Archive for May, 2009
Southern California homes sold at a faster year-over-year pace in April, as first-time buyers and investors continued to target distressed inland properties, according to information from MDA DataQuick.
April's jump in home sales marks the 10th consecutive month of increasing home sales in Southern California.
A total of 20,514 new and resale houses and condos closed in the six-county Southland in April. That's up 5.2% from 19,506 in March and up 31.4% from 15,615 a year ago, according to the real estate information service.
Foreclosure resales –- homes sold in April that had been foreclosed on in the prior 12 months –- accounted for a significant 53.6% of all Southland resales last month, marking the seventh consecutive month in which post-foreclosure properties made up more than half of all resales.
The number of single-family houses that resold during the month was at near-record-high levels in many inland areas where nearby foreclosures have forced home values to fall — places such as Palmdale, Lancaster, Moreno Valley, Perris, Indio, San Jacinto, Lake Elsinore and Victorville.
New home builders are experiencing less favorable conditions, as deep discounts associated with foreclosures create stiff competition. Last month, builders sold the lowest number of newly constructed homes for April since 1988 — 21 years!
And more affluent neighborhoods, typically closer to the coast, where foreclosures and steep discounts are less common, are still feeling the pinch of the housing slump. Existing home sales in Beverly Hills, Malibu and Manhattan Beach remained at near-record-lows for April, according to DataQuick.
The slow sales in high-end markets is likely attributed largely to the lack of credit available, particularly in the jumbo market. Before the credit crunch hit in August 2007, a whopping 40% of Southland sales were financed with jumbo loans, while only 10.9% were financed with jumbo loans in April.
In the more affordable inland areas, first-time buyers seem to rely heavily on government-insured FHA financing. Such loans were used to finance 39.1% of all Southland home purchases last month, up from 18.4% a year ago.
Absentee buyers, which includes investors, bought 18.6% of the areas homes sold last month. That’s up slightly from 17% a year ago and above the 15% monthly average since 2000.
“In many markets we’ve seen signs you’d expect to see not long before prices would normally stabilize: robust investor and first-time-buyer activity, 10-plus months of year-over-year sales gains, and less price erosion, if any,” says John Walsh, MDA DataQuick president.
“The problem,” he continues, “is that we still face two big threats to price stability: layoffs…and possibly a new round of foreclosures triggered by defaults on ‘option ARM’ and ‘stated income’loans used in mid-to high-end markets."
Write to Kelly Curran.
Government-sponsored entity Fannie Mae (FNM: 0.00 N/A) in Q109 began testing the process of securitizing its whole residential mortgage loan portfolio in an effort to boost liquidity at the company. The initiative also boosted agency mortgage-backed securities (MBS) issuance in the process.
A Bank of America (BAC: 7.29 -0.14%) analyst noted a surprising spike in agency MBS issuance last week. Specifically, from Wednesday to Friday, the agencies — both Freddie Mac (FRE: 0.00 N/A) and Fannie Mae — issued $65.5bn in MBS, bringing the total monthly agency MBS issuance to date to $162.7bn.
The analyst said this spike in issuance comes as a surprise to the market, since the overall originator selling remained low over the past several weeks. However, a closer look at the data shows that about $41.5bn agency MBS issuance so far this month comes from seasoned pools; $26.9bn originated in 2003 while $4.5bn came from 2002 origination loans.
"It is likely that some banks or insurance companies that owned seasoned loans are securitizing them to sell into the current strong bid for this product, which helps them to both recognize profits and reduce the size of the balance sheet," says the analyst.
And that's just what Fannie's been up to, according to a Securities and Exchange Commission filing dated May 8, in which the company said its unencumbered mortgage portfolio includes whole loans that Fannie could securitize for sale or use as collateral for loans under the Treasury Department's GSE credit facility.
"Currently, however, we face technological and operational limitations on our ability to securitize these whole loans, particularly in significant amounts, as our systems were not designed to support the securitization of whole loans in our portfolio into Fannie Mae MBS," company officials said in the filing. "We expect that the necessary technology and operational capabilities to support the securitization of a significant portion of our single-family whole loans will be in place during the second quarter of 2009."
