R. Homan and Courtney Schlisserman
Confidence among American consumers improved in August for a second month as the surge in gasoline prices and the slide in home values abated.
The Conference Board’s confidence index rose to 56.9, higher than economists had forecast. House prices in 20 major cities declined at a slower pace for the fourth straight month in June, the S&P/Case-Shiller index showed. The Commerce Department said new-home sales reached a three-month high in July.
“A little bit of the gloom is lifting,” said Peter Kretzmer, a senior economist at Bank of America Corp. in New York who previously worked at both the Federal Reserve Bank of New York and the Fed Board in Washington.
Confidence among American consumers improved in August for a second month as the surge in gasoline prices and the slide in home values abated.
The Conference Board’s confidence index rose to 56.9, higher than economists had forecast. House prices in 20 major cities declined at a slower pace for the fourth straight month in June, the S&P/Case-Shiller index showed. The Commerce Department said new-home sales reached a three-month high in July.
“A little bit of the gloom is lifting,” said Peter Kretzmer, a senior economist at Bank of America Corp. in New York who previously worked at both the Federal Reserve Bank of New York and the Fed Board in Washington.
Commercial Briefs
MBA (8/28/2008 ) Murray, Michael
Apartment vacancy rates increased during the second quarter. The U.S. Census Bureau vacancy rate for all rental apartments—buildings of five or more units—increased to 11.1 percent, up 0.4 percent from the previous quarter and 1 percent from a year earlier.
The second quarter multifamily vacancy rate hit its highest mark since the first quarter of 2005, said the National Multi Housing Council.
Multifamily permits and starts increased, while completions fell in the second quarter. Permits for five units or more increased to a seasonally adjusted annual rate of 364,300—up 21 percent from the first quarter but down 1.2 percent from the previous year.
NMHC said the quarterly figure was pushed upward by a last-minute push in June from New York City developers to qualify for an expiring
tax-abatement program.
*****
Larew, Doyle & Associates, a mid-size real estate mortgage banking firm placing debt and equity capital into the marketplace, opened its new offices in Providence, R.I., Westport, Conn., and Syracuse, N.Y.
The new firm provides real estate investment banking services on behalf of its public and private clientele.
The two principals, Alan Doyle from Providence and Andrew Larew of Westport—formerly partners of Boston-based Goedecke & Co. during the past six years—arranged more than $1.1 billion for their previous firm in commercial real estate debt and equity financing through institutional capital that included insurance companies, commercial banks, Fannie Mae, Freddie Mac and joint venture equity sources.
Doyle and Larew were involved in a $237 million tax-exempt bond for structured parking at the new Yankee Stadium in New York City and the recent $70 million construction redevelopment financing of the historic Ocean House hotel in Watch Hill, R.I. Another major transaction involved $110 million in office and retail acquisition financing on behalf of Boston-based Barrington Capital Partners and its Australian pension fund client.
Apartment vacancy rates increased during the second quarter. The U.S. Census Bureau vacancy rate for all rental apartments—buildings of five or more units—increased to 11.1 percent, up 0.4 percent from the previous quarter and 1 percent from a year earlier.
The second quarter multifamily vacancy rate hit its highest mark since the first quarter of 2005, said the National Multi Housing Council.
Multifamily permits and starts increased, while completions fell in the second quarter. Permits for five units or more increased to a seasonally adjusted annual rate of 364,300—up 21 percent from the first quarter but down 1.2 percent from the previous year.
NMHC said the quarterly figure was pushed upward by a last-minute push in June from New York City developers to qualify for an expiring
tax-abatement program.
*****
Larew, Doyle & Associates, a mid-size real estate mortgage banking firm placing debt and equity capital into the marketplace, opened its new offices in Providence, R.I., Westport, Conn., and Syracuse, N.Y.
The new firm provides real estate investment banking services on behalf of its public and private clientele.
The two principals, Alan Doyle from Providence and Andrew Larew of Westport—formerly partners of Boston-based Goedecke & Co. during the past six years—arranged more than $1.1 billion for their previous firm in commercial real estate debt and equity financing through institutional capital that included insurance companies, commercial banks, Fannie Mae, Freddie Mac and joint venture equity sources.
Doyle and Larew were involved in a $237 million tax-exempt bond for structured parking at the new Yankee Stadium in New York City and the recent $70 million construction redevelopment financing of the historic Ocean House hotel in Watch Hill, R.I. Another major transaction involved $110 million in office and retail acquisition financing on behalf of Boston-based Barrington Capital Partners and its Australian pension fund client.
Consumer Behavior Determines Risk Management
MBA (8/28/2008 ) Palaparty, Vijay
Changes in consumers’ borrowing behavior and attitude toward credit affects how lenders manage risk, according to panelists in a recent webcast from Zoot Enterprises, Bozeman, Mont.
“Current changes in consumer behavior have been driven by an extreme change in the housing environment, particularly around real estate lending products,” said Tim Bates, a banking consultant. “The stress has caused fundamental changes in patterns of consumer behavior toward credit products.”
Tom Johnson, vice president of new product development at Zoot Enterprises, said data are key to recognizing patterns in consumer behavior. “Reach out beyond traditional data sources and pull together more analytics,” he said. “Lenders should collect every bit of data they can and start running analysis, looking at behavior trends. How are consumers behaving differently as they accept credit and use it?”
Andy Callen, executive vice president of CG2 Direct, Allentown, Pa., said the intersection of marketing and risk management, incorporating technology, can help lenders grow. “Lenders can better use technology to identify small, fractional segments of new or current customers,” he said. “Applying technology to further micro-segment populations, lenders are finding pockets of success."
“Real estate lending has really shut down,” Bates said. “The decline is to preserve capital. Most of the cutbacks have been along traditional lines such as tightening parameters on FICO scores and loan-to-value ratios. FICO scores and LTV ratios are blunt.”
Johnson concurred that tightening has followed a “blunt tool approach. The changes we’ve seen aren’t based on understanding of new consumer behavior but to protect capital,” he said. “What we’ve seen are broad strokes and not selective tightening.”
“We’re also seeing increasing emphasis on manual underwriting as some folks are blaming automated underwriting as an excuse to take your eyes off the ball," Bates said. "However, automated underwriting systems drive effective workflow." He added yhay AUS standardizes data acquisition for analysis.
Johnson said current credit risk scoring models are effective, remaining fairly predictive. “Most institutions are trying to ramp up on turn time on scoring models, however” he said. “They could use scoring models for an extended period of time but there is an urgency to take these models and create new ones, getting into a process of continuous score card adjustment. The analytics necessary to build scoring models are changing rapidly than they have in the past.”
Callen said speed-to-market is good. “The more adaptable these decisioning processes are, the better you can adapt to a dynamic market,” he said. “If you can monitor risk and change, there are advantages if you have speed to jump at it.”
Bates said modeling and technology that could help lenders stay current during market fluctuations.
“Not real-time understanding but near-time understanding of markets is a manageable objective,” Bates said. “There are things you can do in terms of compressing time required—blocking and tackling related to data issues with modeling—that put you in a position where you are not short circuiting time to build a credit scoring model.”
Callen said adaptability is important. “Being able to adjust the analytic process and strategy is a key goal to improve risk management and improve customer development,” he said.
Changes in consumers’ borrowing behavior and attitude toward credit affects how lenders manage risk, according to panelists in a recent webcast from Zoot Enterprises, Bozeman, Mont.
“Current changes in consumer behavior have been driven by an extreme change in the housing environment, particularly around real estate lending products,” said Tim Bates, a banking consultant. “The stress has caused fundamental changes in patterns of consumer behavior toward credit products.”
Tom Johnson, vice president of new product development at Zoot Enterprises, said data are key to recognizing patterns in consumer behavior. “Reach out beyond traditional data sources and pull together more analytics,” he said. “Lenders should collect every bit of data they can and start running analysis, looking at behavior trends. How are consumers behaving differently as they accept credit and use it?”
Andy Callen, executive vice president of CG2 Direct, Allentown, Pa., said the intersection of marketing and risk management, incorporating technology, can help lenders grow. “Lenders can better use technology to identify small, fractional segments of new or current customers,” he said. “Applying technology to further micro-segment populations, lenders are finding pockets of success."
“Real estate lending has really shut down,” Bates said. “The decline is to preserve capital. Most of the cutbacks have been along traditional lines such as tightening parameters on FICO scores and loan-to-value ratios. FICO scores and LTV ratios are blunt.”
Johnson concurred that tightening has followed a “blunt tool approach. The changes we’ve seen aren’t based on understanding of new consumer behavior but to protect capital,” he said. “What we’ve seen are broad strokes and not selective tightening.”
“We’re also seeing increasing emphasis on manual underwriting as some folks are blaming automated underwriting as an excuse to take your eyes off the ball," Bates said. "However, automated underwriting systems drive effective workflow." He added yhay AUS standardizes data acquisition for analysis.
Johnson said current credit risk scoring models are effective, remaining fairly predictive. “Most institutions are trying to ramp up on turn time on scoring models, however” he said. “They could use scoring models for an extended period of time but there is an urgency to take these models and create new ones, getting into a process of continuous score card adjustment. The analytics necessary to build scoring models are changing rapidly than they have in the past.”
Callen said speed-to-market is good. “The more adaptable these decisioning processes are, the better you can adapt to a dynamic market,” he said. “If you can monitor risk and change, there are advantages if you have speed to jump at it.”
Bates said modeling and technology that could help lenders stay current during market fluctuations.
“Not real-time understanding but near-time understanding of markets is a manageable objective,” Bates said. “There are things you can do in terms of compressing time required—blocking and tackling related to data issues with modeling—that put you in a position where you are not short circuiting time to build a credit scoring model.”
Callen said adaptability is important. “Being able to adjust the analytic process and strategy is a key goal to improve risk management and improve customer development,” he said.
Durable Goods Orders Post Solid Increase
MBA (8/28/2008 ) Velz, Orawin
Yesterday’s report showed that business investment held up well going into the third quarter. New orders for manufactured durable goods rose by 1.3 percent in July, helped by strong demand for aircraft.
Excluding the volatile orders for transportation equipment, orders were up by 0.7 percent, following a 2.6 percent increase in June. Shipments for nondefense capital goods excluding aircraft—a component used in the calculation of economic growth in the current quarter—rose by 0.6 percent after a 0.4 percent gain in the prior month.
The report also indicated stronger future business investment spending. Nondefense capital goods orders excluding aircraft—a proxy for business investment in equipment and software in the coming quarters—rose by 2.6 percent, the biggest increase since April.
The strong increase is encouraging for the fourth quarter economic growth, when the impact of the fiscal stimulus is expected to fade.
Yesterday’s report showed that business investment held up well going into the third quarter. New orders for manufactured durable goods rose by 1.3 percent in July, helped by strong demand for aircraft.
Excluding the volatile orders for transportation equipment, orders were up by 0.7 percent, following a 2.6 percent increase in June. Shipments for nondefense capital goods excluding aircraft—a component used in the calculation of economic growth in the current quarter—rose by 0.6 percent after a 0.4 percent gain in the prior month.
The report also indicated stronger future business investment spending. Nondefense capital goods orders excluding aircraft—a proxy for business investment in equipment and software in the coming quarters—rose by 2.6 percent, the biggest increase since April.
The strong increase is encouraging for the fourth quarter economic growth, when the impact of the fiscal stimulus is expected to fade.
Fidelity National Financial Put on Negative Watch--Fitch
Forbes (08/28/08)
Fitch Ratings has pinned a negative watch designation on Fidelity National Financial Inc.'s BBB+ issuer default rating and the A rating of the financial strength of Fidelity's nine title insurance underwriting arms. The move was made in response to Fidelity using $180 million in subsidiary dividends to cover its shareholder dividend, generating concerns that statutory capital could be lowered by additional dividend requirements down the road.
Fitch Ratings has pinned a negative watch designation on Fidelity National Financial Inc.'s BBB+ issuer default rating and the A rating of the financial strength of Fidelity's nine title insurance underwriting arms. The move was made in response to Fidelity using $180 million in subsidiary dividends to cover its shareholder dividend, generating concerns that statutory capital could be lowered by additional dividend requirements down the road.
MIT Museum Explores Origins of Mortgages
Boston Herald (08/28/08); McConville, Christine
MIT's Center for Advanced Visual Studies commissioned an art installation from architect and urban designer Damon Rich, who has studied the role of finance in communities since he founded the New York nonprofit Center for Urban Pedagogy in 2000. "Red Lines, Death Vows, Foreclosures, Risk Structures: Architecture of Finance from the Great Depression to the Subprime Meltdown" will open at the MIT Museum on Sept. 9 and run until December, featuring models, videos, photos and drawings. Rich observed foreclosure auctions, interviewed top finance executives and researched the origin of the word "mortgage." In discovering the French term for "death vow," Rich says, "The idea is you would be dead before you could pay it off."
MIT's Center for Advanced Visual Studies commissioned an art installation from architect and urban designer Damon Rich, who has studied the role of finance in communities since he founded the New York nonprofit Center for Urban Pedagogy in 2000. "Red Lines, Death Vows, Foreclosures, Risk Structures: Architecture of Finance from the Great Depression to the Subprime Meltdown" will open at the MIT Museum on Sept. 9 and run until December, featuring models, videos, photos and drawings. Rich observed foreclosure auctions, interviewed top finance executives and researched the origin of the word "mortgage." In discovering the French term for "death vow," Rich says, "The idea is you would be dead before you could pay it off."
Doctors Replace Wall Street Bankers as Go-To Buyers
New York Sun (08/28/08); Taylor, Candace
Although Wall Street continues to feel the effects of the economic downturn, more and more medical professionals--whose incomes are largely insulated from recessionary pressures--are buying up everything from Class A office space to pricey penthouses in New York City. In response, banks are beginning to woo wealthy doctors looking for office space for their practices by tailoring loan products specifically for them, ranging from mortgages with amortization schedules of up to 30 years to as much as 100 percent financing on medical condominiums. Despite an overall cooling in the office market, Corcoran Wexler Health Care Properties President Paul Wexler reports that he has seen an increase of nearly 15 percent in medial office transactions this year. Last month, Manhattan's overall office vacancy rate increased to 7.3 percent from 5.8 percent a year ago, confirms Cushman & Wakefield.
Although Wall Street continues to feel the effects of the economic downturn, more and more medical professionals--whose incomes are largely insulated from recessionary pressures--are buying up everything from Class A office space to pricey penthouses in New York City. In response, banks are beginning to woo wealthy doctors looking for office space for their practices by tailoring loan products specifically for them, ranging from mortgages with amortization schedules of up to 30 years to as much as 100 percent financing on medical condominiums. Despite an overall cooling in the office market, Corcoran Wexler Health Care Properties President Paul Wexler reports that he has seen an increase of nearly 15 percent in medial office transactions this year. Last month, Manhattan's overall office vacancy rate increased to 7.3 percent from 5.8 percent a year ago, confirms Cushman & Wakefield.
Pension Funds Watch Fannie, Freddie
Wall Street Journal (08/28/08) P. C11; Maxey, Daisy
Public pension funds that hold millions of Fannie Mae and Freddie Mac shares in passively managed investments are waiting as the Treasury Department considers whether to bail out the two government-sponsored enterprises. Such funds as the California Public Employees' Retirement Fund, the Florida Retirement System Pension Fund and the New York State Common Retirement Fund all hold millions of shares in the GSEs, which together own or guarantee more than 50 percent of all U.S. mortgages. While some have reported unrealized losses that appear quite large, National Association of State Retirement Administrators research director Keith Brainard believes they represent a small slice of a diversified pension fund portfolio of more than $153 billion. He states, "These funds are long-term investors who are out there looking for opportunities."
Public pension funds that hold millions of Fannie Mae and Freddie Mac shares in passively managed investments are waiting as the Treasury Department considers whether to bail out the two government-sponsored enterprises. Such funds as the California Public Employees' Retirement Fund, the Florida Retirement System Pension Fund and the New York State Common Retirement Fund all hold millions of shares in the GSEs, which together own or guarantee more than 50 percent of all U.S. mortgages. While some have reported unrealized losses that appear quite large, National Association of State Retirement Administrators research director Keith Brainard believes they represent a small slice of a diversified pension fund portfolio of more than $153 billion. He states, "These funds are long-term investors who are out there looking for opportunities."
Moody's Reviewing Jumbo Mortgage Securities as Loan Defaults Soar
Los Angeles Times (08/28/08)
A rapid increase in late loan payments in recent months has prompted Moody's Investors Service to review all prime jumbo mortgage securities issued in 2006 and 2007. The New York ratings company says "serious delinquencies" for prime jumbo loans in securities shot up 72 percent from January to June, jumping from 1 percent of balances to 1.7 percent. "In contrast, subprime delinquencies, though much higher, rose 25 percent over the same period, increasing from 25.2 percent to 31.5 percent," Peter McNally, a Moody's analyst, wrote in a related report. Moody's projects that losses on home equity loans packaged into 2007 bonds will climb to 17 percent on average and losses will rise to 13 percent for 2006 bonds.
A rapid increase in late loan payments in recent months has prompted Moody's Investors Service to review all prime jumbo mortgage securities issued in 2006 and 2007. The New York ratings company says "serious delinquencies" for prime jumbo loans in securities shot up 72 percent from January to June, jumping from 1 percent of balances to 1.7 percent. "In contrast, subprime delinquencies, though much higher, rose 25 percent over the same period, increasing from 25.2 percent to 31.5 percent," Peter McNally, a Moody's analyst, wrote in a related report. Moody's projects that losses on home equity loans packaged into 2007 bonds will climb to 17 percent on average and losses will rise to 13 percent for 2006 bonds.
Mortgage Applications Rise
Wilmington News Journal (DE) (08/28/08)
The Mortgage Bankers Association reports a 0.5-percent increase in home loan applications during the week ended Aug. 22 from a more than seven-year low the previous week. Applications for purchase loans edged up 0.6 percent, while refinancing requests rose 0.3 percent. Expert note that ongoing residential price drops are enticing buyers in search of affordability, but these prospects must contend with rising mortgage rates and stricter credit standards.
The Mortgage Bankers Association reports a 0.5-percent increase in home loan applications during the week ended Aug. 22 from a more than seven-year low the previous week. Applications for purchase loans edged up 0.6 percent, while refinancing requests rose 0.3 percent. Expert note that ongoing residential price drops are enticing buyers in search of affordability, but these prospects must contend with rising mortgage rates and stricter credit standards.
Fannie Shuffles Its Top Leaders
Washington Post (08/28/08) P. D1; Goldfarb, Zachary A.
