Archive for September, 2009
Home prices may decline an average of 5% across the country in 2010. Some regional markets hit hardest by the recession will experience additional double-digit declines while others will increase, according to real estate forecaster Local Market Monitor.
Fresno tops the forecast for cities with populations over 600,000 expected to experience the worst decline in home prices next year, followed by the Las Vegas, Miami, Orlando and Phoenix metropolitan statistical areas (MSAs). The Portland, San Jose, Tacoma, Tucson, West Palm Beach and Stockton, Calif. MSAs round out the bottom 10 regions in terms of projections.
The forecast also reports that nationally, the delinquency rate is currently 9% for residential mortgages and 8% for commercial real estate loans.
But the report’s not all bad news. In Baton Rouge, where the number of jobs has increased, home prices are expected to perform the best across the country, followed by Buffalo, Dallas, Fort Worth and Houston in the forecast of top 10 markets. Little Rock., Omaha, Pittsburgh, San Antonio, Wichita Falls and Syracuse, N.Y. round out the top 10.
These areas are ones that did not experience large price booms and relatively low increases in unemployment. Many Texas markets, for example, should see modest price increases, while Washington D.C. and Anaheim, Calif. will stabilize, said Ingo Winzer, president of Local Market Monitor.
“Right now, a good market is still one where home prices aren't going down,” he said. “However, this will change as the recession eases. Next year we'll see good price increases in many markets.”
The Local Market Monitor is a nearly 20-year-old quarterly forecast of economic performance that uses home values, housing starts, and employment and population growth, and other indicators to project future changes in the economy.
Write to Austin Kilgore.
[Update 1: Adds Mortgage Maxx Index Data]
Mortgage loan application volume rose and interest rates declined in the week ending September 4, according to the Mortgage Bankers Association's (MBA) weekly Applications Survey.
The MBA's Market Composite Index, which measures mortgage loan application volume, increased 17% on a seasonally adjusted basis from the week prior. On an unadjusted basis, the index increased 15.8% from last week and 64.5% from the same week one year earlier.
The Mortgage Application Index (MAX), a separate index produced by Mortgage Maxx, increased 2% in the same time period. The index adjusts total application volume by counting multiple submissions from a single household as one application.
In its analysis, Mortgage Maxx said refinancings are not responding to prevailing rates, and the index is expected to gradually deflate through the end of the year, “absent new government/Fed heroics.”
The MBA’s refinance index increased 22.5% from one week prior, the biggest jump since mid-March.
The seasonally adjusted purchase index increased 9.5% from the week earlier, the largest gain since April. The purchase index is at its highest level since the first week of January.
The share of refinance mortgages increased to 59.8% of total application activity, up from 56.5% the previous week. Adjustable rate mortgages (ARMs) took a 5.8% share this week, up from 5.6% the week prior.
The MBA also reported the average interest rate decreased 13 bps from 5.15% to 5.02% and points increased from 1.09 to 1.23 for 30-year fixed-rate mortgages (FRMs) with an 80% loan-to-value (LTV).
The average interest rate for 15-year FRMs with 80% LTV decreased 12 bps from 4.57% to 4.45% and points increased from .085 to 1.13.
The average interest rate for one-year ARMs with 80% LTV decreased 2 bps from 6.71% to 6.69%, and points decreased to 0.19 from 0.20.
Write to Austin Kilgore.
The commercial mortgage default rate may top 4.2% by year-end and looks likely to peak in 2011, according to Real Estate Econometrics, which tracks data from banks and Federal Deposit Insurance Corp.-insured institutions.
The large losses will be concentrated among regional and community banks, the firm said in an updated Q309 projection for commercial mortgage performance.
The default rate rose to 2.88% in Q209 from 2.25% in Q109, consistent with projections made in June by Real Estate Econometrics.
The outstanding balance of commercial mortgage loans from 30 to 89 days delinquent fell by $2bn from the first to second quarters, slipping to $12.8bn. The balance of loans in default status, 90 plus days delinquent or in non-accrual status jumped by $7.1bn — or 29% — to $31.3bn.
The 8,195 institutions representing data in Real Estate Econometrics’ quarterly analysis experienced a 3.13% default rate on multifamily mortgages in Q209, from 2.45% in the previous quarter and from 1.2% in the year-ago quarter.
Credit standards in commercial mortgage lending contracted in the midst of high delinquency levels, but recently show signs of easing as new loans perform better.
"Following more than three years of tightening credit, the most current survey of senior loan officers suggests that the tightening cycle may be in the initial stages of moderating," the firm said in an August analysis. "Credit standards have stabilized at some institutions, albeit at much higher levels than prevailed in the period leading up to the real estate market’s peak. Consistent with previous cycles, the mortgages that are being made at the current trough in investment activity are unusually conservative and have a low probability of default."
Write to Diana Golobay.
Dallas-based private equity real estate investment firm Encore Enterprises will launch a new investment vehicle through its Encore Capital subsidiary.
The fund, Encore Opportunity II, has set a target to raise $150m in capital, with an option for an additional $100m, and is expected to close in Q409, the company said.