The GSE's conservator, the Federal Housing Finance Agency, warned in a May 18 Congressional report that Fannie's liquidity situation is tight. So if the enterprise cannot issue debt and borrow through mortgage repurchase agreements, it must rely on the Treasury's credit facility, which is scheduled for expiration at year-end '09.
"Fannie Mae cannot securitize its $256bn single-family whole loan portfolio, although it expects to be able to securitize a substantial portion of its portfolio during the first or second quarter of 2009," FHFA's report reads, in part. "During the first quarter of 2009, Fannie Mae conducted a successful pilot test of its ability to securitize its existing whole loan portfolio."
The effort indeed appears to have been successful, as it prompted even BofA analysts to slow down and take a closer look into the issuance numbers for the month.
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.
Redwood Real Estate Partners is launching a $500m investment fund, called Occasio ResCap, in order to jump on distressed assets for sale where the seller may be out of options.
"The current housing market, residential loan performance, and related foreclosure activity have created ample opportunity for us to purchase REO and non-performing whole loans," says fund manger John Duden, a founding partner of Fasthold Capital, which specialized in the acquisition, restructuring, and liquidation of residential whole loans and REO portfolios.
"Our formation of the Occasio Fund and related operating platform will allow us to be an aggressive buyer and to provide sellers with an alternative exit strategy for the disposition of those assets," he adds.
Redwood is known for its entrepreneurial spirit in dealing with assets. The company was founded in 1989 and is privately owned by the Chang family.
"The Occasio Residential Distressed Fund is one of four real estate strategies Redwood is sponsoring in which the Chang Family will be co-investing alongside other third party investment partners," says Carl Chang. "We are pleased with the risk-adjusted returns the Occasio ResCap platform projects and our greatest successes within the single family residential space has been in buying and selling REO."
With the launch of Occasio ResCap, the company aims to leverage current market conditions and acquire $500m in distressed residential real estate while offering sellers a seamless way of liquidating those assets.
As an operating platform, Occasio ResCap will manage the acquisition and handle the risk analysis, pricing, underwriting and liquidation of distressed assets. Because it is a fully funded entity that is sponsored by Redwood, Occasio ResCap has the capital to close sales and mitigate sellers’ risk.
Duden adds that the assets under consideration may come from any area of the country, but some regions, such as the Eastern seaboard, may be held in higher regard than others, such as rust-belt properties. However, underwriting is conducted on an asset-to-asset basis so no property is automatically excluded.
Write to Jacob Gaffney.
Disclosure: Author holds no investment positions.
As of July, certain high-quality commercial mortgage-backed securities (CMBS) issued before January 1, 2009 will be eligible collateral under the Term Asset-Backed Securities Loan Facility (TALF), the Federal Reserve Board said today.
The TALF program is aimed at stimulating lending by allowing private investors to purchase securities with a matching government investment.
The Fed in early May announced that CMBS and securities backed by insurance premium finance loans as of June will be eligible collateral for TALF participation, but today's announcement marks the first addition of a legacy asset class to the list of eligible TALF collateral.
The extension of eligibility to include legacy CMBS is intended to promote price discovery and liquidity for legacy CMBS, the Fed says.
The resulting improvement in legacy CMBS markets should facilitate the issuance of newly issued CMBS, and in turn, help borrowers finance new purchases of commercial properties or refinance existing commercial mortgages on better terms.
To be eligible as collateral for TALF loans, legacy CMBS must be senior in payment priority to all other interests in the underlying pool of commercial mortgages, among other requirements. The Federal Reserve Bank of New York will hold the power to review and reject as collateral any CMBS that does not meet the required terms or poses some unacceptable risk.
All eligible CMBS must have at least two triple-A ratings from DBRS, Fitch Ratings, Moody’s Investors Service, Realpoint or Standard Poor’s and must not have a rating below triple-A from any of these rating agencies.
The Federal Reserve is in the process of determining a standardized procedure for determining the set of rating agencies whose ratings will be accepted for various types of eligible collateral.