Fannie Mae CFO Stephen Swad is leaving the company after a year to pursue other opportunities and will be replaced by senior vice president and controller David Hisey, who has been with the firm for three years. Peter Niculescu, head of capital markets business, has been promoted to replace retiring chief business officer Robert Levin; and Michael Shaw, a senior vice president for credit risk oversight, will take over for chief risk officer Enrico Dallavecchia, who also is leaving to pursue outside interests. The management shakeup comes as mounting losses threaten the survival of Fannie Mae. "This team will be responsible for meeting the dual objectives of conserving capital and controlling credit losses," CEO Daniel Mudd said in a statement.
Fannie Mae CFO Stephen Swad is leaving the company after a year to pursue other opportunities and will be replaced by senior vice president and controller David Hisey, who has been with the firm for three years. Peter Niculescu, head of capital markets business, has been promoted to replace retiring chief business officer Robert Levin; and Michael Shaw, a senior vice president for credit risk oversight, will take over for chief risk officer Enrico Dallavecchia, who also is leaving to pursue outside interests. The management shakeup comes as mounting losses threaten the survival of Fannie Mae. "This team will be responsible for meeting the dual objectives of conserving capital and controlling credit losses," CEO Daniel Mudd said in a statement.
Pipeline: Loss Mitigation
American Banker (08/28/08) P. 10; Colter, Allison Bisbey
To provide additional assistance to borrowers trying to climb out of default, the FHA will limit interest rates on modified mortgages to 200 basis points higher than the monthly average Treasury yield. Additionally, the agency will allow borrowers already in the foreclosure process to wrap related expenses--including legal fees--into the principal of modified loans or add the costs of a canceled foreclosure to a partial claim. Moreover, the FHA says late fees on canceled foreclosures should be erased; and borrowers modifying their mortgages can include each past due payment, along with another month, in the reworked financing.
To provide additional assistance to borrowers trying to climb out of default, the FHA will limit interest rates on modified mortgages to 200 basis points higher than the monthly average Treasury yield. Additionally, the agency will allow borrowers already in the foreclosure process to wrap related expenses--including legal fees--into the principal of modified loans or add the costs of a canceled foreclosure to a partial claim. Moreover, the FHA says late fees on canceled foreclosures should be erased; and borrowers modifying their mortgages can include each past due payment, along with another month, in the reworked financing.
Thursday, August 28, 2008
2 million troubled borrowers avoid foreclosure
The Hope Now coalition reports that it completed a record number of mortgage workouts in July - but that was outpaced by the increasing rate of foreclosures.
By Les Christie, CNNMoney.com staff writer
Last Updated: August 27, 2008: 2:40 PM EDT
NEW YORK (CNNMoney.com) -- Hope Now has helped more than 2 million at-risk borrowers stay in their homes during the past 13 months, according to numbers released by the coalition on Wednesday.
The alliance of mortgage servicers, counselors, and investors assembled to combat foreclosures fixed more than 192,000 problem loans during July, a one-month record that represents a 6% increase over June.
Despite this progress, foreclosures continue to climb; 91,752 families lost their homes in July. That represents an increase of 14% from June and more than double the number of July 2007, when only 42,043 homes went to foreclosure.
"The treadmill is still going a little faster than [Hope Now] can keep up with," said Nicholas Retsinas, Director of Harvard University's Joint Center for Housing Studies. "Foreclosures have outpaced the efforts to combat them."
So, Hope Now is stepping up its efforts to reach out to troubled borrowers to let them know help is available, according to Faith Schwartz, the alliance's executive director. The group has promoted its program through advertising, public announcements, as well as letters to at-risk borrowers and large foreclosure prevention events that it's holding around the country.
Reluctant to seek help
But even now, after months of publicity, many borrowers still fail to respond to Hope Now's offers to help.
Of the nearly 1.6 million letters that have gone out since November 1, 2007 to borrowers 60 days past due, more than 80% of borrowers still had not called their lenders a month after receiving the letters, according to Schwartz.
"Outreach is crucial," she said. "Borrowers have to talk to their lenders. That's the most important message we communicate."
Still, that low response rate is better than the industry norm. Most loan servicers find only about 2% to 3% of delinquent borrowers contact them after receiving a notice, according to John Courson, chief operating officer for the Mortgage Bankers Association.
Hope Now has recently started partnering with community groups to put on large events that allow the thousands of troubled borrowers who attend to meet with foreclosure prevention counselors. It has hosted 20 of these events since March, with a total of 11,500 homeowners in attendance.
Last week Hope Now held several of these events in Florida even as Tropical Storm Fay buffeted the state; a total of 3,300 borrowers turned out for help.
"We are committed to helping as many borrowers as possible and we're not going to let anything, including a tropical storm, get in the way," she said.
Twenty different mortgage lenders and servicers participated in the Florida events including many of the industry's biggest players, like Bank of America (BAC, Fortune 500), JP Morgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500) and Washington Mutual (WM, Fortune 500).
"I think their outreach efforts are great," said Jared Bernstein, senior economist with the Economic Policy Institute, "and they're smart to go to ground zero [for foreclosures] to hold these events. But there's only so much they can do. They cannot change people's circumstances in enough cases to stave off the correction that has to occur."
More help
And a change in lender attitudes has probably paved the way for more workouts, according to Harvard's Retsinas.
"The participating lenders have come to grips with the idea that the market is not going to get better soon, so they are cooperating more with borrowers. Hope Now numbers reflect that," he said.
Of the 192,034 total workouts completed by Hope Now in July, nearly 112,000, or 58%, were repayment plans, while the remaining 80,000 or 42% of the workouts involved permanently modifying the terms of a loan to make it more affordable. Last year at this time, less than 24% of workouts were modifications. Of the nearly 92,000 subprime loans that were fixed, 52% of them were modifications.
Repayment plans simply give borrowers more time to pay lenders what they owe, either by extending the term of the loan or by raising monthly payments. They work best for borrowers who were thrown off the track by one-time events, such as an illness or temporary job loss.
But by and large they're considered to be fairly ineffective at preventing foreclosures in the long run, since borrowers often cannot afford the original terms of their loans.
Modifying a mortgage by lowering the interest rate, the principal, or both, is the most effective means of keeping owners in their homes.
Even modifications won't work for everyone, according to Bernstein.
"Home prices are still falling," he said. "There are probably 10 million folks underwater, owing more on their mortgages than their homes are worth and that's going to climb. Not everybody under water is going to foreclose. If you're close to solvency, these efforts can help pull you back from the brink. But if you're well underwater, you're probably going to drown."
By Les Christie, CNNMoney.com staff writer
Last Updated: August 27, 2008: 2:40 PM EDT
NEW YORK (CNNMoney.com) -- Hope Now has helped more than 2 million at-risk borrowers stay in their homes during the past 13 months, according to numbers released by the coalition on Wednesday.
The alliance of mortgage servicers, counselors, and investors assembled to combat foreclosures fixed more than 192,000 problem loans during July, a one-month record that represents a 6% increase over June.
Despite this progress, foreclosures continue to climb; 91,752 families lost their homes in July. That represents an increase of 14% from June and more than double the number of July 2007, when only 42,043 homes went to foreclosure.
"The treadmill is still going a little faster than [Hope Now] can keep up with," said Nicholas Retsinas, Director of Harvard University's Joint Center for Housing Studies. "Foreclosures have outpaced the efforts to combat them."
So, Hope Now is stepping up its efforts to reach out to troubled borrowers to let them know help is available, according to Faith Schwartz, the alliance's executive director. The group has promoted its program through advertising, public announcements, as well as letters to at-risk borrowers and large foreclosure prevention events that it's holding around the country.
Reluctant to seek help
But even now, after months of publicity, many borrowers still fail to respond to Hope Now's offers to help.
Of the nearly 1.6 million letters that have gone out since November 1, 2007 to borrowers 60 days past due, more than 80% of borrowers still had not called their lenders a month after receiving the letters, according to Schwartz.
"Outreach is crucial," she said. "Borrowers have to talk to their lenders. That's the most important message we communicate."
Still, that low response rate is better than the industry norm. Most loan servicers find only about 2% to 3% of delinquent borrowers contact them after receiving a notice, according to John Courson, chief operating officer for the Mortgage Bankers Association.
Hope Now has recently started partnering with community groups to put on large events that allow the thousands of troubled borrowers who attend to meet with foreclosure prevention counselors. It has hosted 20 of these events since March, with a total of 11,500 homeowners in attendance.
Last week Hope Now held several of these events in Florida even as Tropical Storm Fay buffeted the state; a total of 3,300 borrowers turned out for help.
"We are committed to helping as many borrowers as possible and we're not going to let anything, including a tropical storm, get in the way," she said.
Twenty different mortgage lenders and servicers participated in the Florida events including many of the industry's biggest players, like Bank of America (BAC, Fortune 500), JP Morgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500) and Washington Mutual (WM, Fortune 500).
"I think their outreach efforts are great," said Jared Bernstein, senior economist with the Economic Policy Institute, "and they're smart to go to ground zero [for foreclosures] to hold these events. But there's only so much they can do. They cannot change people's circumstances in enough cases to stave off the correction that has to occur."
More help
And a change in lender attitudes has probably paved the way for more workouts, according to Harvard's Retsinas.
"The participating lenders have come to grips with the idea that the market is not going to get better soon, so they are cooperating more with borrowers. Hope Now numbers reflect that," he said.
Of the 192,034 total workouts completed by Hope Now in July, nearly 112,000, or 58%, were repayment plans, while the remaining 80,000 or 42% of the workouts involved permanently modifying the terms of a loan to make it more affordable. Last year at this time, less than 24% of workouts were modifications. Of the nearly 92,000 subprime loans that were fixed, 52% of them were modifications.
Repayment plans simply give borrowers more time to pay lenders what they owe, either by extending the term of the loan or by raising monthly payments. They work best for borrowers who were thrown off the track by one-time events, such as an illness or temporary job loss.
But by and large they're considered to be fairly ineffective at preventing foreclosures in the long run, since borrowers often cannot afford the original terms of their loans.
Modifying a mortgage by lowering the interest rate, the principal, or both, is the most effective means of keeping owners in their homes.
Even modifications won't work for everyone, according to Bernstein.
"Home prices are still falling," he said. "There are probably 10 million folks underwater, owing more on their mortgages than their homes are worth and that's going to climb. Not everybody under water is going to foreclose. If you're close to solvency, these efforts can help pull you back from the brink. But if you're well underwater, you're probably going to drown."
Unlocking your home equity
More people are using reverse mortgages to finance retirement, but the costs are steep.
By Eugenia Levenson, writer-reporter
Last Updated: August 27, 2008: 11:01 AM EDT
(Fortune Magazine) -- The housing rescue package that Congress scrambled to pass in July was aimed primarily at stemming foreclosures and shoring up Fannie Mae and Freddie Mac. But it also contains provisions that make reverse mortgages a better deal for older homeowners who want to turn their equity into cash.
Lawmakers are paying attention to reverse mortgages because these once-marginal products have exploded over the past decade, thanks to low interest rates and rising home values. The federal government, which backs more than 90% of all such loans through the Home Equity Conversion Mortgage (HECM) program, guaranteed 107,400 reverse mortgages last year, up from 7,900 in 1998. What's more, an industry group estimates that even after the drop in housing prices, seniors' equity in their homes was worth $4.2 trillion at the end of 2007. With slimmer savings and pensions than their parents had, more boomers will probably be turning to reverse mortgages when they retire. But these products are much more complicated than your garden-variety loan, so before you rush to download an application, you have to do some homework.
Here are the basics
Reverse mortgages are like home-equity loans, with a few key differences. First, they're available only to people age 62 and older. The amount you can borrow depends on your age, the value of your home, and interest rates (check out AARP's calculator at rmaarp.com for an estimate). You can choose to receive your money in a lump sum, monthly installments, or a line of credit. There are no monthly payments to make - and therefore you don't have to meet an income requirement to qualify.
In fact, you needn't repay the loan until you move out of your house, sell it, or die: The debt is settled with the proceeds from the sale of your home. If there's money left over, it goes to you or your heirs. But what if your house sells for less than what you owe? (That's not an idle question in a time of plunging home prices.) Don't worry. The federal government covers any shortfall for HECM loans, and for others the mortgage holder simply eats the loss.
So far, the reverse mortgage sounds like a pretty sweet deal. But you know it can't be that simple, and it isn't. Reverse mortgages turn out to be a very expensive way to borrow. The basic rates are currently lower than those on home-equity loans - the monthly adjustable rate for HECM loans is now around 4.3%, vs. 5.3% for home-equity lines of credit - but reverse mortgages are "rising debt" loans: The interest you owe is tacked onto the balance, eventually becoming a substantial portion of your overall debt, and you end up owing interest on the interest, compounding the cost.
Borrowers are also hit with an avalanche of upfront charges, including origination fees; the cost of the appraisal, title search, and the like; and a 2% mortgage insurance premium for all HECM loans. The new law brings some relief: It limits origination fees to 2% of the loan up to the first $200,000 and 1% of the rest, with a cap at $6,000.
Whether a reverse mortgage is worthwhile depends on your situation; for those who qualify for a home-equity loan and can make the monthly payments, that's usually the better option. Another factor is how long you will be in your home. It doesn't make sense to pay the fees if you plan to move within a few years. Since borrowers remain responsible for maintenance, taxes, and homeowners' insurance, selling your house to trade down or rent may be a cheaper way to tap your home equity.
One more point
In the past some reverse-mortgage brokers pressured borrowers to buy investments like deferred annuities with the proceeds of their loans. The new law prohibits lenders from requiring borrowers to buy investments or insurance products as a condition of getting the loan. Indeed, you should never take out a reverse mortgage to buy investments. To get the kinds of returns that would cover the interest on the loan, you would need to take on a level of risk that's unacceptable when your home equity is on the line.
By Eugenia Levenson, writer-reporter
Last Updated: August 27, 2008: 11:01 AM EDT
(Fortune Magazine) -- The housing rescue package that Congress scrambled to pass in July was aimed primarily at stemming foreclosures and shoring up Fannie Mae and Freddie Mac. But it also contains provisions that make reverse mortgages a better deal for older homeowners who want to turn their equity into cash.
Lawmakers are paying attention to reverse mortgages because these once-marginal products have exploded over the past decade, thanks to low interest rates and rising home values. The federal government, which backs more than 90% of all such loans through the Home Equity Conversion Mortgage (HECM) program, guaranteed 107,400 reverse mortgages last year, up from 7,900 in 1998. What's more, an industry group estimates that even after the drop in housing prices, seniors' equity in their homes was worth $4.2 trillion at the end of 2007. With slimmer savings and pensions than their parents had, more boomers will probably be turning to reverse mortgages when they retire. But these products are much more complicated than your garden-variety loan, so before you rush to download an application, you have to do some homework.
Here are the basics
Reverse mortgages are like home-equity loans, with a few key differences. First, they're available only to people age 62 and older. The amount you can borrow depends on your age, the value of your home, and interest rates (check out AARP's calculator at rmaarp.com for an estimate). You can choose to receive your money in a lump sum, monthly installments, or a line of credit. There are no monthly payments to make - and therefore you don't have to meet an income requirement to qualify.
In fact, you needn't repay the loan until you move out of your house, sell it, or die: The debt is settled with the proceeds from the sale of your home. If there's money left over, it goes to you or your heirs. But what if your house sells for less than what you owe? (That's not an idle question in a time of plunging home prices.) Don't worry. The federal government covers any shortfall for HECM loans, and for others the mortgage holder simply eats the loss.
So far, the reverse mortgage sounds like a pretty sweet deal. But you know it can't be that simple, and it isn't. Reverse mortgages turn out to be a very expensive way to borrow. The basic rates are currently lower than those on home-equity loans - the monthly adjustable rate for HECM loans is now around 4.3%, vs. 5.3% for home-equity lines of credit - but reverse mortgages are "rising debt" loans: The interest you owe is tacked onto the balance, eventually becoming a substantial portion of your overall debt, and you end up owing interest on the interest, compounding the cost.
Borrowers are also hit with an avalanche of upfront charges, including origination fees; the cost of the appraisal, title search, and the like; and a 2% mortgage insurance premium for all HECM loans. The new law brings some relief: It limits origination fees to 2% of the loan up to the first $200,000 and 1% of the rest, with a cap at $6,000.
Whether a reverse mortgage is worthwhile depends on your situation; for those who qualify for a home-equity loan and can make the monthly payments, that's usually the better option. Another factor is how long you will be in your home. It doesn't make sense to pay the fees if you plan to move within a few years. Since borrowers remain responsible for maintenance, taxes, and homeowners' insurance, selling your house to trade down or rent may be a cheaper way to tap your home equity.
One more point
In the past some reverse-mortgage brokers pressured borrowers to buy investments like deferred annuities with the proceeds of their loans. The new law prohibits lenders from requiring borrowers to buy investments or insurance products as a condition of getting the loan. Indeed, you should never take out a reverse mortgage to buy investments. To get the kinds of returns that would cover the interest on the loan, you would need to take on a level of risk that's unacceptable when your home equity is on the line.
Housing fix backfires
A new law was supposed to make it easier for buyers in expensive markets to get affordable loans. Instead, rates are going up for everyone.
By Stephen Gandel, Money Magazine senior writer
Last Updated: August 27, 2008: 12:29 PM EDT
NEW YORK (Money Magazine) -- Back in February, Congress passed into law a quick fix for the housing market. Unfortunately, it hasn't done much good.
As part of the economic stimulus plan, lawmakers raised the limit on the size of home loans mortgage giants Fannie Mae and Freddie Mac can guarantee, from $417,000 to as high as $729,750 in some of the most expensive U.S. markets. That was supposed to bring down mortgage rates on jumbo loans and help goose sales in cities across the country - mostly on the East and West coasts - where even outhouses go for close to half a mil.
So just how much help has this change been for homeowners? Not much. Six months ago, the rate on a $500,000 30-year fixed mortgage was 6.73%. Today the rate today is only slightly lower at 6.69%. No surprise then that the housing market is still stuck in reverse.
The problem has a lot to do with news that has been bedeviling Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500). Basically, the mortgage giants have been racking up losses faster than Brangelina's adding children. And the market grows more convinced every day that these two so-called government-sponsored entities will in fact need to bailed out with taxpayer funds, according to a plan recently proposed by Treasury Secretary Henry Paulson and passed into law by Congress.
The catch
Fannie and Freddie play a critical role in the mortgage market by buying loans from banks, securitizing them and then selling those securities to investors. That gives banks more cash to lend to consumers, which keeps home buying affordable.