Leading the fund is Donna Arp, a 28-year finance and real estate investment veteran and former mayor of the city of Colleyville in suburban Dallas-Fort Worth, Texas. Arp assumes the role of president of Encore Capital after most recently servicing as CEO and president of Realty Capital Partners, an investment firm in Colleyville.
In her new role, Arp will launch the new fund and oversee debt and equity financing for real estate projects that meet Encore's investment criteria and scope.
“We are excited about the opportunities we see in the real estate market, and the new dimension Donna and Encore Capital bring to our organization. We have established a strong performance track record over the last decade and Donna will play an important role in helping us meet our high expectations for the next decade,” Encore Enterprises president and CEO Patrick Barber said.
“Donna Arp is a proven real estate investment veteran and we are pleased to have a professional of her caliber lead the newly created Encore Capital,” he added.
Write to Austin Kilgore.
Recent data illustrating steady house prices and rising sales for weeks have led economists and analysts alike to indicate a perceived bottom — or stabilization, at the least — in the US housing market.
New market analysis out of Credit Suisse (CS: 26.78 +0.26%) suggests the US residential housing sector may be past the point of stabilization and is now recovering vital signs.
Demand is returning on higher affordability and the federal first-time homebuyer tax credit, according to Martin Bernhard, of Credit Suisse's private banking, investment services and products divisions.
"On a national level, we think that the turning point could have been reached," he said.
But several factors including unemployment rates and foreclosure levels post-moratoria may pressure these positive developments, Bernhard said in market commentary last week.
The US unemployment rate rose to 9.7% in August, posing an ongoing risk to the recovering in housing demand as consumers remain financially pressured.
New house supply is low as housing construction slips. Weak demand for new houses may reduce inventory in the months ahead, Bernhard said.
The existing house side of the market — which is about 10 times as large as the market for new homes, according to Credit Suisse — remains pressured by levels of foreclosure inventory. Foreclosure sales, which weigh on overall resale house prices, may further depress the market.
The risks posed by the foreclosure pipeline may pressure prices in the short term, but the pricing correction achieved poses long-term investment benefits.
"Given the sharp correction in house prices over the last three years, we think that there now exist interesting investment opportunities in the US housing sector," Bernhard said. "But risks remain due to rising unemployment and foreclosure sales. We thus recommend investors to concentrate on regions with relative robust housing market fundamentals and positive long-term outlooks such as Texas."
Other regional US existing home markets where increasing levels of supply outweigh weak demand may not bottom quite so early. Overall US financials continue to appear strong, however.
The US Q209 earnings season surprised global financial market observers, contributing to an overall expectation that the global recession is nearing an end.
Substantial capital injections by government or the private sector revitalized the banking industry in the US and around the globe since the beginning of 2009, according to Giles Keating, head of the Credit Suisse global economics and strategy group.
Write to Diana Golobay.
Homes sales rose for the fifth consecutive month in Miami in July. The median price held steady, the third month that the median price didn’t drop from the previous month’s, according to MDA DataQuick.
A total 7,942 new and resale houses and condos sold in July, up 2.8% from June and up 24.4% from July 2008. While the results mark the fifth straight month of year-over-year increases, it’s the second-lowest number of sales in the region for the month of July — last year’s marked the worst July total — since 1997, when MDA DataQuick began compiling data on the Miami area.
Sales of existing homes and condos drove the improvement in sales figures. MDA DataQuick said while existing properties have seen year-over-year increases for eight months, new home sales have fallen on a year-over-year basis for 38 consecutive months.
The median price paid for all homes was $160,000; steady from June, but down 36% from $250,000 in July 2008. Median prices have increased or stayed the same every month since May.
Federal Housing Administration- (FHA) insured loans accounted for 46% of all July sales in the Miami region.
Write to Austin Kilgore.
[Update 1: Clarifies version of the bill signed into law]
New legislation passed in Arizona eases restrictions on mortgage insurers and gives the state’s Department of Insurance authority to work with insurers who don’t meet the state’s minimum policyholder position (MPP).
The law — HB 2008 — which takes effect in November, gives the department discretion to allow mortgage insurers to continue writing new business, even if the insurer doesn’t have the capital to meet the MPP. The bill also sets requirements for insurers’ MPP.
Arizona is the 16th state to enact such legislation, and it's already causing at least one prominent mortgage insurers to consider the new role of insurance regulators.
PMI Mortgage Insurance Co., an insurer that falls under the jurisdiction of the Arizona Department of Insurance, said it supports the bill because MPP is only one factor but should not be the sole determinant in evaluating mortgage insurers’ ability to write new business. PMI Mortgage Insurance said it will provide relief to insurers that are restructuring portfolios and rebuilding capital levels.
“Broad support of this regulatory reform reflects the confidence in Arizona’s Department of Insurance as well as the current realities of the housing crisis and its impact on mortgage insurance companies,” said Steve Smith, chairman and CEO of the PMI Group, Inc. (PMI: 0.00 N/A). “A guiding principal of the mortgage insurance industry is supporting sustainable homeownership and the ability to write new business is a critical factor in the recovery of the US housing market.”
Write to Austin Kilgore.
