Archive for May, 2009
The City of Cleveland, Ohio, went after 21 large financial institutions with legal action when it filed a lawsuit alleging their subprime mortgage lending activities constituted organized crime against the city.
The case was tossed out Friday.
The suit aimed to recover foreclosure-related damages to the city's property tax revenues, homes involved and neighboring properties, according to a report filed by Andrew Longstreth at American Lawyer .
Cleveland federal district court judge Sara Lioi dismissed the case on the grounds that Ohio state law preempted the city's allegations, which could not substantially demonstrate the banks' responsibility in causing the damages to the city's neighborhoods and tax revenues.
An attorney representing several of the banks involved in the case told HousingWire the court ruling shows that banks are not responsible for all the social and economic problems of Cleveland, based on the "public nuisance" premise of the prosecution.
But that won't stop the city, according to a statement given by Robert Triozzi, Cleveland's law director: "Our lawsuit has been about holding those responsible for the damages caused to our neighborhoods accountable for their actions," he wrote, according to American Lawyer. "That the court chose to absolve these firms' conduct by dismissing our claims is a setback, but just a temporary setback."
"As we have always stated, we are in this for the long haul," Triozzi added. "We will continue this fight to the Sixth Circuit Court of Appeals where we believe our legal cause will be vindicated. The City of Cleveland deserves its day in court and we will pursue and defend our rights for as long as it takes."
The city filed suit against a number of banks including JPMorgan Securities, Citigroup, Countrywide, Credit Suisse First Boston, Goldman Sachs, Deutsche Bank Securities, Wells Fargo, Greenwich Capital Markets, GMAC-RFC, HSBC Securities, Lehman Brothers Holdings, Merrill Lynch, Morgan Stanley, Washington Mutual, Wells Fargo and Bank of America.
Write to Diana Golobay.
Defaults on commercial real estate loans are rising according to Fitch Ratings, at least in the case where such loans are linked to commercial mortgage-backed securities (CMBS).
What's more, the defaults are concentrated to certain states in America, highlighting a trend of geographically related performance.
Michigan is seeing the highest proportion of loans currently in default for any state, with 6.89% of all loans at least 60 days delinquent or in foreclosure, according to Fitch. 100 commercial loans in the state fit into this category at a total $501m.
The average rate of default among the hardest hit states increased 25bps to 1.78%, according to the rating agency's monthly CMBS loan delinquency index.
"Emerging trends suggest that collateral located in states facing the bleakest economic conditions are seeing systemic declines in occupancy and net operating income, which have pushed property valuations lower and loan default rates higher," says Fitch's head of US CMBS Susan Merrick. "Maturity defaults represent a diminishing proportion of the index at 8.3%, while performance defaults continue to rise."
Rates of defaults remain comparatively high in Tennessee (6.57%), Ohio (4.34%), Indiana (4%) and Rhode Island (3.76%).
While the loans secured by properties located in the worst performing states account for less than 6% of the Fitch-rated universe by balance, they make up nearly one-fourth of all real estate owned (REO) loans tracked in the index – an indication that special servicers are finding limited opportunities to work out or to quickly dispose of assets in these locations.
Fitch's delinquency index includes 1,432 delinquent loans totaling $8.5bn. The credit rating agency tracks the performance of a total of 43,000 commercial loans, totaling $479bn.
The performance of CMBS usually lags behind the performance of residential real estate. Fitch's index suggests CMBS might continue to decline for some time, despite signs the residential market may be seeing a bottom.
For in-depth coverage of commercial real estate, see the July issue of HousingWire magazine.
Write to Jacob Gaffney.
Mortgage lending rose at 12 of the 18 largest US residential mortgage lenders, according to a report released Friday by the US Treasury Department. The median change at these banks was an 11% increase from February.
"First mortgage originations rose from February to March as low interest rates sustained growth in mortgage refinancing and home purchases," Treasury officials said in a media statement.
New lending among the top 21 banks that received funds through the Capital Purchase Program (CPP) rose 27% — about $63bn — in all loan categories from February to March. Home purchase mortgages rose a median 38% while mortgages originated for refinance rose a median 6% at all firms in March.
Treasury attributed this gain to two factors: the three additional business days in March for a total 22 days over February's 19 days, and a normal seasonal pattern of rising loan volume at quarter-end.
Wells Fargo (WFC: 29.60 +1.89%) in March posted $31.95bn in refinance mortgage origination and $8.25bn in purchase mortgage origination. Bank of America (BAC: 7.29 -0.14%) posted $24.68bn in refinance and $8.97bn in purchase mortgage origination. JP Morgan Chase (JPM: 37.21 -0.75%) originated $12.09bn in refi and $3.58bn in purchase origination. Citigroup (C: 30.87 +1.61%) posted $1.98bn in refi and $405m in purchase origination.
Despite the strong residential mortgage originations, commercial mortgage activity continued to lag in March.
"In commercial real estate (CRE), new loan demand remains low due to the lack of new construction activity," Treasury officials said in a media statement. "Real estate developers are reluctant to begin new projects or purchase existing projects under current poor economic conditions, which include a rising supply of office space, as firms downsize and vacancies rise."