The catch: Fannie and Freddie could until recently only buy loans up to $417,000. That meant it was harder and more expensive for home buyers to get a loan in areas where the median priced home is north of $500,000, which is why Congress elected to raise that $417,000 cap substantially.
The idea was to narrow the spread between the interest rates for buyers taking out loans of less than $417,000, and those borrowing between $417,000 and roughly $730,000. By February, the rate on a loan over $417,000 was as much as 1.5 percentage points higher than loans beneath that cap, according to mortgage industry research firm HSH Associates.
But rates haven't fallen for those hoping to get a larger mortgage, and they've actually risen for everyone else. The average rate for a mortgage of $417,000 or less is now at 6.57%, while loans larger than that have rates about 0.12 of a percentage point higher. Sure, the spread narrowed, but only because rates are going up for everyone.
Several factors are at work. Since Fannie and Freddie look shakier than ever, fewer investors are willing to buy their bonds - even with the government's guarantee. And the raised caps forced the mortgage giants to spread their limited capital across a much larger market of mortgages.
Add in the new fees that Fannie and Freddie have tacked on to their mortgages since the housing crisis hit, and most borrowers are paying more than they were six months ago.
"Really the way it has translated is that by the time it gets to the borrower they get no real savings," says Steve Habetz, who runs Threshold Mortgage in Westport, Conn.
What it means for you
And don't look for mortgage rates to come down anytime soon. Fannie and Freddie need to build their capital back up. That means make as much money as possible. So even if their borrowing rates come down, don't expect them to pass that savings to you.
"There are a lot of moving parts here, and none of them are moving in favor of lower mortgage rates," says Bob Auwaerter, head of the fixed income group at Vanguard.
In the meantime, here are some steps you can take to lower your borrowing costs:
Check out smaller banks. Since local lenders have not being hit as hard by the mortgage mess - they didn't make as many sub-prime or option-ARM loans - they are the ones who can offer the best deals right now.
Try for a home equity line of credit. HELOCs can be hard to get right now, but they are cheaper than doing a complete refinance. Recently, the average rate on a HELOC was 5.73%, a point lower than the new jumbo loans. What's more, HELOC generally have no upfront fees. The rub is that HELOCs are adjustable, but with the economy looking sluggish it's a good bet interest rates won't rise soon.
Improve your credit score. It used to be that people with a 620 or higher qualified for Freddie and Fannie's best rates. As of Oct. 1, you will need at least a 720 credit score. And there may be even more rate breaks for higher credit score borrowers. The quickest way to boost your score is to get a credit report and correct any errors. Don't be surprised to see a few.
Spend more time shopping around for a mortgage. With Fannie and Freddie able to buy fewer mortgages, they have less ability to dictate prices. That means mortgage interest rates are going to vary more from bank to bank. So get rate quotes from at least five lenders before you decide you have found the lowest rates. It is extra work, but it will be worth it. After all, as we should have learned by now, counting for some government plan to lower interest rates is silly.
By Stephen Gandel, Money Magazine senior writer
Last Updated: August 27, 2008: 12:29 PM EDT
NEW YORK (Money Magazine) -- Back in February, Congress passed into law a quick fix for the housing market. Unfortunately, it hasn't done much good.
As part of the economic stimulus plan, lawmakers raised the limit on the size of home loans mortgage giants Fannie Mae and Freddie Mac can guarantee, from $417,000 to as high as $729,750 in some of the most expensive U.S. markets. That was supposed to bring down mortgage rates on jumbo loans and help goose sales in cities across the country - mostly on the East and West coasts - where even outhouses go for close to half a mil.
So just how much help has this change been for homeowners? Not much. Six months ago, the rate on a $500,000 30-year fixed mortgage was 6.73%. Today the rate today is only slightly lower at 6.69%. No surprise then that the housing market is still stuck in reverse.
The problem has a lot to do with news that has been bedeviling Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500). Basically, the mortgage giants have been racking up losses faster than Brangelina's adding children. And the market grows more convinced every day that these two so-called government-sponsored entities will in fact need to bailed out with taxpayer funds, according to a plan recently proposed by Treasury Secretary Henry Paulson and passed into law by Congress.
The catch
Fannie and Freddie play a critical role in the mortgage market by buying loans from banks, securitizing them and then selling those securities to investors. That gives banks more cash to lend to consumers, which keeps home buying affordable.
The catch: Fannie and Freddie could until recently only buy loans up to $417,000. That meant it was harder and more expensive for home buyers to get a loan in areas where the median priced home is north of $500,000, which is why Congress elected to raise that $417,000 cap substantially.
The idea was to narrow the spread between the interest rates for buyers taking out loans of less than $417,000, and those borrowing between $417,000 and roughly $730,000. By February, the rate on a loan over $417,000 was as much as 1.5 percentage points higher than loans beneath that cap, according to mortgage industry research firm HSH Associates.
But rates haven't fallen for those hoping to get a larger mortgage, and they've actually risen for everyone else. The average rate for a mortgage of $417,000 or less is now at 6.57%, while loans larger than that have rates about 0.12 of a percentage point higher. Sure, the spread narrowed, but only because rates are going up for everyone.
Several factors are at work. Since Fannie and Freddie look shakier than ever, fewer investors are willing to buy their bonds - even with the government's guarantee. And the raised caps forced the mortgage giants to spread their limited capital across a much larger market of mortgages.
Add in the new fees that Fannie and Freddie have tacked on to their mortgages since the housing crisis hit, and most borrowers are paying more than they were six months ago.
"Really the way it has translated is that by the time it gets to the borrower they get no real savings," says Steve Habetz, who runs Threshold Mortgage in Westport, Conn.
What it means for you
And don't look for mortgage rates to come down anytime soon. Fannie and Freddie need to build their capital back up. That means make as much money as possible. So even if their borrowing rates come down, don't expect them to pass that savings to you.
"There are a lot of moving parts here, and none of them are moving in favor of lower mortgage rates," says Bob Auwaerter, head of the fixed income group at Vanguard.
In the meantime, here are some steps you can take to lower your borrowing costs:
Check out smaller banks. Since local lenders have not being hit as hard by the mortgage mess - they didn't make as many sub-prime or option-ARM loans - they are the ones who can offer the best deals right now.
Try for a home equity line of credit. HELOCs can be hard to get right now, but they are cheaper than doing a complete refinance. Recently, the average rate on a HELOC was 5.73%, a point lower than the new jumbo loans. What's more, HELOC generally have no upfront fees. The rub is that HELOCs are adjustable, but with the economy looking sluggish it's a good bet interest rates won't rise soon.
Improve your credit score. It used to be that people with a 620 or higher qualified for Freddie and Fannie's best rates. As of Oct. 1, you will need at least a 720 credit score. And there may be even more rate breaks for higher credit score borrowers. The quickest way to boost your score is to get a credit report and correct any errors. Don't be surprised to see a few.
Spend more time shopping around for a mortgage. With Fannie and Freddie able to buy fewer mortgages, they have less ability to dictate prices. That means mortgage interest rates are going to vary more from bank to bank. So get rate quotes from at least five lenders before you decide you have found the lowest rates. It is extra work, but it will be worth it. After all, as we should have learned by now, counting for some government plan to lower interest rates is silly.
Home prices plummet in a new record
National prices fell 15.4% in past 12 months. Las Vegas was the worst-hit city, while Denver and Boston saw the biggest price increases.
By Les Christie, CNNMoney.com staff writer
Last Updated: August 26, 2008: 11:55 AM EDT
NEW YORK (CNNMoney.com) -- National U.S. home prices fell a record 15.4% in the second quarter compared with last year, according to a report released Tuesday.
The latest S&P/Case-Shiller national home price index is down 18.2% from its peak in the second quarter of 2006, and there are no signs that the pace of home-price declines is easing. The second-quarter loss was even larger than the record 14.2% drop posted in the first three months of 2008.
Both the Case-Shiller 10-city index (down 17%) and 20-city index (down 15.9%) also posted record year-over-year losses in the second quarter.
A small piece of good news: In June the pace of monthly declines slowed ever so slightly compared with May. Prices for the 10-city index declined 16.9% year-over-year and the 20-city index was down 15.8%.
Too much inventory
"While there is no national turnaround in residential real estate prices, it is possible that we are seeing some regions struggling to come back, which has resulted in some moderation in price declines at the national level," said David Blitzer, chairman of the Index Committee at Standard & Poor's, in a statement.
Still, all 20 cities covered by Case-Shiller are in negative territory for the past 12 months, said Mike Larson, a real estate analyst with Weiss Research. "[The moderation] is not good news," he said. "It's just a little less bad."
And with mortgage loans difficult for many home buyers to obtain and foreclosure rates still rising, inventories of homes for sale continue to expand, depressing home prices. There is now an 11.2 month supply of existing homes on the market.
"The inventory problem has not been solved," said Larson.
Peter Schiff, president and chief global strategist at Euro Pacific Capital, said the market is only about halfway to its bottom. In 2005, he predicted the then-coming bust would cut 30% off national home prices.
Losses will continue because there has been no fundamental change in markets, he said. Despite abundant foreclosure sales, inventories are still growing and lending availability is still shrinking.
And, people are not inclined to buy in a falling market. They wait for it to hit bottom. "If prices fall another 20%, that's the time to buy," said Schiff.
Hardest hit
The worst performing city in the index was Las Vegas, where prices plunged 28.6% year-over-year, followed by Miami, down 28.3%, and Phoenix, down 27.9%.
In June, Phoenix prices dropped 2.6% from May, the largest decline of any city in the index.
Denver and Boston were winners for the month, with home prices climbing 1.5% and 1.2%, respectively. Prices have risen in both markets for three consecutive months. Charlotte and Dallas, both up 1%, have recorded four straight months of gains
The lower-priced homes are posting the biggest price declines, according to Blitzer. One reason: Lending abuses were much more common low-priced homes during the boom.
"There was more speculative lending in inexpensive homes," he said.
He cited San Francisco, where the price of inexpensive homes has fallen more than 40% from the peak, while moderate priced homes were off 30%, and expensive homes fell just over 10%.
"That's a dramatic spread," said Blitzer.
Still, Larson of Weiss Research said he believes that while year-over-year prices will continue to decline, sales of foreclosed homes will help moderate those losses by taking rock-bottom priced homes off of the market.
"Prices have fallen so much that you're starting to see sales improvement," he said. "People are snapping up a lot of distressed properties."
By Les Christie, CNNMoney.com staff writer
Last Updated: August 26, 2008: 11:55 AM EDT
NEW YORK (CNNMoney.com) -- National U.S. home prices fell a record 15.4% in the second quarter compared with last year, according to a report released Tuesday.
The latest S&P/Case-Shiller national home price index is down 18.2% from its peak in the second quarter of 2006, and there are no signs that the pace of home-price declines is easing. The second-quarter loss was even larger than the record 14.2% drop posted in the first three months of 2008.
Both the Case-Shiller 10-city index (down 17%) and 20-city index (down 15.9%) also posted record year-over-year losses in the second quarter.
A small piece of good news: In June the pace of monthly declines slowed ever so slightly compared with May. Prices for the 10-city index declined 16.9% year-over-year and the 20-city index was down 15.8%.
Too much inventory
"While there is no national turnaround in residential real estate prices, it is possible that we are seeing some regions struggling to come back, which has resulted in some moderation in price declines at the national level," said David Blitzer, chairman of the Index Committee at Standard & Poor's, in a statement.
Still, all 20 cities covered by Case-Shiller are in negative territory for the past 12 months, said Mike Larson, a real estate analyst with Weiss Research. "[The moderation] is not good news," he said. "It's just a little less bad."
And with mortgage loans difficult for many home buyers to obtain and foreclosure rates still rising, inventories of homes for sale continue to expand, depressing home prices. There is now an 11.2 month supply of existing homes on the market.
"The inventory problem has not been solved," said Larson.
Peter Schiff, president and chief global strategist at Euro Pacific Capital, said the market is only about halfway to its bottom. In 2005, he predicted the then-coming bust would cut 30% off national home prices.
Losses will continue because there has been no fundamental change in markets, he said. Despite abundant foreclosure sales, inventories are still growing and lending availability is still shrinking.
And, people are not inclined to buy in a falling market. They wait for it to hit bottom. "If prices fall another 20%, that's the time to buy," said Schiff.
Hardest hit
The worst performing city in the index was Las Vegas, where prices plunged 28.6% year-over-year, followed by Miami, down 28.3%, and Phoenix, down 27.9%.
In June, Phoenix prices dropped 2.6% from May, the largest decline of any city in the index.
Denver and Boston were winners for the month, with home prices climbing 1.5% and 1.2%, respectively. Prices have risen in both markets for three consecutive months. Charlotte and Dallas, both up 1%, have recorded four straight months of gains
The lower-priced homes are posting the biggest price declines, according to Blitzer. One reason: Lending abuses were much more common low-priced homes during the boom.
"There was more speculative lending in inexpensive homes," he said.
He cited San Francisco, where the price of inexpensive homes has fallen more than 40% from the peak, while moderate priced homes were off 30%, and expensive homes fell just over 10%.
"That's a dramatic spread," said Blitzer.
Still, Larson of Weiss Research said he believes that while year-over-year prices will continue to decline, sales of foreclosed homes will help moderate those losses by taking rock-bottom priced homes off of the market.
"Prices have fallen so much that you're starting to see sales improvement," he said. "People are snapping up a lot of distressed properties."
Mortgage volume rises
WASHINGTON (AP) -- Mortgage application volume rose less than 1% during the week ended Aug. 22, according to the Mortgage Bankers Association's weekly application survey.
The trade group's application index rose to 421.6 during the week, from 419.3 a week earlier, which had been the lowest index level in nearly eight years.
Refinance volume rose 0.3%, while purchase volume increased 0.6% during the week. Refinance volume accounted for 35.2% of all applications.
The index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the housing boom.
An index value of 100 is equal to the application volume on March 16, 1990, the first week the MBA tracked application volume. A reading of 421.6 means mortgage application activity is 4.216 times higher than it was when the MBA began tracking the data.
The survey provides a snapshot of mortgage lending activity among mortgage bankers, commercial banks and thrifts. It covers about 50% of all residential retail mortgage originations each week.
Application volume increased slightly as fixed-rate mortgages dipped. The average rate for traditional, 30-year fixed-rate mortgages fell to 6.44% from 6.47% during the prior week. The average rate for 15-year fixed-rate mortgages, often a popular option for refinancing a home, decreased to 5.94% from 5.99%.
The average rate for one-year adjustable-rate mortgages increased to 7.15% from 7.07%.
The trade group's application index rose to 421.6 during the week, from 419.3 a week earlier, which had been the lowest index level in nearly eight years.
Refinance volume rose 0.3%, while purchase volume increased 0.6% during the week. Refinance volume accounted for 35.2% of all applications.
The index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the housing boom.
An index value of 100 is equal to the application volume on March 16, 1990, the first week the MBA tracked application volume. A reading of 421.6 means mortgage application activity is 4.216 times higher than it was when the MBA began tracking the data.
The survey provides a snapshot of mortgage lending activity among mortgage bankers, commercial banks and thrifts. It covers about 50% of all residential retail mortgage originations each week.
Application volume increased slightly as fixed-rate mortgages dipped. The average rate for traditional, 30-year fixed-rate mortgages fell to 6.44% from 6.47% during the prior week. The average rate for 15-year fixed-rate mortgages, often a popular option for refinancing a home, decreased to 5.94% from 5.99%.
The average rate for one-year adjustable-rate mortgages increased to 7.15% from 7.07%.
Mortgage fraud still soaring
A crackdown on underwriting has failed to halt an explosion of fraudulent home loans.
By Les Christie, CNNMoney.com staff writer
Last Updated: August 26, 2008: 6:03 AM EDT
NEW YORK (CNNMoney.com) -- With the housing market in turmoil and lending standards tougher than ever, you'd think that the kind of unscrupulous activity that helped plunge the industry into crisis would be a thing of the past.
You'd be wrong. Mortgage fraud is still soaring, according to a new report from the Mortgage Asset Research Institute (MARI), a division of ChoicePoint. (CPS)
The study found that the number of fraudulent loans issued during the first three months of 2008 skyrocketed 42% compared with the same period in 2007.
The big jump was a surprise even to MARI. "We were stunned," said spokeswoman Jennifer Butts. "It shows that some folks [in the industry] are desperate."
Loan applications are at an eight-year low, according to the Mortgage Bankers Association, and deals are harder than ever to come by for real estate professionals. Loan originators, real estate agents and property appraisers are all scrambling for clients.
Making things even more difficult, mortgage lenders have tightened underwriting standards after getting clobbered with soaring delinquencies and foreclosures.
Now, the credit histories of many applicants are not good enough to get approved for mortgages, except through some creativity - or chicanery - by brokers and loan officers.
The most common type of fraud that MARI found pertained to employment history and income. Many applications exaggerated how much borrowers earned and misrepresented their job descriptions.
The biggest increase came from a jump in the number of undisclosed or incorrectly reported debts, liens and judgments.
Most fraud involves average home buyers whose lending officers feel compelled to tweak their applications. But some involves criminal enterprises.
Cases of identity theft accounted for 6% of all mortgage fraud in Illinois, for example. In many of these deals, crime rings use phony identities to obtain mortgages on properties they don't own, then take the cash and vanish.
Same industry, same problems
"The reality is that the industry's structure has not changed," said Bill Garber, a director of government affairs for the Appraisal Institute trade group. "Mortgage brokers are paid on commission; loan officers are rewarded for volume. There are the same pressures to get things done."
The regulatory agencies, he said, are overwhelmed. But the FBI did step up its efforts to combat mortgage fraud recently. In June, its Mortgage Fraud Task Force arrested more than 400 mortgage brokers, lenders, appraisers and other industry insiders responsible for more than $1 billion in losses.
Despite these efforts, MARI doesn't expect things to change any time soon. "Loan application misrepresentation continues to plague the industry," the group said in a press statement. "Mortgage fraud will not disappear - in fact, it is expected to significantly grow, evolve and penetrate new areas within the industry."
MARI compiled its statistics from data submitted by its clients, which include all of the biggest names in the lending industry: Fannie Mae (FAM) and Freddie Mac (FRE, Fortune 500) - the government sponsored mortgage giants - as well as private lenders Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500) and J.P.MorganChase (JPM, Fortune 500) as well as scores of smaller lenders.
Leading states
Florida had the largest volume of mortgage fraud in the first three months of 2008, accounting for about 24% of the national total.