In a separate report today, the Wall Street Journal conducted an analysis that found commercial real estate loans could generate losses of $100bn by year-end 2010 if the economy worsens. Such loans could potentially account for almost half the losses at the 900 small and mid-sized banks analyzed by the WSJ.
Write to Kelly Curran.
As the deadline for capital plans under the government's stress test requirements approaching, the line of banks jostling toward the TARP exit sign grows.
Additionally, three large institutions, Goldman Sachs (GS: 111.77 +2.96%), JP Morgan Chase (JPM: 37.21 -0.75%) and Morgan Stanley (MS: 18.56 +2.26%) are the subjects of the newest reports circulating around possible TARP repayments.
Bank holding companies that failed the government's Supervisory Capital Assessment Program (SCAP) must achieve a 6% Tier 1 risk-based capital ratio and a 4% Tier 1 common risk-based ratio by year-end '10. Banks found to lack capital have until June 8 to develop a detailed plan to raise capital and until November 9 to put the plan to work, according to details released in early May by the US Treasury Department.
"Those institutions that do not need to raise additional capital will have the opportunity to repay the government’s existing capital investments," Treasury secretary Tim Geithner said in a statement following the release of the stress test results. "To do this, they will need to demonstrate that they are able to issue debt without FDIC guarantees, as some banks have already begun to do."
The bank holding companies wishing to return funds must retain the capital ratios required under SCAP even after TARP repayment. The Treasury also requires them to issue senior unsecured debt for a term greater than five years and not backed by FDIC guarantees "in amounts sufficient to demonstrate a capacity to meet funding needs independent of government guarantees," according to a frequently-asked-questions document on repaying funds.
The list of banks to already repurchase preferred stock through the Capital Purchase Program swelled to 14, according to the latest transaction report. The reasons for repayment ranged from the stigma associated with accepting government aid and tighter compensation-related regulations to capital raised at the institutions, to sufficient capital raised under profitable business practices.
For instance, Alliance Financial's (ALNC: 31.20 -3.38%) CEO Jack Web, in announcing the company's $26.9m repayment, said changes in legal and regulatory requirements "inhibit the manner in which we operate our business and are not in the best interests of our customers, community and shareholders."
American Express (AXP: 49.85 -0.26%), however, in a media release announcing it applied for repayment in the wake of positive test results, said the CPP targets banks in need of access to needed credit. "Since then, financial markets have become more stable, and American Express has made substantial progress in adapting to a very difficult economic environment," company officials said in the press statement.
The repayment has not finalized yet, but media reports indicate large, qualifying institutions like American Express might be authorized to begin repayment as early as June 8.
Goldman, which in October received $10bn through CPP, announced shortly after its Q109 earnings release it would offer $5bn in common stock for public sale.
“After the completion of the stress assessment, if permitted by our supervisors and if supported by the results of the stress assessment, Goldman Sachs would like to use the capital raised [through the common stock sale] plus additional resources to redeem all of the TARP capital,” company executives said in a press release.
Goldman earlier this month told the Federal Reserve it would like to begin repayment as soon as possible. A company spokesperson tells HousingWire Goldman wants to repay the funds as soon as possible, pending approval by its regulators.
JP Morgan, which also received $25bn through CPP, said in an early May statement responding to the SCAP stress test results that its ratios would remain very strong "even when excluding" TARP funds. "The Administration and our supervisors know that we would like to repay our TARP funding," a Chase spokesperson tells HousingWire. "We are awaiting instructions."
Federal regulators found Morgan Stanley, which received $10bn through CPP, in need of $1.8bn to meet SCAP ratio requirements. On May 8 it said it expected gross proceeds from certain equity and debt offerings to total $8bn. It was unclear whether the company intended to use these funds toward just meeting its capital requirement or also repaying TARP funds, and company spokespeople did not return inquiries before this story went to press.
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.
Beazer Mortgage Corporation (BZH: 3.25 +0.62%), a subsidiary of Beazer Homes USA, will delve out a total of $2.5m to more than 1,000 N.C. borrowers due to alleged origination violations in 2007.