New global initiatives to strengthen the regulation, supervision and risk management of the banking sector will reduce the likelihood of another global economic crisis, according to the Bank for International Settlements (BIS), an international organization that serves as a bank for central banks.
Central bank governors and supervisory heads on Sunday agreed on several key measures to strengthen regulation of the banking sector, including raising the quality of the Tier 1 capital base. They also agreed to introduce a new leverage ratio to act alongside the Basel II risk-based framework.
Central bank governors agreed on a measure to introduce a minimum global standard for funding liquidity that includes a stressed liquidity coverage ratio requirement. They settled on a measure to introduce a framework for counter-cyclical capital buffers above the minimum requirement, as well as a measure to issue recommendations to reduce systemic risk involved in the resolution of cross-border banks.
The Basel Committee will issue formal proposals on these issues by year-end and will begin assessing the impact of new requirements in early 2010, BIS said.
"[T]hese measures will result over time in higher capital and liquidity requirements and less leverage in the banking system, less procyclicality, greater banking sector resilience to stress and strong incentives to ensure that compensation practices are properly aligned with long-term performance and prudent risk-taking," said Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank.
As the banking industry faces regulatory overhaul on a global level, the securitization industry itself faces a push for more regulation. The International Organization of Securities Commissions (IOSCO) issued a report last week recommending greater regulation of several areas of the securitization process.
IOSCO recommends addressing imbalanced incentives, inadequate risk management practices, counterparty risk, lack of transparency, regulatory structure and oversight issues, according to the report. IOSCO called for a requirement that originators retain some form of long-term exposure to securitization, and for regulation of improved disclosure to investors regarding underlying asset pool performance.
The report urged the formation of a regulatory structure to establish central counter parties (CCPs) to clear standardized credit default swaps (CDS). IOSCO also called for jurisdictions to assess the scope of their regulatory reach within each recommended measure and to determine what enhancements would be needed to ensure international regulatory coordination.
“The recommendations contained in this Final Report are aimed at restoring investor confidence and at improving the functioning, integrity and oversight of unregulated financial market segments and products, such as securitisation and credit default swaps, and international financial markets generally," said Kathleen Casey, chairman of IOSCO's technical committee, in the report.
Write to Diana Golobay.
Real estate investment trust (REIT) activity is picking up as investors look to take advantage of the glut of distressed assets hitting the market.
A trio of REITs launched initial public offerings (IPOs) this summer and raised millions for their investment ventures.
Invesco Mortgage Capital (IVR: 15.81 -0.25%) raised $201m in July through a public and private offering to invest in agency residential mortgage-backed securities (RMBS), non-agency RMBS, CMBS and residential and commercial mortgages.
Starwood Property Trust (STWD: 19.71 +0.31%) raised $952m from its public and private offerings.
PennyMac Mortgage Investment Trust (PMT: 17.75 +0.06%) had a $325m IPO this summer to purchase residential mortgage loans and other mortgage-related assets.
On Friday, two more REITs filed Securities and Exchange Commission (SEC) briefs announcing IPOs as well.
But the activity isn’t limited to the US. Canadian REIT InterRent Real Estate Investment Trust announced Monday it completed a private placement of 9.3m units at a price of C$1.50 (US$1.39) per unit for total gross proceeds of C$14m.
In the UK, Hansteen Holdings announced its intentions to transition from a property company to a REIT. The move will likely require a number of amendments to Hansteen’s articles of association and will have tax implications for the firm.
But as more REITs are getting into the market, some are reducing asset inventory. Alstria Office REIT, which acquires, owns and manages office real estate in Germany, announced Monday it will sell three Hamburg office buildings with a combined 6,000 square meters of rental space for €15.5m (US$22.5m), a premium of 5%, the company announced.
Write to Austin Kilgore.
Option adjustable-rate mortgages (ARMs) are due to affect performance of US residential mortgage-backed securities (RMBS) in the next two years, according to Fitch Ratings.
Fitch Ratings determined $134bn of loans within US option ARM RMBS will recast in 2011.
Option ARMs historically present concerns over negative amortization, a process through which the loan balance essentially grows each month as borrowers elect to repay the minimum amount due.
An option ARM recasts when it reaches a balance cap typically ranging from 110%-125% of the original mortgage or 60 months of age, according to Fitch. The monthly payment obligation then increases from the minimum amount to a fully amortizing principle and interest payment.
This "payment shock," a hike often 63% higher than the minimum payment, indicates a greater risk of default, Fitch said.
"Having not demonstrated their ability to make payments at the full rate, option ARM borrowers are at the greatest risk of default resulting from payment shock," said Huxley Somerville, group managing director and US RMBS group head.
The majority of option ARMs Of $189bn of securitized option ARM loans outstanding, 88% have yet to recast. Of those, 94% negatively amortized through the use of minimum monthly payments.
Performance is already troubled among option ARMs. Serious delinquencies — loans more than 90 days past due, in foreclosure or real estate-owned proceedings — rose to 37% from 16% in the past year.
The risks associated with payment shock drove Fitch to rate a small number of option ARM transactions, approximately 5% of all option ARM transactions.
Write to Diana Golobay.