Second was California, which was followed by Illinois, Maryland and Michigan, all of which had about the same number of incidents.
The Miami metro area was ground zero for mortgage fraud during the period; it accounted for nearly half of all of Florida's incidents while the Los Angeles area produced 52% of California's.
Because of agreements with its clients, MARI does not reveal the total numbers of fraud incidents.
Until systems are implemented to foster the development of ethical, responsible mortgage originators, said Garber, the "bad actors" will continue to find places in the lending industry and mortgage fraud will go on as before.
By Les Christie, CNNMoney.com staff writer
Last Updated: August 26, 2008: 6:03 AM EDT
NEW YORK (CNNMoney.com) -- With the housing market in turmoil and lending standards tougher than ever, you'd think that the kind of unscrupulous activity that helped plunge the industry into crisis would be a thing of the past.
You'd be wrong. Mortgage fraud is still soaring, according to a new report from the Mortgage Asset Research Institute (MARI), a division of ChoicePoint. (CPS)
The study found that the number of fraudulent loans issued during the first three months of 2008 skyrocketed 42% compared with the same period in 2007.
The big jump was a surprise even to MARI. "We were stunned," said spokeswoman Jennifer Butts. "It shows that some folks [in the industry] are desperate."
Loan applications are at an eight-year low, according to the Mortgage Bankers Association, and deals are harder than ever to come by for real estate professionals. Loan originators, real estate agents and property appraisers are all scrambling for clients.
Making things even more difficult, mortgage lenders have tightened underwriting standards after getting clobbered with soaring delinquencies and foreclosures.
Now, the credit histories of many applicants are not good enough to get approved for mortgages, except through some creativity - or chicanery - by brokers and loan officers.
The most common type of fraud that MARI found pertained to employment history and income. Many applications exaggerated how much borrowers earned and misrepresented their job descriptions.
The biggest increase came from a jump in the number of undisclosed or incorrectly reported debts, liens and judgments.
Most fraud involves average home buyers whose lending officers feel compelled to tweak their applications. But some involves criminal enterprises.
Cases of identity theft accounted for 6% of all mortgage fraud in Illinois, for example. In many of these deals, crime rings use phony identities to obtain mortgages on properties they don't own, then take the cash and vanish.
Same industry, same problems
"The reality is that the industry's structure has not changed," said Bill Garber, a director of government affairs for the Appraisal Institute trade group. "Mortgage brokers are paid on commission; loan officers are rewarded for volume. There are the same pressures to get things done."
The regulatory agencies, he said, are overwhelmed. But the FBI did step up its efforts to combat mortgage fraud recently. In June, its Mortgage Fraud Task Force arrested more than 400 mortgage brokers, lenders, appraisers and other industry insiders responsible for more than $1 billion in losses.
Despite these efforts, MARI doesn't expect things to change any time soon. "Loan application misrepresentation continues to plague the industry," the group said in a press statement. "Mortgage fraud will not disappear - in fact, it is expected to significantly grow, evolve and penetrate new areas within the industry."
MARI compiled its statistics from data submitted by its clients, which include all of the biggest names in the lending industry: Fannie Mae (FAM) and Freddie Mac (FRE, Fortune 500) - the government sponsored mortgage giants - as well as private lenders Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500) and J.P.MorganChase (JPM, Fortune 500) as well as scores of smaller lenders.
Leading states
Florida had the largest volume of mortgage fraud in the first three months of 2008, accounting for about 24% of the national total.
Second was California, which was followed by Illinois, Maryland and Michigan, all of which had about the same number of incidents.
The Miami metro area was ground zero for mortgage fraud during the period; it accounted for nearly half of all of Florida's incidents while the Los Angeles area produced 52% of California's.
Because of agreements with its clients, MARI does not reveal the total numbers of fraud incidents.
Until systems are implemented to foster the development of ethical, responsible mortgage originators, said Garber, the "bad actors" will continue to find places in the lending industry and mortgage fraud will go on as before.
New home sales rise, but grim news lurks
Sales pace of new homes in July grew 2.4%, due to a large downward revision in sales from the previous month. Unadjusted monthly sales fall to 13-year low.
By David Goldman, CNNMoney.com staff writer
Last Updated: August 26, 2008: 2:11 PM EDT
NEW YORK (CNNMoney.com) -- The government offered more discouraging news about the housing sector on Tuesday, reporting that new home sales rose slightly in July only after revising the previous month's number sharply lower.
Sales for July came in at a seasonally adjusted annual rate of 515,000, up 2.4% from 503,000 in the previous month, the Census Bureau reported. Last month, Census had put the June figure at 530,000.
The change marks the fourth of the past five reports that Census has slashed the previous month's number. The trend worries economists who say a hoped-for stabilization of the housing market remains elusive.
"It's concerning because the pattern of revisions from the Census Bureau has been systematically downward instead of random as you'd expect," said David Seiders, chief economist for the National Association of Home Builders. "Chances are we'll see some downward revision when they put out the August numbers."
The July reading on the battered housing market was below the consensus forecast of 525,000, according to economists surveyed by Briefing.com.
"The uptick is still good news, but we'll see if it holds," said Seiders. "The market could really use a boost."
Even though sales for the month unexpectedly rose month to month, sales fell 35.3% from July 2007, when new home sales were on an annual pace of 796,000.
The rise in new home sales is also deceptive because of seasonal adjustments. On a non-seasonally adjusted basis, the report showed only 43,000 new homes were sold in July, which marks the lowest level for that measure since December 1994.
Price and supply woes continue
Sales rose as home prices continued to plummet. The median price of a new home sold last month was $230,700, up just 0.2% from $230,100 in June.
July's median price was down 6.3% from $246,200 a year earlier, the Census Bureau reported.
This decline in median price probably doesn't accurately capture the weakness in prices for new homes, as about three out of four builders have reported having to pay buyers' closing costs or offer other incentives such as expensive features for free in order to maintain sales.
Prices have been driven down by the glut of new homes on the market.
The report showed 169,000 completed new homes available at the end of the month, bringing total inventory - including new homes under construction and not yet started - to 416,000, equal to 10.1-month supply.
Builders were finding that it typically takes 8.5 months to sell a completed home in the current market, according to the report.
"Inventory of existing home sales has definitely been affected by foreclosure sales, and the new home market has been afflicted by that negatively," said Seiders. "But in recent quarters, we've seen sales volume exceeding housing starts for sale, so that will run inventory down if that continues."
Two days of grim news
The report is the latest sign of trouble in the overall housing market.
On Monday, the National Realtors Association reported existing home sales rose more than expected in July, but prices continued to fall and inventory increased to a record high. Earlier Tuesday, the S&P/Case-Shiller national home price index showed U.S. home prices fell a record 15.4% in the second quarter compared with last year.
And according to a new report from the Mortgage Asset Research Institute released Tuesday, the number of fraudulent loans issued during the first three months of 2008 skyrocketed 42% compared with the same period in 2007.
By David Goldman, CNNMoney.com staff writer
Last Updated: August 26, 2008: 2:11 PM EDT
NEW YORK (CNNMoney.com) -- The government offered more discouraging news about the housing sector on Tuesday, reporting that new home sales rose slightly in July only after revising the previous month's number sharply lower.
Sales for July came in at a seasonally adjusted annual rate of 515,000, up 2.4% from 503,000 in the previous month, the Census Bureau reported. Last month, Census had put the June figure at 530,000.
The change marks the fourth of the past five reports that Census has slashed the previous month's number. The trend worries economists who say a hoped-for stabilization of the housing market remains elusive.
"It's concerning because the pattern of revisions from the Census Bureau has been systematically downward instead of random as you'd expect," said David Seiders, chief economist for the National Association of Home Builders. "Chances are we'll see some downward revision when they put out the August numbers."
The July reading on the battered housing market was below the consensus forecast of 525,000, according to economists surveyed by Briefing.com.
"The uptick is still good news, but we'll see if it holds," said Seiders. "The market could really use a boost."
Even though sales for the month unexpectedly rose month to month, sales fell 35.3% from July 2007, when new home sales were on an annual pace of 796,000.
The rise in new home sales is also deceptive because of seasonal adjustments. On a non-seasonally adjusted basis, the report showed only 43,000 new homes were sold in July, which marks the lowest level for that measure since December 1994.
Price and supply woes continue
Sales rose as home prices continued to plummet. The median price of a new home sold last month was $230,700, up just 0.2% from $230,100 in June.
July's median price was down 6.3% from $246,200 a year earlier, the Census Bureau reported.
This decline in median price probably doesn't accurately capture the weakness in prices for new homes, as about three out of four builders have reported having to pay buyers' closing costs or offer other incentives such as expensive features for free in order to maintain sales.
Prices have been driven down by the glut of new homes on the market.
The report showed 169,000 completed new homes available at the end of the month, bringing total inventory - including new homes under construction and not yet started - to 416,000, equal to 10.1-month supply.
Builders were finding that it typically takes 8.5 months to sell a completed home in the current market, according to the report.
"Inventory of existing home sales has definitely been affected by foreclosure sales, and the new home market has been afflicted by that negatively," said Seiders. "But in recent quarters, we've seen sales volume exceeding housing starts for sale, so that will run inventory down if that continues."
Two days of grim news
The report is the latest sign of trouble in the overall housing market.
On Monday, the National Realtors Association reported existing home sales rose more than expected in July, but prices continued to fall and inventory increased to a record high. Earlier Tuesday, the S&P/Case-Shiller national home price index showed U.S. home prices fell a record 15.4% in the second quarter compared with last year.
And according to a new report from the Mortgage Asset Research Institute released Tuesday, the number of fraudulent loans issued during the first three months of 2008 skyrocketed 42% compared with the same period in 2007.
Five-fold jump in Thornburg profit
Struggling mortgage lender posts second-quarter net income of $412.3M - up from $78.1 a year ago - on one-off gains from asset sales.
August 26, 2008: 9:56 AM EDT
SANTA FE, N.M. (AP) -- Troubled mortgage lender Thornburg Mortgage Inc. said late Monday that its profit increased by more than five times in the second quarter, due to big one-time gains from the sale of assets and decreases in the fair value of certain items.
Shares more than doubled to as much as $1.06 in premarket trading Tuesday, after closing the previous session at 40 cents. Shares recently traded up 10 cents, or 25%, to 50 cents.
Big 12-month gain
For the period ended June 30, the company reported net income available to common shareholders of $412.3 million, or 84 cents per share, compared with $78.1 million, or 66 cents per share, in the year-ago period.
Results are based on 484.6 million common shares outstanding in the 2008 quarter and 119.3 million shares outstanding in the 2007 quarter.
The increase in results was primarily due to a $536.9 million fair value gain related to a liability; a $24.9 million fair value gain related to senior subordinated notes; a $14.3 million net gain on the sale of certain assets; and a $23 million gain on the extinguishment of debt.
Adjusted income after eliminating these items was $22.7 million, the company said.
Net interest income, or income generated from loans and deposits, fell 48% to $53.3 million from $102.3 million. Net noninterest income, or income generated from fees and other charges, jumped to $377.8 million from $6.8 million.
On Aug. 21, the company said it used money from its liquidity fund to pay margin calls totaling $219 million. As of August 22, Thornburg identified additional downgrades in its portfolio that would result in margin calls of $25.9 million.
Margin calls
Thornburg (TMA) said there can be no assurance that the company will not receive additional margin calls that could exceed the balance of its liquidity fund. Margin calls require companies to put up more collateral for financing lines of credit.
Thornburg -- which specializes in originating and investing in jumbo mortgages that are worth more than $417,000 -- has been struggling since the middle of last year amid the downturn in the real estate market.
In early March, Thornburg disclosed it had faced nearly $1.8 billion in margin calls since the beginning of the year. Thornburg faced a similar round of margin calls last August but was able to meet them.
As delinquencies and defaults among certain types of mortgages have risen, investors have shied away from purchasing nearly all types of loans in the secondary market.
The withering market for debt backed by mortgages has caused prices to plunge. As those prices fell, companies like Thornburg have been forced to reduce the value of their holdings, regardless of actual performance. Those declining prices also have banks making margin calls.
Staying afloat
Last week, Thornburg extended its exchange offer for four classes of its preferred stock, as part of its efforts to remain in business.
The exchange offer is being completed as part of a recapitalization deal Thornburg announced at the end of March to raise $1.35 billion in new capital through an investment by MatlinPatterson.
Thornburg needs to have at least two-thirds of each of four classes of preferred stock tendered for exchange to meet the requirements of the exchange offer.
August 26, 2008: 9:56 AM EDT
SANTA FE, N.M. (AP) -- Troubled mortgage lender Thornburg Mortgage Inc. said late Monday that its profit increased by more than five times in the second quarter, due to big one-time gains from the sale of assets and decreases in the fair value of certain items.
Shares more than doubled to as much as $1.06 in premarket trading Tuesday, after closing the previous session at 40 cents. Shares recently traded up 10 cents, or 25%, to 50 cents.
Big 12-month gain
For the period ended June 30, the company reported net income available to common shareholders of $412.3 million, or 84 cents per share, compared with $78.1 million, or 66 cents per share, in the year-ago period.
Results are based on 484.6 million common shares outstanding in the 2008 quarter and 119.3 million shares outstanding in the 2007 quarter.
The increase in results was primarily due to a $536.9 million fair value gain related to a liability; a $24.9 million fair value gain related to senior subordinated notes; a $14.3 million net gain on the sale of certain assets; and a $23 million gain on the extinguishment of debt.
Adjusted income after eliminating these items was $22.7 million, the company said.
Net interest income, or income generated from loans and deposits, fell 48% to $53.3 million from $102.3 million. Net noninterest income, or income generated from fees and other charges, jumped to $377.8 million from $6.8 million.
On Aug. 21, the company said it used money from its liquidity fund to pay margin calls totaling $219 million. As of August 22, Thornburg identified additional downgrades in its portfolio that would result in margin calls of $25.9 million.
Margin calls
Thornburg (TMA) said there can be no assurance that the company will not receive additional margin calls that could exceed the balance of its liquidity fund. Margin calls require companies to put up more collateral for financing lines of credit.
Thornburg -- which specializes in originating and investing in jumbo mortgages that are worth more than $417,000 -- has been struggling since the middle of last year amid the downturn in the real estate market.
In early March, Thornburg disclosed it had faced nearly $1.8 billion in margin calls since the beginning of the year. Thornburg faced a similar round of margin calls last August but was able to meet them.
As delinquencies and defaults among certain types of mortgages have risen, investors have shied away from purchasing nearly all types of loans in the secondary market.
The withering market for debt backed by mortgages has caused prices to plunge. As those prices fell, companies like Thornburg have been forced to reduce the value of their holdings, regardless of actual performance. Those declining prices also have banks making margin calls.
Staying afloat
Last week, Thornburg extended its exchange offer for four classes of its preferred stock, as part of its efforts to remain in business.
The exchange offer is being completed as part of a recapitalization deal Thornburg announced at the end of March to raise $1.35 billion in new capital through an investment by MatlinPatterson.
Thornburg needs to have at least two-thirds of each of four classes of preferred stock tendered for exchange to meet the requirements of the exchange offer.
These homes for sale suck
Never before have there been so many squalid, dilapidated homes on the market - and they're helping to exaggerate already-plummeting home prices.
By Les Christie, CNNMoney.com staff writer
Last Updated: August 26, 2008: 9:54 AM EDT
NEW YORK (CNNMoney.com) -- Mold, maggots and piles of festering trash - no wonder home prices are in freefall.
It's not just the subprime mortgage crisis that's to blame for plummeting home prices. A flood of squalid properties on the market is helping to exaggerate the post-bubble price declines.
"Part of the reason home prices are declining is a fundamental deterioration in the housing stock," said Glenn Kelman, CEO of the online, discount broker Redfin. "During the boom, nine out of 10 houses for sale in many markets were in prime condition. Now, for every 10 houses, at least three are dogs."
Most of these mutts are foreclosed properties that have been permitted to fall into disrepair by lenders overwhelmed with thousands of vacant homes. If these houses sell at all, they're going for bargain basement prices that are hurting home values throughout the neighborhood.
"I've never seen so many houses in this condition before," said Ray Anderson of Buyer's Advantage Real Estate in Auburn Calif., near Sacramento. "And I've been in the business 20 years. I've seen bank-owned properties in the past. They were never like this."
Distressed properties usually sell for discounts of 10% to 40% below comparable, well-maintained homes, according to Tom Inserra, executive vice president for Zaio, an appraisal company that is creating a national database of home values.
Richard Smith, CEO of Realogy, the parent company for Coldwell Banker, Century 21 and Sotheby's International Realty, estimates that homes that are not bank-owned have actually only seen price declines in the low single digits over the past 12 months. That's compared with the 15% price drop recorded by the S&P/Case-Shiller Index for all homes over the same period.
'Crime scene'
Lori Mize has firsthand experience with horrible homes for sale. She waited for years for prices to come down in her Elk Grove, Calif. home area, just east of Sacramento. With the median home there now selling 30% below the market's peak, Mize thought it was time to buy. But nearly all the homes in her price range - $250,000 to $300,000 - are bank-owned properties, which tend to be in the most beat-up condition.
After looking at a few of them, she was almost ready to give up.
"The first one I saw was the worst home I had ever seen in my life," said the married mother of two young girls. "There were magic-marker messages on the front door saying, 'STAY OUT.' They had poured paint and other stuff on the carpets. There was a lot of trash. I felt like I was at the scene of a crime. I wouldn't let my daughters touch anything."
In Florida, another foreclosure hot spot, vacant homes deteriorate rapidly in the high heat and humidity.
Garbage and food that's left behind fester. "The properties smell," said Eve Alexander, an agent in Orlando. "You find maggots. The swimming pools are green. The lawns dry up. They're eyesores. Neighbors yell at us to water the lawn."
Often the homes have been stripped bare. "All the kitchen appliances, cabinets and countertops, bathroom fixtures, lights are [stolen]," she said.
Others trash the place before they leave, according to Adele Hrovat, a real estate agent with the Buyer's Realty of Las Vegas. "They punch holes in the walls, dump oil on the carpets. The banks are so overwhelmed, they haven't gotten to the point when they send in crews to fix them up," she said.
Indeed, soaring foreclosures have returned many houses to their lenders, who put them right back on the market - usually as is.
Nationally 18.6% of all homes sold during the three months ended June 30 were foreclosures, compared with just 7% during the same period a year earlier, and 3.1% in 2006, according to the real estate Web site Zillow.com. And that doesn't include short sales, which is when a home is sold for less than the mortgage balance and the bank forgives the unpaid balance and also account for a lot of sales in many areas.