The Atlanta-based homebuilder entered into a settlement agreement with the North Carolina Office of the Commissioner of Banks (NCCOB) today, but without admitting to the alleged violations, according to the company's statement.
NCCOB claims Beazer Homes and Beazer Mortgage, which the homebuilder closed in February 2008, wrongly steered borrowers into their own mortgage operations, effectively earning kickbacks — an allegation long brought against builders.
"We believe that many homebuyers were sold loans from Beazer Mortgage that violated North Carolina law," Mark Pearce, N.C. deputy commissioner of banks, told the Charlotte Observer.
Beazer allegedly failed to comply with North Carolina’s requirement that discount points be bona fide and paid for the purpose of reducing a borrower’s interest rate.
Through this settlement, however, the homebuilder must provide refunds of these discount points to victimized homeowners.
The company, once a major builder in the Charlotte area, left the market last year at the time it ceased mortgage operations, turning over its lending license to the state.
Beazer said this month it expects to spend more than $80m to settle a lawsuit and a federal criminal investigation, according to the Observer. The firm said today the $2.5m in restitution is included in the approximately $13m it set aside at first quarter's end for estimated payments related to governmental investigations.
As part of the settlement, the banking commission said it agreed to take no further investigative or enforcement action against Beazer.
Write to Kelly Curran.
London, like most major urban areas across the globe, is experiencing a massive slowdown in the commercial property market.
However, Great Portland Estates announced today that it is bucking the trend by selling Bond Street House, in London's West End to an Institutional Luxemburg Société d'investissement à capital variable fund for around $67.5m. Such funds are increasingly popular in the EU and are similar to mutual funds in the US.
The deals represents an initial yield of 5.8% and approximately 4% ahead of the 31 March 09 book value.
The investment advisor is the Munich based iii-investments, the Real Estate Investment Company (KAG) of HypoVereinsbank.
GPE also confirms Great Capital Partnership, its 50:50 joint venture with Liberty International subsidiary Capital & Counties has sold 29/35 Great Portland Street, W1 to a private buyer for $1.2m, an initial yield of 6.8% and in line with the March 2009 book value.
Bond Street House is held on a lease from the Pollen Estate for a further 116 years at a fixed head rent of $0.75m per annum until September 2009 after which it increases to 25% of the net rents received.
The office space above was refurbished by GPE in 2006 and let at rents of between $60 and $100 per sq. ft. The current net rent, having deducted headrent is nearly $4m per year.
The Sicav will pay GPE initial consideration of $60m, and up to a maximum further $7.5m based on the April 2009 rent review settlement.
GPE will retain control of the review and the full $7.5m will become payable provided the settlement is broadly in line with its external valuer's 31 March 2009 rental value. The payment to GPE will be reduced on a straight line basis below this.
Robert Noel, Property Director at GPE says: "These sales are in line with our disciplined approach to recycling capital from mature assets as we can put the money, in today’s opportune market, to better use elsewhere."
Collaboration techniques have become increasingly common among industry professionals as each attempts to succeed in a trying market during challenging economic times. Today, another partnership was formed.
Software service provider Qvault has teamed up with new media marketing firm, Think Big Work Small (TBWS), to launch a collaborative effort to help mortgage professionals gain greater access to the tools they need to help increase and manage their business.
"As pressure has mounted on our clients to find new ways to attract more business, we have been looking for ways to help our clients gain access to creative and affordable marketing tools," says Jeffrey Parry, founder and CEO of Qvault.
Beginning immediately, both organizations will consolidate their client bases and promote each other's product lines.
Qvault, which has focused on helping clients increase revenue and streamline operations, is turning to TBWS to help its clients gain access to marketing tools to drive more business and fill their pipelines. In turn, clients of TBWS will gain exposure to Qvault’s product Status Sweep, a web based sharing and transaction solution.
Write to Kelly Curran.
Mortgage software provider Calyx Software today offers server hosting for a new product that gives remote users access to loan information through the Internet.