The monthly report studies the 21 top aid recipients through the CPP vehicle of the Troubled Asset Relief Program, together accounting for $4.4trn in outstanding loans as of year-end '08 — more than half the outstanding loans in all depository institutions. Treasury reported the outstanding loan balances among these firms slipped 1% in March as borrowers paid down debt.
Write to Diana Golobay.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Goldman Sachs (GS: 111.77 +2.96%) upgraded Bank of America (BAC: 7.29 -0.14%) to buy from neutral, sending BofA's stock prices up more than 11% to trade at $11.92 as this story goes to press.
"Our optimism is based on another solid mortgage and capital markets quarter, given observable activity levels since March," Goldman said, according to a Market Watch bulletin.
Goldman added BofA to its conviction buy list and estimated it may earn as much as $0.25 per share in Q209. It raised the price target from $7 to $15, estimating BofA's common share count will rise from 6.4bn to 9bn after a new stock issue to be sold at market price in upcoming weeks.
"Historically banks sell 5%-15% of total trading volume each day in these deals," Goldman said, according to Market Watch. "We estimate Bank of America has been at the high end in a bid to get the deal done sooner rather than later in order to remove uncertainty. If this is the case, given large trading volumes in Bank of America's stock, we estimate that $5bn of capital may already have been raised and that it may only take six more trading days to get to the bank's approximate goal of $8.5bn."
Write to Diana Golobay.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Housing sales may hover near the bottom, but market recovery remains a long way off, says economist and author David Lereah in a media statement today that illustrates a surprisingly more conservative market view than he is known for.
"The three major housing measures — existing home sales, new home sales and housing starts — are hovering above their cyclical lows posted in January of this year," he says. "And home values are currently falling at a slower pace than the pace registered in January."
"It is possible that the worst may be behind us; but it is another thing to say that the housing markets are on the road to recovery," he adds.
With nearly 22% of all US homeowners underwater in Q109, owing more on their homes than the current market value, Lereah says the housing market has a long way to go as prices continue to adjust.
The housing market is saturated with surplus housing inventory — and with a shadow inventory of homeowners who decided to wait to put their homes on the market until some recovery appears — that continues to place downward pressure on sales. Foreclosure sales also pressure home prices, as so-called "distressed" sales typically bring around 20% less than non-foreclosures.
"Only when home values stabilize, will we have a true recovery in the housing markets," Lereah says.
His comments today suggest a cautious approach to the market's recovery — a reversal from his history of supporting investment bubbles at their peaks.
A former chief economist with the National Association of Realtors (NAR), Lereah currently serves as president of Washington, DC-based real estate advisory firm Reecon Advisors. He joined the firm in 2008, bringing a bibliography of real estate and investment titles. In 2000 just as the dot-com bubble prepared to collapse, Lereah penned The Rules for Growing Rich: Making Money in the New Information Economy.
Lereah went on to publish multiple titles on profiting from the real estate boom. In 2005 he wrote Are You Missing the Real Estate Boom?: Why Home Values and other Real Estate Investments Will Climb Through the End of the Decade–And How to Profit From Them. The book faced a bit of a rework before reappearing in 2006 as Why the Real Estate Boom Will Not Bust–And How You Can Profit From It. Before leaving his post at NAR, Lereah penned All Real Estate is Local: What You Need to Know to Profit in Real Estate.
Write to Diana Golobay.
Mortgage Spirit's Gold Member Program, a think tank focused on rebuilding the mortgage industry, just added credit reporting service, Advantage Credit, to the ranks of its independent service professionals already involved in the forum. These professionals — often like-minded in corporate values — collaborate in order to provide products that increase efficiency and reduce operating costs within the mortgage banking industry. "We take great pride in providing our customers with advanced credit technologies, and inclusion into the Gold Member Services Program seems very fitting for our overall goal of advancing the mortgage industry," says Don Unger, president of Advantage Credit. Unger says through the firm's membership with the program, it's able to form strategic partnerships with companies to advocate positive change within the industry. As a member, Advantage Credit will now receive a company overview on Mortgage Spirit's Web site, recognition in industry-related press releases and monthly and regular Gold Member Services planning sessions. Write to Kelly Curran.
Giant Home Improvement retailer Lowe's (LOW: 26.91 -0.15%) posted a larger than expected first-quarter profit today, signaling an increased demand for home improvement projects over the quarter.
Lowe's says spring gardening sales and the demand for minor outdoor projects boosted its earnings.
Regardless the reason, the data indicates people are putting more money into their homes after months of cutbacks on discretionary home improvement purchases.
Analysts expected the Mooresville, N.C.-based retailer would earn just $0.25 per share in Q109, according to FactSet research; however, its net income for Q109 came in at $476m, or $0.32 cents per share. That's down from $607m, or $0.41 per share, earned last year.
"In recent weeks we have seen consumer confidence improve, housing turnover show signs of a bottom in certain markets, and home prices slow their decline," said Robert Niblock, chief executive of Lowe's, in a statement Monday.