Just a few years ago in Detroit, only one in a hundred listings were foreclosures or short sales, according to agent David Mills of Homebuyer's Realty. Now half of the listings are. Some have been badly damaged and suffered huge drops in value.
"A three-year old home that recently sold for $660,000 is listed for $350,000. There's no kitchen, no master bath. The toilet was taken, the tub, cabinets gone."
A growing problem
With the number of foreclosed properties projected to keep rising, there seems to be no end in sight to falling prices, according to Texas A&M real estate economist Mark Dotzour. Even though many of these dilapidated homes are actually pretty good bargains, Dotzour isn't surprised that more people aren't jumping in. Everyone is reluctant to buy in a declining market.
"Once buyers start to feel confident that prices in a given community have stabilized, they'll start buying again," he said.
For that to happen, the natural population increase will have to absorb all the excess housing inventory, until supply and demand are in balance again.
In the meantime, Congress has allocated $4 billion for municipalities to rehab derelict foreclosures in an effort to prevent them from dragging down nearby neighborhoods.
But mostly hitting bottom is just waiting for market events to play out and the construction of new homes drops and remains below below the replacement rate for a while.
"Once that inventory is gone, we'll be at the market bottom, and the price trajectory will flatten out," said Dotzour.
Until then, dilapidated homes will continue to aggravate the steep price drops being recorded throughout the nation.
By Les Christie, CNNMoney.com staff writer
Last Updated: August 26, 2008: 9:54 AM EDT
NEW YORK (CNNMoney.com) -- Mold, maggots and piles of festering trash - no wonder home prices are in freefall.
It's not just the subprime mortgage crisis that's to blame for plummeting home prices. A flood of squalid properties on the market is helping to exaggerate the post-bubble price declines.
"Part of the reason home prices are declining is a fundamental deterioration in the housing stock," said Glenn Kelman, CEO of the online, discount broker Redfin. "During the boom, nine out of 10 houses for sale in many markets were in prime condition. Now, for every 10 houses, at least three are dogs."
Most of these mutts are foreclosed properties that have been permitted to fall into disrepair by lenders overwhelmed with thousands of vacant homes. If these houses sell at all, they're going for bargain basement prices that are hurting home values throughout the neighborhood.
"I've never seen so many houses in this condition before," said Ray Anderson of Buyer's Advantage Real Estate in Auburn Calif., near Sacramento. "And I've been in the business 20 years. I've seen bank-owned properties in the past. They were never like this."
Distressed properties usually sell for discounts of 10% to 40% below comparable, well-maintained homes, according to Tom Inserra, executive vice president for Zaio, an appraisal company that is creating a national database of home values.
Richard Smith, CEO of Realogy, the parent company for Coldwell Banker, Century 21 and Sotheby's International Realty, estimates that homes that are not bank-owned have actually only seen price declines in the low single digits over the past 12 months. That's compared with the 15% price drop recorded by the S&P/Case-Shiller Index for all homes over the same period.
'Crime scene'
Lori Mize has firsthand experience with horrible homes for sale. She waited for years for prices to come down in her Elk Grove, Calif. home area, just east of Sacramento. With the median home there now selling 30% below the market's peak, Mize thought it was time to buy. But nearly all the homes in her price range - $250,000 to $300,000 - are bank-owned properties, which tend to be in the most beat-up condition.
After looking at a few of them, she was almost ready to give up.
"The first one I saw was the worst home I had ever seen in my life," said the married mother of two young girls. "There were magic-marker messages on the front door saying, 'STAY OUT.' They had poured paint and other stuff on the carpets. There was a lot of trash. I felt like I was at the scene of a crime. I wouldn't let my daughters touch anything."
In Florida, another foreclosure hot spot, vacant homes deteriorate rapidly in the high heat and humidity.
Garbage and food that's left behind fester. "The properties smell," said Eve Alexander, an agent in Orlando. "You find maggots. The swimming pools are green. The lawns dry up. They're eyesores. Neighbors yell at us to water the lawn."
Often the homes have been stripped bare. "All the kitchen appliances, cabinets and countertops, bathroom fixtures, lights are [stolen]," she said.
Others trash the place before they leave, according to Adele Hrovat, a real estate agent with the Buyer's Realty of Las Vegas. "They punch holes in the walls, dump oil on the carpets. The banks are so overwhelmed, they haven't gotten to the point when they send in crews to fix them up," she said.
Indeed, soaring foreclosures have returned many houses to their lenders, who put them right back on the market - usually as is.
Nationally 18.6% of all homes sold during the three months ended June 30 were foreclosures, compared with just 7% during the same period a year earlier, and 3.1% in 2006, according to the real estate Web site Zillow.com. And that doesn't include short sales, which is when a home is sold for less than the mortgage balance and the bank forgives the unpaid balance and also account for a lot of sales in many areas.
Just a few years ago in Detroit, only one in a hundred listings were foreclosures or short sales, according to agent David Mills of Homebuyer's Realty. Now half of the listings are. Some have been badly damaged and suffered huge drops in value.
"A three-year old home that recently sold for $660,000 is listed for $350,000. There's no kitchen, no master bath. The toilet was taken, the tub, cabinets gone."
A growing problem
With the number of foreclosed properties projected to keep rising, there seems to be no end in sight to falling prices, according to Texas A&M real estate economist Mark Dotzour. Even though many of these dilapidated homes are actually pretty good bargains, Dotzour isn't surprised that more people aren't jumping in. Everyone is reluctant to buy in a declining market.
"Once buyers start to feel confident that prices in a given community have stabilized, they'll start buying again," he said.
For that to happen, the natural population increase will have to absorb all the excess housing inventory, until supply and demand are in balance again.
In the meantime, Congress has allocated $4 billion for municipalities to rehab derelict foreclosures in an effort to prevent them from dragging down nearby neighborhoods.
But mostly hitting bottom is just waiting for market events to play out and the construction of new homes drops and remains below below the replacement rate for a while.
"Once that inventory is gone, we'll be at the market bottom, and the price trajectory will flatten out," said Dotzour.
Until then, dilapidated homes will continue to aggravate the steep price drops being recorded throughout the nation.
Capmark Partners with CampusMBA to Certify Commercial Servicing Staff
MBA (8/27/2008 ) Stokes, Aleis
CampusMBA, the education division of the Mortgage Bankers Association, announced its commercial servicing training partnership with Capmark, San Mateo, Calif., a leading global commercial loan services provider.
The training initiative will cover nearly all of Capmark's U.S. commercial servicing staff in nine offices across the country as well as its employees in the company's offices in Ireland and India that service U.S. loans. Upon completion, Capmark staff will earn the Commercial Mortgage Servicer (CMS) designation.
"CampusMBA is eager to partner with Capmark on this large-scale training initiative to educate its exceptional commercial servicing staff," said MBA COO John Courson. "We at MBA equate professional education with real-world business results and will work with Capmark's staff to achieve these positive and measurable results through CampusMBA's commercial CMS program."
The commercial CMS demonstrates a professional's superior knowledge, experience and professional conduct in the servicing of commercial mortgage loans. The CampusMBA designation program consists of three levels of training including the achievement certificate (level I), professional certificate (level II) and the specialist designation (level III). Successful completion all three levels earns the professional the commercial CMS designation.
"We are looking forward to working with CampusMBA to initially certify 150 of our top commercial mortgage servicers with the ultimate goal of providing training to more than 700 of our current staff," said Capmark Executive Vice President Michael Lipson, head of the company’s global services operations. "A robust training curriculum has always been core to our success; we feel the CMS program and its structure are aligned with our business goals."
CampusMBA's commercial servicing training partnership with Capmark will work through its Enterprise Training arm, an all-encompassing and customized program designed to fit the overall needs of an organization by drilling down to train its core resource, its staff. Enterprise Training can include any of CampusMBA's certification and designation programs, which include those in residential underwriting, loan origination, servicing, regulatory compliance, quality assurance and commercial servicing. Additionally, general education programs are offered for all levels of experience and industry expertise in both commercial and residential real estate finance.
CampusMBA, the education division of the Mortgage Bankers Association, announced its commercial servicing training partnership with Capmark, San Mateo, Calif., a leading global commercial loan services provider.
The training initiative will cover nearly all of Capmark's U.S. commercial servicing staff in nine offices across the country as well as its employees in the company's offices in Ireland and India that service U.S. loans. Upon completion, Capmark staff will earn the Commercial Mortgage Servicer (CMS) designation.
"CampusMBA is eager to partner with Capmark on this large-scale training initiative to educate its exceptional commercial servicing staff," said MBA COO John Courson. "We at MBA equate professional education with real-world business results and will work with Capmark's staff to achieve these positive and measurable results through CampusMBA's commercial CMS program."
The commercial CMS demonstrates a professional's superior knowledge, experience and professional conduct in the servicing of commercial mortgage loans. The CampusMBA designation program consists of three levels of training including the achievement certificate (level I), professional certificate (level II) and the specialist designation (level III). Successful completion all three levels earns the professional the commercial CMS designation.
"We are looking forward to working with CampusMBA to initially certify 150 of our top commercial mortgage servicers with the ultimate goal of providing training to more than 700 of our current staff," said Capmark Executive Vice President Michael Lipson, head of the company’s global services operations. "A robust training curriculum has always been core to our success; we feel the CMS program and its structure are aligned with our business goals."
CampusMBA's commercial servicing training partnership with Capmark will work through its Enterprise Training arm, an all-encompassing and customized program designed to fit the overall needs of an organization by drilling down to train its core resource, its staff. Enterprise Training can include any of CampusMBA's certification and designation programs, which include those in residential underwriting, loan origination, servicing, regulatory compliance, quality assurance and commercial servicing. Additionally, general education programs are offered for all levels of experience and industry expertise in both commercial and residential real estate finance.
Investors Weary of Rating Agencies Past and Present
MBA (8/27/2008 ) Murray, Michael
A lack of investor confidence in rating agencies is only one aspect keeping investors away from commercial and residential mortgage-backed securities, and current models could cause an even longer wait.
In their original design, ratings agencies provided research and information to debt buyers on an asset, but in 1975 the Securities and Exchange Commission named seven rating agencies as Nationally Recognized Statistical Rating Organizations. In the current model, debt issuers pay to get loans rated. Otherwise, they cannot sell them. Issuers “shop” loans to determine which ratings agency would give the debt its highest rating.
“Standard & Poor’s recognizes that the issuer-pays model we have been using for the past 30 years may raise potential conflicts of interest. What is important is how we continue to manage such potential conflict,” said Vickie Tillman, executive vice president at S&P, from an op-ed article, Credit Ratings Integrity, in April’s Washington Times. “In this regard, ratings firms are not unique. Potential conflicts of interest are common in the world of business, which is why companies in virtually every industry have stringent policies in place to manage them.”
Industry participants, investors and advisors said rating agencies need to take responsibility and admit fault in giving subprime RMBS pools investment-grade ratings.
“I’m wondering if [investor] confidence is permanently damaged; we’ll see," said Michael Shedlock, investment advisor representative at Sitka Pacific Capital Management, Edmonds, Wash. "It certainly is from my aspect. That does not mean the market will see it the same way I do.”
In testimony before the Senate Banking Committee in April, Tillman outlined 27 initiatives in four categories that S&P turned into its Leadership Actions Web site. The actions include steps to manage potential conflicts of interest, the Tillman said.
For Shedlock, removing government sponsorship of the rating agencies "really needs to happen" to increase investor confidence.
"That’s what it would take for me to have confidence because then the markets will quickly sort this thing out," Shedlock said. "Instead, we’re going down the path of putting more regulation on top of this.”
In July, the House Financial Services Committee unanimously approved H.R. 6308, the Municipal Bond Fairness Act, requiring credit rating agencies to apply rating symbols consistently for all securities. Industry groups said the legislation would help to restore investor confidence and said a single and consistent ratings structure is "critical to bond investors" who want the ability to compare a multitude of investment options across asset classes.
"Investors have been concerned about the confusion, uncertainty and implementation issues a new system would create during this challenging time," said Dottie Cunningham, CEO of the Commercial Mortgage Securities Association.
The bill also required the SEC to create a system to measure NRSRO accuracy and to use the results to help guide its decision on when to initiate an examination of a ratings agency. However, Shedlock said the current model still reflects companies earning business based on government sponsorship rather than through the free market.
“If the big three—Moody’s, S&P and Fitch—all had to live or die on the basis of their ratings, they would be a lot better than they are,” Shedlock said. “As long as the SEC says that all debt issues have to be rated, and they have to be rated by a Nationally Recognized Statistical Rating Organization, then these problems will continue.”
S&P said it would work with market participants to improve the quality, integrity and disclosure of information on collateral underlying structured securities.
Project RESTART, for example, a proposed RMBS Disclosure Package from the American Securitization Forum, would allow investors to more easily compare loans and transactions across all issuers. The proposal follows the CMSA Investor Reporting Package model for the CMBS market.
Shedlock said greater transparency is “whitewashing” and that Moody’s Investors Service, Fitch Ratings and S&P are still “well-behind the curve” in their ratings. He said some RMBS investment grade paper continue to show delinquencies, REO or foreclosures in nearly 100 percent of the pools.
“It’s not an A-rated paper when the entire pool is delinquent,” Shedlock said. “It’s the same issue across the board. Are these companies keeping up? Are they making any effort to clean up? Are they doing it proactively or are they doing it after the fact? All of these issues are still lurking out there, and they can get away with this sloppiness as long as they get paid whether they are sloppy or not.”
A lack of investor confidence in rating agencies is only one aspect keeping investors away from commercial and residential mortgage-backed securities, and current models could cause an even longer wait.
In their original design, ratings agencies provided research and information to debt buyers on an asset, but in 1975 the Securities and Exchange Commission named seven rating agencies as Nationally Recognized Statistical Rating Organizations. In the current model, debt issuers pay to get loans rated. Otherwise, they cannot sell them. Issuers “shop” loans to determine which ratings agency would give the debt its highest rating.
“Standard & Poor’s recognizes that the issuer-pays model we have been using for the past 30 years may raise potential conflicts of interest. What is important is how we continue to manage such potential conflict,” said Vickie Tillman, executive vice president at S&P, from an op-ed article, Credit Ratings Integrity, in April’s Washington Times. “In this regard, ratings firms are not unique. Potential conflicts of interest are common in the world of business, which is why companies in virtually every industry have stringent policies in place to manage them.”
Industry participants, investors and advisors said rating agencies need to take responsibility and admit fault in giving subprime RMBS pools investment-grade ratings.
“I’m wondering if [investor] confidence is permanently damaged; we’ll see," said Michael Shedlock, investment advisor representative at Sitka Pacific Capital Management, Edmonds, Wash. "It certainly is from my aspect. That does not mean the market will see it the same way I do.”
In testimony before the Senate Banking Committee in April, Tillman outlined 27 initiatives in four categories that S&P turned into its Leadership Actions Web site. The actions include steps to manage potential conflicts of interest, the Tillman said.
For Shedlock, removing government sponsorship of the rating agencies "really needs to happen" to increase investor confidence.
"That’s what it would take for me to have confidence because then the markets will quickly sort this thing out," Shedlock said. "Instead, we’re going down the path of putting more regulation on top of this.”
In July, the House Financial Services Committee unanimously approved H.R. 6308, the Municipal Bond Fairness Act, requiring credit rating agencies to apply rating symbols consistently for all securities. Industry groups said the legislation would help to restore investor confidence and said a single and consistent ratings structure is "critical to bond investors" who want the ability to compare a multitude of investment options across asset classes.
"Investors have been concerned about the confusion, uncertainty and implementation issues a new system would create during this challenging time," said Dottie Cunningham, CEO of the Commercial Mortgage Securities Association.
The bill also required the SEC to create a system to measure NRSRO accuracy and to use the results to help guide its decision on when to initiate an examination of a ratings agency. However, Shedlock said the current model still reflects companies earning business based on government sponsorship rather than through the free market.
“If the big three—Moody’s, S&P and Fitch—all had to live or die on the basis of their ratings, they would be a lot better than they are,” Shedlock said. “As long as the SEC says that all debt issues have to be rated, and they have to be rated by a Nationally Recognized Statistical Rating Organization, then these problems will continue.”
S&P said it would work with market participants to improve the quality, integrity and disclosure of information on collateral underlying structured securities.
Project RESTART, for example, a proposed RMBS Disclosure Package from the American Securitization Forum, would allow investors to more easily compare loans and transactions across all issuers. The proposal follows the CMSA Investor Reporting Package model for the CMBS market.
Shedlock said greater transparency is “whitewashing” and that Moody’s Investors Service, Fitch Ratings and S&P are still “well-behind the curve” in their ratings. He said some RMBS investment grade paper continue to show delinquencies, REO or foreclosures in nearly 100 percent of the pools.
“It’s not an A-rated paper when the entire pool is delinquent,” Shedlock said. “It’s the same issue across the board. Are these companies keeping up? Are they making any effort to clean up? Are they doing it proactively or are they doing it after the fact? All of these issues are still lurking out there, and they can get away with this sloppiness as long as they get paid whether they are sloppy or not.”
Mortgage Applications Rebound In MBA Weekly Survey
MBA (8/27/2008 ) Kemp, Carolyn
Mortgage application activity, buoyed by dropping interest rates, rebounded following two weeks of declines, according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending August 22.
The Market Composite Index rose to 421.6, an increase of 0.5 percent on a seasonally adjusted basis from 419.3 one week earlier. On an unadjusted basis, the Index decreased 0.9 percent compared with the previous week and fell by 31.2 percent compared with the same week one year earlier. The four-week moving average rose by 0.05 percent.
The seasonally adjusted Refinance Index increased by 0.3 percent to 1038.0 from the previous week. The four-week moving average fell by 0.85 percent. The refinance share of mortgage activity increased to 35.2 percent of total applications from 34.8 percent the previous week.
The seasonally adjusted Purchase Index increased by 0.6 percent to 315.9 from one week earlier. The Conventional Purchase Index decreased by 0.6 percent while the Government Purchase Index (largely FHA) increased by 3.3 percent. The four-week moving average rose by 0.51 percent.
The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.44 percent from 6.47 percent, with points decreasing to 1.03 from 1.10 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
The average contract interest rate for 15-year fixed-rate mortgages decreased to 5.94 percent from 5.99 percent, with points decreasing to 1.13 from 1.18 (including the origination fee) for 80 percent LTV loans.