Calyx's new product involved in the off-site hosting, PointCentral, offers mortgage professionals the loan file storage facilities necessary for mobile operations. The remote hosting interface gives banks, credit unions, mortgage bankers and brokers the option to store sensitive loan files on an outsourced server.
"The hosting option is perfect for those companies that may not have access to a central server or the ability to purchase one," said Calyx executive Dennis Boggs in a media statement today.
"With today's mobile environment, it's crucial that all loan data is stored in a secure location while also allowing remote accessibility," he adds.
Write to Diana Golobay.
HousingWire is kicking around the idea of doing a July feature on the global history of bank bailouts… Japan's lost decade and the like.
The view, though the idea is still on the drawing board, is to see if the Obama approach to bank bailouts will create a model of rescue going forward.
The idea is still being researched. In the meantime, cases are being brought against banks left and right in the United States. Having just moved from the UK, this behavior feels relatively new, though not unexpected given the landscape of the crises here.
A case against banks in Cleveland got tossed out, while class actions continue to be brought by pass-through investors against IndyMac and Morgan Stanley Capital.
Now, for the record, I'm no big bank supporter, but these lawsuits are the last thing anyone needs. I feel investor grievance, I feel socio-economic upheaval, but let's face it: The majority of these lawsuits are destined for failure.
And here's why.
Actions against banks are going to be pre-empted by state laws, according to one attorney who is representing bank interests. In the Cleveland case, which is sure to be a successful model of argument going forward, the lawyers only need to explain that the banks represented in the case operated under applicable state and federal guidelines.
The banks themselves obviously believed these products are robust enough to withstand some turbulence, for to argue to the contrary reasons that financial institutions are not adverse to the bust cycles that originate from pushing platforms that are knowingly doomed. The banks want nothing more than for securitizations to meet long-term maturity, for example.
Therefore, isn't the blame really in the hands of lax regulation of the current statutes, which are meant to curtail such impropriety?
This is a particularly effective method considering the recent swap of character in the White House. Though banks need not soften judges by blaming Bush, as there remain other ways in which financial firms can prove a lack of culpability.
In the case of pass-through certificate investors the cases seem even weaker. One of HousingWire's sources used to be an asset-backed securities analyst and is now bond trading over at… well I can't say. At any rate, he is fond of asking "So, who put a gun to the investor's head?"
A lack of due diligence.
Confidence in triple-A rating from credit rating agencies.
A fundamental misunderstanding of risk.
The onus on investors will be to prove their actions are the result of, essentially, someone else. Even if a judge believes a bank 'made them do it,' the bank can solidly counter that the risk appeared mitigated by the ratings.
Ratings agencies, of course, defend that no one saw this coming. For their part, they continue to "tighten criteria."
But this isn't HousingWire's attempt to throw its hat into the blame game arena. Or to take sides. There's been enough shouting in those corners.
Rather, as one lawyer I spoke to this morning put it: "The government is really good at preventing the last crisis." The announced regulation of OTC derivatives is an example, considering credit default swaps as a form of credit enhancement no longer exists in the wake of the Lehman collapse.
If such regulations do pass, the bad products will simply go by another name, just as 'toxic' is now 'legacy.'
The situation is not unlike the current mortgage market in Italy. There, celebrities spent 2006 and 2007 promoting mortgage products on television — these same high loan-to-value type loans that no longer exist.
Politicians are now shuffling regulation through with names such as the Tremonti and Bersani decrees, in an effort to appear proactive in sorted the whole mess out. But, the typical implementation scenarios are set-up to where the windows in which these programs will have a chance to make a difference is too small.
By way of comparison, what's the point of an $8,000 tax credit for first time buyers when the people who truly need homes are now foreclosed? Meaning there are not that many first time buyers on the bad side of a housing bubble, are there?
An $8,000 rent credit would likely do more to stimulate macroeconomic conditions. But, right or wrong, this would be tremendously unpopular. So these actions are simply the results of populist posturing, at home as well as abroad.
The only difference is, in Italy, no one is telling a judge that they blame the banks.
Write to Jacob Gaffney.
Disclosure: The author held no relevant investment positions when this story was published.
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