The company said its gross margin — a measure of sales profitability — widened to 35.46% from 34.69% in the quarter, which J.P. Morgan Analyst Christopher Horvers told Market Watch should ease investors' fear of more aggressive pricing tactics in the home improvement sector.
Analysts expect Lowe's direct competitor, Home Depot, will also report a smaller than expected Q1 profit decline on Tuesday. According to a Wall Street Journal report, analysts are predicting earnings per share will have declined 32%.
The company has recently shuffled its business tactics to accommodate the tightening economy, cutting back on store growth, reducing inventory and investing in improving customer service and marketing the do-it-yourself tactic, encouraging consumers to save money on labor costs.
Of recent, Home Depot champions a new tag line: "More Saving. More Doing."
The home-improvement industry has been pounded by the economic downturn, which has led consumers to put off home-improvement projects and the purchase of big-ticket items — which most still seem to be putting on the back-burner.
But Lowe's offers hope that the housing market may be nearing bottom in its second-quarter profit forecast — $0.51 to $0.55 per share — which exceeds analysts' expectations and raises its full-year projection.
In contrast, in April, Standard & Poor's lowered its ratings outlook on Lowe's to negative from stable, due to the ailing housing-market.
Write to Kelly Curran.
Mortgage insurer Triad Guaranty (TGIC: 0.00 N/A) lost a net $55.2m — or $3.68 per share — in Q109, narrowed from the $122.2m in the previous quarter.
The trend might not continue in the face of a growing number of mortgage defaults, however, despite the new limit on payable claims in the insured portfolio–which helps Triad stretch capital further but hurts servicers that now will only receive back a fraction of claims filed.
"During the first quarter of 2009, risk in default continued to increase as the combination of the recession and declines in home prices impacted our insured portfolio," CEO Ken Jones said in a media statement late Friday.
Triad's insurance-in-force slipped 3.4% from year-end to $60.5bn and is down 10.6% from the year-ago level. Net losses of $101.6m erased $50.9m in revenue for the quarter. Losses declined from $178.1m seen in the previous quarter, while revenues gained from $41.4m.
"Although we are pleased with the decline in incurred losses during the first quarter," Jones added, "we continue to operate in historically unprecedented times and the uncertainty regarding the deepening recession, continued declining home prices, and rising unemployment rates, among other considerations, could further adversely impact our future results of operations and financial condition."
Triad paid out $53.9m in losses, down from the $69.4m in claims paid in the fourth quarter. The quarter-over-quarter slow down might not continue for Q209, according to company estimates.
"We anticipate that paid losses will grow substantially in future quarters due to the expiration of the public and private foreclosure moratoriums previously in place," Triad officials said in the statement.
Despite any influx in claims filed in the months since the end of Q109, the company may have found some sort of balance, now that it has paid out less on each claim.
Triad put itself into run-off and ceased writing new mortgage insurance policies in the middle of last year but on March 3 received a corrective order from its regulator — the Illinois Director of Insurance — limiting its payout on claims to 60 percent. The remaining 40% of a claim will essentially take the form of an IOU, or a deferred payment obligation (DPO), meaning the lender/investor will not immediately be able recover the full amount of its claim.
The change in Triad's payout structure might benefit the company in the short term by allowing it to stretch its capital further on a larger number of claims. It also, however, puts servicers in the position of only receiving a portion of any claim made within an insurance contract, even after paying 100% of the premium.
Triad is only the beginning, as HousingWire's sources say other regulators will eventually force mortgage insurers across the US to adopt similar policies in the face of tight capital.
Write to Diana Golobay.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
WNC Insurance Services launched a new insurance product exclusively for real estate-owned (REO) properties.
Mortgage lenders and servicers can use the product to cover both residential and commercial REO properties for anything from floods to earthquakes, and from business contents to liability protection.
The new product "puts a lender in control," said CEO Bill Keeler in a media statement. "By allowing a lender to select the specific coverages, amounts and options it needs, it is able to manage its insurance costs more effectively," he added.
The product arrives as foreclosure filings on US housing units in particular are up 32% in April from the same time last year, according to a report by RealtyTrac.
Homes and commercial properties repossessed by banks after foreclosure might sit vacant on the market for months, vulnerable to the elements or other types of damage. REO insurance covers lenders and servicers from such unanticipated losses.
Write to Diana Golobay.
Mortgage bank and broker NOVA Home Loans branches into security-backed lending services through newly-launched NOVA Financial Services.
The move comes as part of an effort to also provide investment planning services, professional portfolio management tools, estate planning and wealth management advice.
"NOVA Financial Services is a company committed to providing its clients with sage and sound investment advice in the same way that NOVA Home Loans has provided its customers sound lending advice for 29 years," says NOVA Home Loans president Ray Desmond in a media statement today.
The new business will serve as a broker of National Financial Services, which in '08 serviced 18.5m accounts representing $1.7trn in assets. The firm brings on an experienced investment advisor, Jacob Kagele, as managing director to oversee NOVA Financial Services as it launches into investment waters.
Write to Diana Golobay.