The average contract interest rate for one-year adjustable-rate mortgages increased to 7.15 percent from 7.07 percent, with points decreasing to 0.36 from 0.42 (including the origination fee) for 80 percent LTV loans. The ARM share of activity decreased to 7.9 percent from 8.0 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 application activity, buoyed by dropping interest rates, rebounded following two weeks of declines, according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending August 22.
The Market Composite Index rose to 421.6, an increase of 0.5 percent on a seasonally adjusted basis from 419.3 one week earlier. On an unadjusted basis, the Index decreased 0.9 percent compared with the previous week and fell by 31.2 percent compared with the same week one year earlier. The four-week moving average rose by 0.05 percent.
The seasonally adjusted Refinance Index increased by 0.3 percent to 1038.0 from the previous week. The four-week moving average fell by 0.85 percent. The refinance share of mortgage activity increased to 35.2 percent of total applications from 34.8 percent the previous week.
The seasonally adjusted Purchase Index increased by 0.6 percent to 315.9 from one week earlier. The Conventional Purchase Index decreased by 0.6 percent while the Government Purchase Index (largely FHA) increased by 3.3 percent. The four-week moving average rose by 0.51 percent.
The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.44 percent from 6.47 percent, with points decreasing to 1.03 from 1.10 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
The average contract interest rate for 15-year fixed-rate mortgages decreased to 5.94 percent from 5.99 percent, with points decreasing to 1.13 from 1.18 (including the origination fee) for 80 percent LTV loans.
The average contract interest rate for one-year adjustable-rate mortgages increased to 7.15 percent from 7.07 percent, with points decreasing to 0.36 from 0.42 (including the origination fee) for 80 percent LTV loans. The ARM share of activity decreased to 7.9 percent from 8.0 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.
Brinkmann Tapped as MBA’s Chief Economist
MBA (8/27/2008 ) Stokes, Aleis
The Mortgage Bankers Association announced that Jay Brinkmann has been named the organization's chief economist and senior vice president for research and economics. Brinkmann has been with the MBA since 2001 and has served as the organization's vice president of research for most of that tenure.
"When the position first became vacant last March, Jay suggested we conduct a national search to find an ideal candidate," said MBA COO John Courson. "After months of interviewing many well-qualified candidates, it became apparent that the best candidate already worked at MBA and we approached Jay to take the job."
Prior to joining the MBA, Brinkmann worked at Fannie Mae in the portfolio strategy and credit pricing areas. He served previously on the business school faculty of the University of Houston, where he specialized in regulation of financial institutions and teaching commercial bank management after having worked in the commercial lending division of Premier National Bank in Louisiana. He also served as the deputy of chief of staff for Louisiana Gov. David Treen (R) and was Treen's press secretary during Treen's years in the House.
"Jay brings a unique set of qualifications to the position that will serve the mortgage industry well," Courson said. "Beyond having a firm grasp of the fundamental drivers of the economy and the real estate industry, both single-family and commercial/multifamily, Jay has an intimate knowledge of mortgage company business operations and business models. And perhaps most importantly, Jay's background in finance brings a capital markets perspective to the position that will be invaluable to the industry as we work through the challenges now facing the secondary markets."
Brinkmann holds a Ph.D. in finance from Purdue University, an MBA from Tulane University and an undergraduate degree from The George Washington University. He is a native of New Orleans and he and his wife Nancy currently reside in Virginia.
Brinkmann succeeds Doug Duncan, who left MBA in March to become chief economist at Fannie Mae.
The Mortgage Bankers Association announced that Jay Brinkmann has been named the organization's chief economist and senior vice president for research and economics. Brinkmann has been with the MBA since 2001 and has served as the organization's vice president of research for most of that tenure.
"When the position first became vacant last March, Jay suggested we conduct a national search to find an ideal candidate," said MBA COO John Courson. "After months of interviewing many well-qualified candidates, it became apparent that the best candidate already worked at MBA and we approached Jay to take the job."
Prior to joining the MBA, Brinkmann worked at Fannie Mae in the portfolio strategy and credit pricing areas. He served previously on the business school faculty of the University of Houston, where he specialized in regulation of financial institutions and teaching commercial bank management after having worked in the commercial lending division of Premier National Bank in Louisiana. He also served as the deputy of chief of staff for Louisiana Gov. David Treen (R) and was Treen's press secretary during Treen's years in the House.
"Jay brings a unique set of qualifications to the position that will serve the mortgage industry well," Courson said. "Beyond having a firm grasp of the fundamental drivers of the economy and the real estate industry, both single-family and commercial/multifamily, Jay has an intimate knowledge of mortgage company business operations and business models. And perhaps most importantly, Jay's background in finance brings a capital markets perspective to the position that will be invaluable to the industry as we work through the challenges now facing the secondary markets."
Brinkmann holds a Ph.D. in finance from Purdue University, an MBA from Tulane University and an undergraduate degree from The George Washington University. He is a native of New Orleans and he and his wife Nancy currently reside in Virginia.
Brinkmann succeeds Doug Duncan, who left MBA in March to become chief economist at Fannie Mae.
New Home Sales Rise
MBA (8/27/2008 ) Velz, Orawin
New homes sales rose by 2.4 percent in July to a seasonally-adjusted annualized pace of 515,000, following a 2.1 percent decline in June. However, sales of new homes in May and June revised downward by 46,000 units.
During the first seven months of this year, new home sales were down 36.8 percent from the same period last year. The seasonally-adjusted number, however, may be a little misleading, in terms of the actually number of units sold. The total for July was the lowest month since December 1994. The seasonally adjusted number showed an increase because the drop from June was smaller than what we usually see between June and July.
Sales varied considerably by region: up by 38.9 percent in the Northeast and rising by 9.9 percent in the West, all on a seasonally-adjusted basis. Sales declined by 8.2 percent in the Midwest and dropped by 2.5 percent in the South.
The number of homes available for sale fell 5.2 percent, the 15th consecutive monthly decline and the biggest drop since November 1963. The steady decline in inventory, which has reached the lowest level since October 2004, reflected considerable cutbacks in single-family starts, which have posted 14 declines over the past 15 months.
The length of time that houses have spent on the market continued to break records. The median number of months rose to 8.5 in July from 8.3 in June and from 6.0 in July 2007. A huge drop in inventory and an increase in sales pushed down the months’ supply to 10.1 months from 10.7 months in June and 10.8 months in May. The median price for new homes was down 6.3 percent in July from a year ago.
The median home price does not necessarily give the true picture of home price trend, however, as it can be distorted by the mix of sales. The decline in the median home price may have been understated since sales increased the most in the West and Northeast regions, where the value of a typical house is more than the national average.
Two measures of home price released yesterday control for the mix of high- and low-price of home sales by tracking repeat sales of the same houses over time: the Standard and Poor’s Case-Shiller Home Price Index and the Office of Federal Housing Enterprise Oversight House Price Index.
The CSI was down 15.4 percent in the second quarter from a year ago—the largest year-over-year drop since the inception of the index in 1987. While the year-over-year declines in the index continued to set records, the report offered some good news in that the quarterly decline in the index moderated significantly from 24.4 percent (annualized rate) in the first quarter to 9.0 percent in the first quarter. However, since the data are not seasonally adjusted, some of the moderation in home price drops could be influenced by seasonal factors, since home prices generally rise during the spring/summer buying season.
The monthly indices available for a composite of 10 and 20 major cities have shown slower pace of house price declines since February, supporting the view that while home prices should continue to fall for some time, given the historically high months’ supply of homes, the largest drops in home prices may be behind us.
The OFHEO House Price Index fell 1.7 percent in the second quarter from a year ago. The HPI is based on data from both purchase and refinance transactions from Fannie Mae and Freddie Mac. The index excluding refinance transactions posted a sharper drop from a year ago of 4.8 percent. Both OFHEO indices continued to perform better than the CSI largely because the PFHEO indices include only conventional, conforming loans and include relatively few subprime loans as well as adjustable rate mortgage loans.
A separate report showed that The Conference Board's Consumer Confidence Index rose five points to 56.9 in August. The improvement was driven entirely by the expectations component, which gained 5.1 points to 52.8. The present conditions component fell 2.6 points to 63.2.
Consumer assessment of current labor market conditions deteriorated further during the month. The share of consumers finding jobs plentiful fell from 13.5 percent to 13.1 percent, a five-year low. The share finding jobs hard to get increased from 30.2 percent to 32.0 percent. Despite the improvement in the index for the second consecutive month, the overall index is still quite low by historical standards.
New homes sales rose by 2.4 percent in July to a seasonally-adjusted annualized pace of 515,000, following a 2.1 percent decline in June. However, sales of new homes in May and June revised downward by 46,000 units.
During the first seven months of this year, new home sales were down 36.8 percent from the same period last year. The seasonally-adjusted number, however, may be a little misleading, in terms of the actually number of units sold. The total for July was the lowest month since December 1994. The seasonally adjusted number showed an increase because the drop from June was smaller than what we usually see between June and July.
Sales varied considerably by region: up by 38.9 percent in the Northeast and rising by 9.9 percent in the West, all on a seasonally-adjusted basis. Sales declined by 8.2 percent in the Midwest and dropped by 2.5 percent in the South.
The number of homes available for sale fell 5.2 percent, the 15th consecutive monthly decline and the biggest drop since November 1963. The steady decline in inventory, which has reached the lowest level since October 2004, reflected considerable cutbacks in single-family starts, which have posted 14 declines over the past 15 months.
The length of time that houses have spent on the market continued to break records. The median number of months rose to 8.5 in July from 8.3 in June and from 6.0 in July 2007. A huge drop in inventory and an increase in sales pushed down the months’ supply to 10.1 months from 10.7 months in June and 10.8 months in May. The median price for new homes was down 6.3 percent in July from a year ago.
The median home price does not necessarily give the true picture of home price trend, however, as it can be distorted by the mix of sales. The decline in the median home price may have been understated since sales increased the most in the West and Northeast regions, where the value of a typical house is more than the national average.
Two measures of home price released yesterday control for the mix of high- and low-price of home sales by tracking repeat sales of the same houses over time: the Standard and Poor’s Case-Shiller Home Price Index and the Office of Federal Housing Enterprise Oversight House Price Index.
The CSI was down 15.4 percent in the second quarter from a year ago—the largest year-over-year drop since the inception of the index in 1987. While the year-over-year declines in the index continued to set records, the report offered some good news in that the quarterly decline in the index moderated significantly from 24.4 percent (annualized rate) in the first quarter to 9.0 percent in the first quarter. However, since the data are not seasonally adjusted, some of the moderation in home price drops could be influenced by seasonal factors, since home prices generally rise during the spring/summer buying season.
The monthly indices available for a composite of 10 and 20 major cities have shown slower pace of house price declines since February, supporting the view that while home prices should continue to fall for some time, given the historically high months’ supply of homes, the largest drops in home prices may be behind us.
The OFHEO House Price Index fell 1.7 percent in the second quarter from a year ago. The HPI is based on data from both purchase and refinance transactions from Fannie Mae and Freddie Mac. The index excluding refinance transactions posted a sharper drop from a year ago of 4.8 percent. Both OFHEO indices continued to perform better than the CSI largely because the PFHEO indices include only conventional, conforming loans and include relatively few subprime loans as well as adjustable rate mortgage loans.
A separate report showed that The Conference Board's Consumer Confidence Index rose five points to 56.9 in August. The improvement was driven entirely by the expectations component, which gained 5.1 points to 52.8. The present conditions component fell 2.6 points to 63.2.
Consumer assessment of current labor market conditions deteriorated further during the month. The share of consumers finding jobs plentiful fell from 13.5 percent to 13.1 percent, a five-year low. The share finding jobs hard to get increased from 30.2 percent to 32.0 percent. Despite the improvement in the index for the second consecutive month, the overall index is still quite low by historical standards.
S&P Downgrades Units of Three Mortgage Insurers
Wall Street Journal (08/27/08) P. C3; Pollock, Lauren
Reflecting its concerns about the profitability of insured mortgages originated in 2008, Standard & Poor's Ratings Services has downgraded its credit ratings on the units of three mortgage insurers: Old Republic International Corp., PMI Group Inc. and Radian Group Inc. S&P's projected claims for mortgages originated the previous two years indicate that the volatility of mortgage insurers' operating results is much greater than the ratings firm assumed before the woes in the mortgage and housing markets took hold. This uncertainty suggests that an underwriting loss is possible. This past spring, S&P slashed all three companies' ratings, as well as that of MGIC Investment Corp.
Reflecting its concerns about the profitability of insured mortgages originated in 2008, Standard & Poor's Ratings Services has downgraded its credit ratings on the units of three mortgage insurers: Old Republic International Corp., PMI Group Inc. and Radian Group Inc. S&P's projected claims for mortgages originated the previous two years indicate that the volatility of mortgage insurers' operating results is much greater than the ratings firm assumed before the woes in the mortgage and housing markets took hold. This uncertainty suggests that an underwriting loss is possible. This past spring, S&P slashed all three companies' ratings, as well as that of MGIC Investment Corp.
Small Banks, Tight Credit
Washington Post (08/27/08) P. D1; Appelbaum, Binyamin; Cho, David
New data from the FDIC shows that the delinquency rate on construction and development loans topped 8.1 percent as of the end of June--the highest rate for any category of bank loans. The missed payments are forcing many banks to tighten lending standards, some to hoard money against possible losses and others to curtail lending to new customers altogether in an effort to conserve available funds for existing customers. Small banks are among those suffering most, as many flocked to construction and development lending during the boom because it was one of the few areas where they could compete with bigger banks by nurturing relationships with developers and shouldering risk. The profit margins of small banks that focused on such lending shrank below the margins for other small banks in the first three months of this year for the first time since the boom started, and many are now struggling with defaults on loans to home builders.
New data from the FDIC shows that the delinquency rate on construction and development loans topped 8.1 percent as of the end of June--the highest rate for any category of bank loans. The missed payments are forcing many banks to tighten lending standards, some to hoard money against possible losses and others to curtail lending to new customers altogether in an effort to conserve available funds for existing customers. Small banks are among those suffering most, as many flocked to construction and development lending during the boom because it was one of the few areas where they could compete with bigger banks by nurturing relationships with developers and shouldering risk. The profit margins of small banks that focused on such lending shrank below the margins for other small banks in the first three months of this year for the first time since the boom started, and many are now struggling with defaults on loans to home builders.
OTS Issues Home Equity Guidelines
American Banker (08/27/08) P. 10; Hopkins, Cheyenne
On Aug. 26, the Office of Thrift Supervision released guidelines for thrifts to follow when freezing or shrinking home equity lines of credit. Under the Truth-in-Lending Act, fraud or material misrepresentation, the inability of borrowers to comply with repayment terms or actions that have a negative impact on the property are all valid reasons for lenders to suspend home equity loans. Additionally, the guidance says home equity loans can be frozen or terminated if the property value drops under the appraised value, material changes in income prevent borrowers from making payments or material default occurs. Foresight Analytics LLC reports a 345-percent surge in home equity nonaccruals at the nation's 50 biggest thrifts during the second quarter.
On Aug. 26, the Office of Thrift Supervision released guidelines for thrifts to follow when freezing or shrinking home equity lines of credit. Under the Truth-in-Lending Act, fraud or material misrepresentation, the inability of borrowers to comply with repayment terms or actions that have a negative impact on the property are all valid reasons for lenders to suspend home equity loans. Additionally, the guidance says home equity loans can be frozen or terminated if the property value drops under the appraised value, material changes in income prevent borrowers from making payments or material default occurs. Foresight Analytics LLC reports a 345-percent surge in home equity nonaccruals at the nation's 50 biggest thrifts during the second quarter.
Key Rate May Rise, Fed Report Suggests
Washington Post (08/27/08) P. D2; Aversa, Jeannine
Federal Reserve policymakers decided to hold their key interest rate steady at 2 percent for their August meeting, although most did not consider it too low, according to documents that also suggest the next action will be to raise rates. Released on Aug. 26, the documents reveal that "members generally anticipated that the next policy move would likely be a tightening" and indicate that economic growth and inflation would determine the timetable for any hikes. The Fed is unlikely to raise rates to reign in inflation until next year, according to most economists. Fed Chairman Ben Bernanke has suggested that the central bank will hold rates at 2 percent for the September meeting and for the rest of this year.
Federal Reserve policymakers decided to hold their key interest rate steady at 2 percent for their August meeting, although most did not consider it too low, according to documents that also suggest the next action will be to raise rates. Released on Aug. 26, the documents reveal that "members generally anticipated that the next policy move would likely be a tightening" and indicate that economic growth and inflation would determine the timetable for any hikes. The Fed is unlikely to raise rates to reign in inflation until next year, according to most economists. Fed Chairman Ben Bernanke has suggested that the central bank will hold rates at 2 percent for the September meeting and for the rest of this year.
FHA Raises Its Premiums to Insure Repayment of Mortgages
Wall Street Journal (08/27/08) P. A11; Hagerty, James R.
Effective Oct. 1, upfront charges imposed on most FHA borrowers will climb to 1.75 percent of the mortgage amount from 1.5 percent prior to implementation of the agency's new risk-based pricing system that bases fees on credit scores, down-payment amounts and equity levels. The FHA is holding annual premiums steady, however, at 0.50 percent to 0.55 percent. With investors increasingly avoiding mortgages not backed by the FHA, Fannie Mae or Freddie Mac and the government-sponsored enterprises becoming more selective about which loans to buy or guarantee, Inside Mortgage Finance reports a jump in FHA-insured mortgages to 23 percent of all home loans last month from 1.8 percent two years ago; the publication predicts that the figure could hit 30 percent by the end of 2008. While the FHA reports $19 billion in reserves, rising defaults have generated concerns that the agency might need money from the government to cover losses.
Effective Oct. 1, upfront charges imposed on most FHA borrowers will climb to 1.75 percent of the mortgage amount from 1.5 percent prior to implementation of the agency's new risk-based pricing system that bases fees on credit scores, down-payment amounts and equity levels. The FHA is holding annual premiums steady, however, at 0.50 percent to 0.55 percent. With investors increasingly avoiding mortgages not backed by the FHA, Fannie Mae or Freddie Mac and the government-sponsored enterprises becoming more selective about which loans to buy or guarantee, Inside Mortgage Finance reports a jump in FHA-insured mortgages to 23 percent of all home loans last month from 1.8 percent two years ago; the publication predicts that the figure could hit 30 percent by the end of 2008. While the FHA reports $19 billion in reserves, rising defaults have generated concerns that the agency might need money from the government to cover losses.
Reports Suggest a Way Out for Fannie and Freddie Holders
Wall Street Journal (08/27/08) P. C3; Hagerty, James R.
New reports from analysts at Citigroup and Goldman Sachs Group suggest that purchasing mortgage securities from Fannie Mae and Freddie Mac would be one way for the government to prop up the mortgage finance giants without hurting shareholders. Goldman says another option is to reduce the minimum capital requirements of the companies, while Citigroup adds that credit-loss estimates indicate they would have enough capital to get through 2008. Meanwhile, Standard & Poor's Ratings Service lowered its ratings on the preferred stock of Fannie Mae and Freddie Mac to BBB-minus from A-minus. S&P says there is "increasing uncertainty" over whether government support "will extend to these securities."
New reports from analysts at Citigroup and Goldman Sachs Group suggest that purchasing mortgage securities from Fannie Mae and Freddie Mac would be one way for the government to prop up the mortgage finance giants without hurting shareholders. Goldman says another option is to reduce the minimum capital requirements of the companies, while Citigroup adds that credit-loss estimates indicate they would have enough capital to get through 2008. Meanwhile, Standard & Poor's Ratings Service lowered its ratings on the preferred stock of Fannie Mae and Freddie Mac to BBB-minus from A-minus. S&P says there is "increasing uncertainty" over whether government support "will extend to these securities."
Fannie, Freddie Mortgage Profit Reaches 10-Year High
Bloomberg (08/27/08); Shenn, Jody
Citigroup Inc. reports a yield of approximately 40 basis points on current-coupon mortgage bonds bought by Fannie Mae and Freddie Mac, surpassing the amount they pay to borrow by unloading benchmark bonds. Net interest income recorded by Fannie Mae surged to $2.1 billion in the second quarter from $1.7 billion in the first quarter, according to Credit Suisse Group, with investment profits rising to 100 basis points from 82 basis points. Meanwhile, Freddie Mac posted a 92-percent jump in net interest income to $1.5 billion, with investment profits increasing to 80 basis points from 48 basis points. According to Loomis Sayles & Co. Vice Chairman Dan Fuss, "They, at the increment, are very, very profitable. If they can continue to do anything close to business as usual, they are immensely profitable."
Citigroup Inc. reports a yield of approximately 40 basis points on current-coupon mortgage bonds bought by Fannie Mae and Freddie Mac, surpassing the amount they pay to borrow by unloading benchmark bonds. Net interest income recorded by Fannie Mae surged to $2.1 billion in the second quarter from $1.7 billion in the first quarter, according to Credit Suisse Group, with investment profits rising to 100 basis points from 82 basis points. Meanwhile, Freddie Mac posted a 92-percent jump in net interest income to $1.5 billion, with investment profits increasing to 80 basis points from 48 basis points. According to Loomis Sayles & Co. Vice Chairman Dan Fuss, "They, at the increment, are very, very profitable. If they can continue to do anything close to business as usual, they are immensely profitable."
Home Prices Still Falling, But the Pace Is Slowing
New York Times (08/27/08) P. C1; Grynbaum, Michael M.
The Commerce Department reports a 2.4-percent jump in new-home sales to an annual pace of 515,000 in July from the prior month, following a report from the National Association of Realtors indicating a 3.1-percent jump in existing-home sales during the same period. Year over year, however, new-home sales were down 35.3 percent, and the median new-home price slipped 6.3 percent to $230,700. The S&P/Case-Shiller home price index posted a 15.9-percent decline during the 12 months ended in June, and analysts believe additional decreases are necessary before the housing market can rebound. "The biggest declines, they're all behind us now," says Global Insight chief domestic economist Nigel Gault. "But that doesn't mean we're in any sense ready to move up. Or that we're ready for sales to accelerate. Or for prices to flatten out."
The Commerce Department reports a 2.4-percent jump in new-home sales to an annual pace of 515,000 in July from the prior month, following a report from the National Association of Realtors indicating a 3.1-percent jump in existing-home sales during the same period. Year over year, however, new-home sales were down 35.3 percent, and the median new-home price slipped 6.3 percent to $230,700. The S&P/Case-Shiller home price index posted a 15.9-percent decline during the 12 months ended in June, and analysts believe additional decreases are necessary before the housing market can rebound. "The biggest declines, they're all behind us now," says Global Insight chief domestic economist Nigel Gault. "But that doesn't mean we're in any sense ready to move up. Or that we're ready for sales to accelerate. Or for prices to flatten out."
'Technicals' Catching Up to Fundamentals
MBA (8/26/2008 ) Murray, Michael
The “technicals” in the commercial mortgage-backed securities market—and lack of liquidity—could be catching up to property fundamentals as the economy continues its slowdown.
Rick Williamson, principal of WLJ Partners, Coral Gables, Fla., said “technicals” in the commercial mortgage-backed securities market—spreads and pricing driven wider by CMBX synthetic derivatives that caused a disconnect—are beginning to catch up to property fundamentals.
Williamson, a former commercial real estate bank lender, said banks will need to “shrink” and not lend anymore on commercial real estate because of prior lax underwriting.
“A year and a half ago, it was just crazy,” Williamson said. “Money was free, and the deals that were getting done were just insane. At the bank, for the last two years, we were just sitting around twiddling our thumbs saying, 'this is crazy. We can't participate in these deals.' It was extremely hard but, I'll tell you, the folks that are still at the banks are sure glad they didn’t."
Michael Grupe, executive vice president of research and investor outreach at the National Association of Real Estate Investment Trusts, said economic events, including consumer spending and corporate investment, are true unknowns that can affect commercial real estate property fundamentals.
“There are clearly some structural problems in the economy,” Grupe said. “It is reasonable to expect that some of those problems—perhaps excessive levels for debt in the household sector that could constrain spending on the retail side going forward—those are challenges going forward. They are real. They cannot be ignored.”
"Retail is definitely hurting,” Williamson said. “They are already talking about a bust to the 'back to school' season, saying it will carry over to the bust in the Christmas season. I don't see how they avoid it. I think you are going to see alot more bankruptcies, a lot more store closings from January to February. They will be out there for one last gasp—the 'Hail Mary'—hoping that Christmas saves them. I don't think it is going to happen. Come January and February, it is going to be a real thud."
Some industry analysts view commercial real estate as a lagging indicator of the residential real estate market. Reports have Lehman Brothers, New York, trying to rid itself of $40 billion in commercial real estate assets.
The New York Times reported last week that Wall Street banks were trying to unload bridge equity and floating-rate loans made to hotels, office developers and retail strips. It said holders of nearly $100 billion of CMBS feared problems in the commercial property market could lead to more write-downs.
Commercial Real Estate Direct.com reported the previous week that CBRE Realty Finance wrote off $40 million in mezzanine debt used by Macklowe Properties to finance their acquisition of four office properties from the Blackstone purchase of Equity Office. Macklowe and their senior lenders had been trying to sell the buildings but “indicative bids came in at below expectations.”
Williamson said office properties in Orange County, Calif., are closing down as a result of the residential subprime crisis.
Matthew Mowell, analyst at Property & Portfolio Research, Boston, compared the economy in the Inland Empire—the Riverside and San Bernardino counties in Southern California—to Cleveland or Detroit.
“Most of the economic indicators—job growth and unemployment—paint quite a dire picture,” Mowell said. “A recovery here will require the housing market to stabilize, net migration to pick up to steadier levels and restored consumer confidence.”
Mowell forecasts “severe occupancy losses” for the next four quarters in office properties—not much change from the past year.
“The metro is seeing the weakest demand in over a decade, and although construction is slowing, it is still a force to be reckoned with," Mowell said. "The Inland Empire will rank fifth for occupancy losses over the next year—down by 330 basis points."
Grupe, however, said commercial real estate property fundamentals remain at a “decent balance” compared to prior cycles.
“It’s not like we started off with significant excess supply of space,” Grupe said. “I think we were pretty well balanced and, in that respect, should be able to handle any weakness in far better shape than we might have otherwise.”
"Multifamily seems to be holding up better, but that's also going to follow because, as we get further and deeper into a recession, household formation is going to fall and reverse itself—entry level workers moving back home with their parents or combining into one apartment,” Williamson said. “There is a huge shadow market of condos and empty houses out there competing for established multifamily properties. The multifamily market is going to be hurt as well."
The “technicals” in the commercial mortgage-backed securities market—and lack of liquidity—could be catching up to property fundamentals as the economy continues its slowdown.
Rick Williamson, principal of WLJ Partners, Coral Gables, Fla., said “technicals” in the commercial mortgage-backed securities market—spreads and pricing driven wider by CMBX synthetic derivatives that caused a disconnect—are beginning to catch up to property fundamentals.
Williamson, a former commercial real estate bank lender, said banks will need to “shrink” and not lend anymore on commercial real estate because of prior lax underwriting.
“A year and a half ago, it was just crazy,” Williamson said. “Money was free, and the deals that were getting done were just insane. At the bank, for the last two years, we were just sitting around twiddling our thumbs saying, 'this is crazy. We can't participate in these deals.' It was extremely hard but, I'll tell you, the folks that are still at the banks are sure glad they didn’t."
Michael Grupe, executive vice president of research and investor outreach at the National Association of Real Estate Investment Trusts, said economic events, including consumer spending and corporate investment, are true unknowns that can affect commercial real estate property fundamentals.
“There are clearly some structural problems in the economy,” Grupe said. “It is reasonable to expect that some of those problems—perhaps excessive levels for debt in the household sector that could constrain spending on the retail side going forward—those are challenges going forward. They are real. They cannot be ignored.”
"Retail is definitely hurting,” Williamson said. “They are already talking about a bust to the 'back to school' season, saying it will carry over to the bust in the Christmas season. I don't see how they avoid it. I think you are going to see alot more bankruptcies, a lot more store closings from January to February. They will be out there for one last gasp—the 'Hail Mary'—hoping that Christmas saves them. I don't think it is going to happen. Come January and February, it is going to be a real thud."
Some industry analysts view commercial real estate as a lagging indicator of the residential real estate market. Reports have Lehman Brothers, New York, trying to rid itself of $40 billion in commercial real estate assets.
The New York Times reported last week that Wall Street banks were trying to unload bridge equity and floating-rate loans made to hotels, office developers and retail strips. It said holders of nearly $100 billion of CMBS feared problems in the commercial property market could lead to more write-downs.
Commercial Real Estate Direct.com reported the previous week that CBRE Realty Finance wrote off $40 million in mezzanine debt used by Macklowe Properties to finance their acquisition of four office properties from the Blackstone purchase of Equity Office. Macklowe and their senior lenders had been trying to sell the buildings but “indicative bids came in at below expectations.”
Williamson said office properties in Orange County, Calif., are closing down as a result of the residential subprime crisis.
Matthew Mowell, analyst at Property & Portfolio Research, Boston, compared the economy in the Inland Empire—the Riverside and San Bernardino counties in Southern California—to Cleveland or Detroit.
“Most of the economic indicators—job growth and unemployment—paint quite a dire picture,” Mowell said. “A recovery here will require the housing market to stabilize, net migration to pick up to steadier levels and restored consumer confidence.”
Mowell forecasts “severe occupancy losses” for the next four quarters in office properties—not much change from the past year.
“The metro is seeing the weakest demand in over a decade, and although construction is slowing, it is still a force to be reckoned with," Mowell said. "The Inland Empire will rank fifth for occupancy losses over the next year—down by 330 basis points."
Grupe, however, said commercial real estate property fundamentals remain at a “decent balance” compared to prior cycles.
“It’s not like we started off with significant excess supply of space,” Grupe said. “I think we were pretty well balanced and, in that respect, should be able to handle any weakness in far better shape than we might have otherwise.”
"Multifamily seems to be holding up better, but that's also going to follow because, as we get further and deeper into a recession, household formation is going to fall and reverse itself—entry level workers moving back home with their parents or combining into one apartment,” Williamson said. “There is a huge shadow market of condos and empty houses out there competing for established multifamily properties. The multifamily market is going to be hurt as well."
IT Security Staffing Decreases Despite Growing Threat Landscape
MBA (8/26/2008 ) Palaparty, Vijay
More than 10 million “zombie” computers sent spam and malware during the second quarter alone, according to Panda Security, Glendale, Calif. Regardless of increasing threats, Computer Economics, Irvine, Calif., says the number of IT security professionals in organizations has steadily declined.
The Panda Security report defined “zombie” computers as systems affected by bots, controlled remotely by cyber criminals. It revealed that 74 percent of all email received between April and June was spam.
“This is not just annoying for users who have to delete all of this mail, but in corporate environments, it has important repercussions on productivity and resource consumption,” said Luis Corrons, technical director at PandaLabs.
Last year, Nucleus Research Inc., Wellesley, Mass., said the spam epidemic costs U.S. businesses $712 per employee in lost worker productivity.
The report said Turkey had the most zombie computers, comprising 11 percent of the global total. Brazil ranked second at 8.4 percent, followed by Russia at 7.4 percent. The United States accounted for 4.3 percent, ranking ninth, dropping from 5 percent during the first quarter.
“The percentage of IT employees dedicated to security in any given IT organization is relatively small—only 1.5 percent of the typical IT staff, and has been declining,” said John Longwell, director of research at Computer Economics.
Security as a percentage of IT staff was 2 percent in 2006. The report added that the decline was not a result of staff growth in other areas.
Jay Meadows, CEO of Rapid Reporting, Fort Worth, Texas, said IT security needs in the mortgage banking industry have evolved over the past 10 years. “Many companies are deploying systems that already have a lot of security measures built into them,” he said. “But technology is created in an environment for possible intrusion. There has been a tremendous reduction in mortgage staff nationwide, and while the reduction in security has been significantly smaller, security measures can ultimately be the demise of a company and should not be taken lightly.
“Security begins at the top,” Longwell said. “A commitment from executive management is required to create a culture of security that ensures procedures are enforced, audits are taken seriously and investments are made in personnel, training, services and technology. That commitment undoubtedly has more bearing on security than staffing levels.”
Meadows urged lenders to be vigilant not only about their own security measures, but also of their vendors. “If a lender is doing business with a vendor that is not as secure as it is, then by association the lender is increasing its fraud risk," he said. "Ultimately the highest burden of risk falls on the lender and not the vendor that may cause damage. As cost-cutting measures prevail, lenders should keep in mind that if a vendor’s price seems low, they may secretly be skimping on security, which is expensive to uphold.”
More than 10 million “zombie” computers sent spam and malware during the second quarter alone, according to Panda Security, Glendale, Calif. Regardless of increasing threats, Computer Economics, Irvine, Calif., says the number of IT security professionals in organizations has steadily declined.
The Panda Security report defined “zombie” computers as systems affected by bots, controlled remotely by cyber criminals. It revealed that 74 percent of all email received between April and June was spam.
“This is not just annoying for users who have to delete all of this mail, but in corporate environments, it has important repercussions on productivity and resource consumption,” said Luis Corrons, technical director at PandaLabs.
Last year, Nucleus Research Inc., Wellesley, Mass., said the spam epidemic costs U.S. businesses $712 per employee in lost worker productivity.
The report said Turkey had the most zombie computers, comprising 11 percent of the global total. Brazil ranked second at 8.4 percent, followed by Russia at 7.4 percent. The United States accounted for 4.3 percent, ranking ninth, dropping from 5 percent during the first quarter.
“The percentage of IT employees dedicated to security in any given IT organization is relatively small—only 1.5 percent of the typical IT staff, and has been declining,” said John Longwell, director of research at Computer Economics.
Security as a percentage of IT staff was 2 percent in 2006. The report added that the decline was not a result of staff growth in other areas.
Jay Meadows, CEO of Rapid Reporting, Fort Worth, Texas, said IT security needs in the mortgage banking industry have evolved over the past 10 years. “Many companies are deploying systems that already have a lot of security measures built into them,” he said. “But technology is created in an environment for possible intrusion. There has been a tremendous reduction in mortgage staff nationwide, and while the reduction in security has been significantly smaller, security measures can ultimately be the demise of a company and should not be taken lightly.
“Security begins at the top,” Longwell said. “A commitment from executive management is required to create a culture of security that ensures procedures are enforced, audits are taken seriously and investments are made in personnel, training, services and technology. That commitment undoubtedly has more bearing on security than staffing levels.”
Meadows urged lenders to be vigilant not only about their own security measures, but also of their vendors. “If a lender is doing business with a vendor that is not as secure as it is, then by association the lender is increasing its fraud risk," he said. "Ultimately the highest burden of risk falls on the lender and not the vendor that may cause damage. As cost-cutting measures prevail, lenders should keep in mind that if a vendor’s price seems low, they may secretly be skimping on security, which is expensive to uphold.”
Existing Home Sales Rebound
MBA (8/26/2008 ) Velz, Orawin
Total existing home sales rose by 3.1 percent in July to a seasonally-adjusted annualized rate of 5.0 million, rebounding from a record low in June. June’s sales pace had been the slowest of total existing home sales since the inception of the series in January 1999.
On an unadjusted basis, sales fell between June and July as they normally do, but since the decline was smaller than those in recent years, the seasonally adjusted numbers showed an increase. Since November 2007, total existing home sales have been in a narrow range of 4.8 million units to 5.1 million units.
Sales continued to decline significantly from the same period last year, however. Sales of single-family homes during the first seven months of this year were down 16.6 percent from those during the same period last year. The year-to-date decline has been worse for condo sales, with sales 23.6 percent lower than those last year.
Existing home sales increased in three regions, led by a 9.7 percent jump in the West, the fifth consecutive monthly increase. Sales also rose in the Northeast and the Midwest by 5.9 percent and 0.9 percent, respectively. The South posted a slight decline of 0.5 percent.
Foreclosure or distressed sales, which accounted for as much as a third to 40 percent of the national market last month, according to the National Association of Realtors, helped support sales in the West over the past several months. 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 7.1 percent in July from a year ago, the decline in the West was 22.2 percent—the largest on the record. Since February, the region has posted double-digit year-over-year home price declines.
Bargain prices have helped lure buyers back into the market, however. While the year-over-year price drop has accelerated since February, the year-over-year drop in sales has moderated. July marked the first month since October 2005 that the West has posted a year-over-year increase in sales. All other regions continued to show double-digit declines in home sales from a year ago.
Other data corroborated the strong activities induced by rising distressed sales in the West. For example, according to a report by DataQuick released on August 18, home sales in Southern California increased 16.7 percent in July from June and 13.8 percent from last July. July’s sales were up from a year ago level for the first since September 2005. Foreclosure sales accounted for 43.6 percent of Southern California existing home sales in July, helping to push down the median home price 31.1 percent lower than a year ago level.
For the nation, the number of total homes available for sale was up 3.9 percent in July from June, solely a result of a 29.2 percent surge in the number of condos for sale. (The data are not seasonally-adjusted.) A stronger sales pace and a flat inventory pushed down the months’ supply of existing single-family homes to 10.6 months in July from 11.1 months in June. The huge jump in the number of condos for sale pushed up the months’ supply to 15.1 months, despite the increase in sales pace.
Total existing home sales rose by 3.1 percent in July to a seasonally-adjusted annualized rate of 5.0 million, rebounding from a record low in June. June’s sales pace had been the slowest of total existing home sales since the inception of the series in January 1999.
On an unadjusted basis, sales fell between June and July as they normally do, but since the decline was smaller than those in recent years, the seasonally adjusted numbers showed an increase. Since November 2007, total existing home sales have been in a narrow range of 4.8 million units to 5.1 million units.
Sales continued to decline significantly from the same period last year, however. Sales of single-family homes during the first seven months of this year were down 16.6 percent from those during the same period last year. The year-to-date decline has been worse for condo sales, with sales 23.6 percent lower than those last year.
Existing home sales increased in three regions, led by a 9.7 percent jump in the West, the fifth consecutive monthly increase. Sales also rose in the Northeast and the Midwest by 5.9 percent and 0.9 percent, respectively. The South posted a slight decline of 0.5 percent.
Foreclosure or distressed sales, which accounted for as much as a third to 40 percent of the national market last month, according to the National Association of Realtors, helped support sales in the West over the past several months. 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 7.1 percent in July from a year ago, the decline in the West was 22.2 percent—the largest on the record. Since February, the region has posted double-digit year-over-year home price declines.
Bargain prices have helped lure buyers back into the market, however. While the year-over-year price drop has accelerated since February, the year-over-year drop in sales has moderated. July marked the first month since October 2005 that the West has posted a year-over-year increase in sales. All other regions continued to show double-digit declines in home sales from a year ago.
Other data corroborated the strong activities induced by rising distressed sales in the West. For example, according to a report by DataQuick released on August 18, home sales in Southern California increased 16.7 percent in July from June and 13.8 percent from last July. July’s sales were up from a year ago level for the first since September 2005. Foreclosure sales accounted for 43.6 percent of Southern California existing home sales in July, helping to push down the median home price 31.1 percent lower than a year ago level.
For the nation, the number of total homes available for sale was up 3.9 percent in July from June, solely a result of a 29.2 percent surge in the number of condos for sale. (The data are not seasonally-adjusted.) A stronger sales pace and a flat inventory pushed down the months’ supply of existing single-family homes to 10.6 months in July from 11.1 months in June. The huge jump in the number of condos for sale pushed up the months’ supply to 15.1 months, despite the increase in sales pace.
CRE Collapse Deeper
National Mortgage News (08/25/08) Vol. 32, No. 46, P. 1; Harmon, Jennifer
The Mortgage Bankers Association reports that commercial and multifamily loan originations fell in this year's April-through-June period to a level 63 percent below that of 2007's second quarter. MBA researchers cite declines in nearly every property type, including hotels, down 87 percent; healthcare facilities, 66 percent; offices, 65 percent; retail stores, 63 percent; industrial, 57 percent; and, finally, a 42-percent decline for multifamily housing. Looking at investor types, a whopping 98-percent year-over-year decline in mortgage originations was recorded for conduits for commercial mortgage-backed securities; while the second-quarter volume for government-sponsored enterprises was essentially flat compared to the first three months of this year. Looking at the various geographic regions, the Midwest underperformed all regions with an index value of 73.1; the South was listed as the most optimistic, with an index score of 84.6, and was the only region not to post a decline in rental rates; while the West recorded the biggest decline in positive attitudes with regard to the state of the office and industrial property markets.
The Mortgage Bankers Association reports that commercial and multifamily loan originations fell in this year's April-through-June period to a level 63 percent below that of 2007's second quarter. MBA researchers cite declines in nearly every property type, including hotels, down 87 percent; healthcare facilities, 66 percent; offices, 65 percent; retail stores, 63 percent; industrial, 57 percent; and, finally, a 42-percent decline for multifamily housing. Looking at investor types, a whopping 98-percent year-over-year decline in mortgage originations was recorded for conduits for commercial mortgage-backed securities; while the second-quarter volume for government-sponsored enterprises was essentially flat compared to the first three months of this year. Looking at the various geographic regions, the Midwest underperformed all regions with an index value of 73.1; the South was listed as the most optimistic, with an index score of 84.6, and was the only region not to post a decline in rental rates; while the West recorded the biggest decline in positive attitudes with regard to the state of the office and industrial property markets.
Responding to a Housing Crisis
New York Times (08/26/08) P. C1; Bajaj, Vikas
Many cities across the country are taking action to prevent an increasing number of foreclosed homes from blighting neighborhoods; and they hope their efforts will get a boost from the federal housing bill, which earmarked $4 billion in grant money for them to purchase distressed properties. Cities are taking different approaches, with Boston snapping up homes in the Dorchester area and selling them to developers for the purpose of renovating and reselling them; Cleveland, meanwhile, is seeking permission to raze properties and replace them with small parks or side yards for other residents as a way to revitalize affected communities. However, there are concerns about local governments purchasing foreclosed properties, with Cato Institute senior fellow Daniel Mitchell insisting that it hinders the efficiency of the housing market by adding politics and bureaucracy.
Many cities across the country are taking action to prevent an increasing number of foreclosed homes from blighting neighborhoods; and they hope their efforts will get a boost from the federal housing bill, which earmarked $4 billion in grant money for them to purchase distressed properties. Cities are taking different approaches, with Boston snapping up homes in the Dorchester area and selling them to developers for the purpose of renovating and reselling them; Cleveland, meanwhile, is seeking permission to raze properties and replace them with small parks or side yards for other residents as a way to revitalize affected communities. However, there are concerns about local governments purchasing foreclosed properties, with Cato Institute senior fellow Daniel Mitchell insisting that it hinders the efficiency of the housing market by adding politics and bureaucracy.
After Merrill's Sale of Bad Debt, Few Have Followed
Washington Post (08/26/08) P. D1; Landy, Heather
In July, Merrill Lynch sold off a massive portfolio of securities badly damaged by the subprime mortgage meltdown--a move that was applauded at the time by shareholders and regulators, many of whom had been pressing banks and investment firms to rid themselves of such problem assets. However, widespread dumping of the securities never came to fruition because purging the collateralized debt obligations would have required pricing them at a fraction of their face value. The dilemma is one that Wall Street firms face as they look to repair balance sheets devastated by the credit crunch. Treasury Secretary Henry Paulson Jr. continues to push Wall Street executives to clean up the mess quickly and raise more capital.
In July, Merrill Lynch sold off a massive portfolio of securities badly damaged by the subprime mortgage meltdown--a move that was applauded at the time by shareholders and regulators, many of whom had been pressing banks and investment firms to rid themselves of such problem assets. However, widespread dumping of the securities never came to fruition because purging the collateralized debt obligations would have required pricing them at a fraction of their face value. The dilemma is one that Wall Street firms face as they look to repair balance sheets devastated by the credit crunch. Treasury Secretary Henry Paulson Jr. continues to push Wall Street executives to clean up the mess quickly and raise more capital.
Mortgage Fraud Soars in First Quarter, Report Says
Los Angeles Times (08/26/08)
The Mortgage Asset Research Institute reports a 42-percent year-over-year increase in mortgage fraud nationwide during the first quarter, with almost 25 percent of such cases occurring in Florida. The report ranks California second for the most mortgage fraud; while Illinois, Maryland and Michigan tied for third. A majority of mortgage fraud cases involved improperly reported income, employment, debt and asset information; and MARI's Merle Sharick insists that such practices will not be curtailed by stricter credit standards alone. Over the past 10 years, the Mortgage Bankers Association reports $1 billion in losses associated with mortgage fraud.
The Mortgage Asset Research Institute reports a 42-percent year-over-year increase in mortgage fraud nationwide during the first quarter, with almost 25 percent of such cases occurring in Florida. The report ranks California second for the most mortgage fraud; while Illinois, Maryland and Michigan tied for third. A majority of mortgage fraud cases involved improperly reported income, employment, debt and asset information; and MARI's Merle Sharick insists that such practices will not be curtailed by stricter credit standards alone. Over the past 10 years, the Mortgage Bankers Association reports $1 billion in losses associated with mortgage fraud.
JPMorgan's Mortgage Losses Rose in Quarter
New York Times (08/26/08) P. C2
A 50-percent drop in the value of its investments in Fannie Mae and Freddie Mac preferred shares to $600 million in the third quarter could prompt JPMorgan Chase & Co. to record a decline in earnings, having already announced another $1.5 billion in subprime mortgage-related write downs. Observers anticipate similar announcements from other large and regional banks, including Wells Fargo and Sovereign Bancorp. While it calls into question banks' risk management strategies, Stanford Group financial services analyst Jaret Seiberg says this will not be "a crippling blow" for most banks.
A 50-percent drop in the value of its investments in Fannie Mae and Freddie Mac preferred shares to $600 million in the third quarter could prompt JPMorgan Chase & Co. to record a decline in earnings, having already announced another $1.5 billion in subprime mortgage-related write downs. Observers anticipate similar announcements from other large and regional banks, including Wells Fargo and Sovereign Bancorp. While it calls into question banks' risk management strategies, Stanford Group financial services analyst Jaret Seiberg says this will not be "a crippling blow" for most banks.
Sale of Debt Steadies Freddie
Chicago Tribune (08/26/08)
Freddie Mac confirms that it has sold $1 billion of three-month notes at a yield of 2.58 percent and $1 billion of six-month debt at a yield of 2.858 percent, at about 90 basis points and 92 basis points more than similar-maturity U.S. Treasuries, respectively. Although Freddie Mac paid higher yields relative to benchmarks, increased demand for the short-term debt compared to last week's sale shows that the mortgage-finance giant can still attract investors. Shares of Freddie Mac rose 17 percent in Aug. 25 trading on news of the sale, and shares of Fannie Mae increased 3.8 percent.
Freddie Mac confirms that it has sold $1 billion of three-month notes at a yield of 2.58 percent and $1 billion of six-month debt at a yield of 2.858 percent, at about 90 basis points and 92 basis points more than similar-maturity U.S. Treasuries, respectively. Although Freddie Mac paid higher yields relative to benchmarks, increased demand for the short-term debt compared to last week's sale shows that the mortgage-finance giant can still attract investors. Shares of Freddie Mac rose 17 percent in Aug. 25 trading on news of the sale, and shares of Fannie Mae increased 3.8 percent.
Sales of Existing Homes Rise in July; Inventory at Record High
Washington Post (08/26/08) P. D2; Zibel, Alan
According to the National Association of Realtors, existing-home sales bumped up 3.1 percent in July to an annual rate of 5 million from 4.85 million the prior month. Year over year, resales were down 13 percent; and the median home price fell 7.1 percent to $212,000. Meanwhile, inventory of existing single-family dwellings and condominiums surged to a 40-year high of 4.67 million, or an 11.2-month supply. NAR chief economist Lawrence Yun said foreclosures and distressed property sales account for 33 percent to 40 percent of current sales activity.
According to the National Association of Realtors, existing-home sales bumped up 3.1 percent in July to an annual rate of 5 million from 4.85 million the prior month. Year over year, resales were down 13 percent; and the median home price fell 7.1 percent to $212,000. Meanwhile, inventory of existing single-family dwellings and condominiums surged to a 40-year high of 4.67 million, or an 11.2-month supply. NAR chief economist Lawrence Yun said foreclosures and distressed property sales account for 33 percent to 40 percent of current sales activity.
Monday, August 25, 2008
MacManus: Current Cycle Unlike Any Other
MBA (8/25/2008 ) Murray, Michael
Thomas MacManus, CEO and chairman of Cushman & Wakefield Sonnenblick Goldman, New York, discusses the current real estate cycle and his outlook in the second of a two-part interview with MBA NewsLink.
MBA NEWSLINK: This is a intense cycle, and analysts are now saying the residential market will not return until 2010 or possibly 2011 or 2012 after hitting bottom in 2009. What are your thoughts for this on commercial real estate?
THOMAS MACMANUS: It is really a function of what happens in the rest of the economy. I think it’s too early to tell. What will really have the most impact on the commercial sector will be the overall economy—whether it’s job creation or job losses.
We want confidence to come back to the extent that we just have a normal flow of capital. Never mind the fundamental side. I would expect the mid-to-latter part of next year we will start to see a notable improvement in the flow of capital. That could mean that there has been an adjustment of risk-adjusted pricing, that buyers and sellers, lenders and investors have recognized where they want to be on the price point and now they are doing business at a different price point so there’s flow, but it’s done based on different fundamentals—an assessment of risk, vacancy and other data.
The best thing that can happen to us is in the confidence level where capital flow is decisive—even if the decision is in paying less based on cost of capital or not paying as much because of vacancy [movement]. At least that’s data which results in decisions. Right now, there is a lack of confidence and a lack of data points because of the insufficient transactions necessary to reflect the lines on these data points.
NEWSLINK: During the savings and loans crisis, the commercial real estate market’s fundamentals eventually led to poor fundamentals in residential real estate. Do you see it as reversed this time around—that residential is going to cause poor property fundamentals in commercial real estate?
MACMANUS: Real estate is local in many respects. As the economy goes, you will see appropriate adjustments in the commercial sector. That will be the lagging indicator or consequence from an economic downturn if and when that proves to be a sustained fact. Right now, we don’t know that.
NEWSLINK: Based on past cycles, how do you see the CMBS market moving out of this cycle, particularly if the economy and property fundamentals weaken?
MACMANUS: It is a little different cycle. There was an unusual liquidity crunch during the Russian ruble crisis back in 1998, and that was more of a capital markets event—not a fundamental real estate problem.
In the late 1980s and early 1990s, we went through that last real estate recession. That was very much a function of loose money and loose underwriting, excessive capital and excessive supply of real estate. There was a lot of spec lending and spec development going on. We do not have that level of speculative development except—granted—there was the hype in the condo for-sale market, but it was not necessarily elsewhere in the commercial sector.
This doesn’t look exactly like anything we have seen in the past, so it is difficult to project what the outcome is going to be. If there is, in fact, a sustained downturn—and I’m not saying there will be, but if there is—the challenge to the capital structures that have been put in place are going to be very interesting because the solutions to the workouts from 20 years ago were different. Those capital structures were not as complicated as the capital structures are today.
The good news is that complications might be great in good times, and people are comfortable with that. But, if you’re trying to reconstruct the capital structure through a workout, that could prove quite challenging.
NEWSLINK: When capital flows do return, how do you see the market? Would it be back to something more in line with 2002?
MACMANUS: I would see more simplicity, transparency in structures. Again, it could be creative, but they have to be sufficiently transparent even if they are creative structures. That will be the first step that we will see. You might even see CMBS come back and look a little bit more like a true investment-grade loan on real estate with not so much reliance on the mezzanine and b-note.
It might have a very high quality, low leveraged securitized loan, and the b-note, or b-piece, is taken by someone that truly owns the risk and may not be distributed as far through the capital sources distribution network as it has been lately.
Thomas MacManus, CEO and chairman of Cushman & Wakefield Sonnenblick Goldman, New York, discusses the current real estate cycle and his outlook in the second of a two-part interview with MBA NewsLink.
MBA NEWSLINK: This is a intense cycle, and analysts are now saying the residential market will not return until 2010 or possibly 2011 or 2012 after hitting bottom in 2009. What are your thoughts for this on commercial real estate?
THOMAS MACMANUS: It is really a function of what happens in the rest of the economy. I think it’s too early to tell. What will really have the most impact on the commercial sector will be the overall economy—whether it’s job creation or job losses.
We want confidence to come back to the extent that we just have a normal flow of capital. Never mind the fundamental side. I would expect the mid-to-latter part of next year we will start to see a notable improvement in the flow of capital. That could mean that there has been an adjustment of risk-adjusted pricing, that buyers and sellers, lenders and investors have recognized where they want to be on the price point and now they are doing business at a different price point so there’s flow, but it’s done based on different fundamentals—an assessment of risk, vacancy and other data.
The best thing that can happen to us is in the confidence level where capital flow is decisive—even if the decision is in paying less based on cost of capital or not paying as much because of vacancy [movement]. At least that’s data which results in decisions. Right now, there is a lack of confidence and a lack of data points because of the insufficient transactions necessary to reflect the lines on these data points.
NEWSLINK: During the savings and loans crisis, the commercial real estate market’s fundamentals eventually led to poor fundamentals in residential real estate. Do you see it as reversed this time around—that residential is going to cause poor property fundamentals in commercial real estate?
MACMANUS: Real estate is local in many respects. As the economy goes, you will see appropriate adjustments in the commercial sector. That will be the lagging indicator or consequence from an economic downturn if and when that proves to be a sustained fact. Right now, we don’t know that.
NEWSLINK: Based on past cycles, how do you see the CMBS market moving out of this cycle, particularly if the economy and property fundamentals weaken?
MACMANUS: It is a little different cycle. There was an unusual liquidity crunch during the Russian ruble crisis back in 1998, and that was more of a capital markets event—not a fundamental real estate problem.
In the late 1980s and early 1990s, we went through that last real estate recession. That was very much a function of loose money and loose underwriting, excessive capital and excessive supply of real estate. There was a lot of spec lending and spec development going on. We do not have that level of speculative development except—granted—there was the hype in the condo for-sale market, but it was not necessarily elsewhere in the commercial sector.
This doesn’t look exactly like anything we have seen in the past, so it is difficult to project what the outcome is going to be. If there is, in fact, a sustained downturn—and I’m not saying there will be, but if there is—the challenge to the capital structures that have been put in place are going to be very interesting because the solutions to the workouts from 20 years ago were different. Those capital structures were not as complicated as the capital structures are today.
The good news is that complications might be great in good times, and people are comfortable with that. But, if you’re trying to reconstruct the capital structure through a workout, that could prove quite challenging.
NEWSLINK: When capital flows do return, how do you see the market? Would it be back to something more in line with 2002?
MACMANUS: I would see more simplicity, transparency in structures. Again, it could be creative, but they have to be sufficiently transparent even if they are creative structures. That will be the first step that we will see. You might even see CMBS come back and look a little bit more like a true investment-grade loan on real estate with not so much reliance on the mezzanine and b-note.
It might have a very high quality, low leveraged securitized loan, and the b-note, or b-piece, is taken by someone that truly owns the risk and may not be distributed as far through the capital sources distribution network as it has been lately.
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