Archive for October, 2009
The pain felt in the distressed commercial real estate (CRE) sector will affect the residential mortgage industry on two fronts. The affects range from banks' disposition of residential assets to a reluctance to lend to the residential sector at all, according to commentary Friday by John Burns Real Estate Consulting.
The consulting firm indicated banks may need to dispose of residential assets to concentrate on commercial real estate distress as it continues to pressure the banks. This should have the affect of creating land-buying opportunities at low prices and sparking a bit of recovery, the firm said.
But banks with high exposure to commercial real estate may not lend to the residential sector — many may not survive at all, the firm said.
Commercial property prices are down 35% from the peak and will likely fall further as leases expire and tenants begin to reduce costs by renting less space at a lower price. This will have significant implications for commercial banks holding commercial mortgage assets, as commercial banks own nearly 45% of commercial mortgage debt outstanding, according to John Burns Real Estate Consulting.
By contrast, commercial banks own 21% of the single-family mortgage debt outstanding, the firm said. As the distress in the commercial mortgage sector worsens, banks holding outstanding commercial mortgage debt may turn insolvent. John Burns Real Estate Consulting indicated the resulting pressure on the regulatory system will delay the emergence of a healthy banking system by another three years.
"We expect the government to intervene even more than it has in order to save the US banking system," the firm said. "When this occurs, it could indirectly benefit home builders by providing great distressed land buying opportunities, and by shoring up the banks so the better banks can start lending again soon."
Write to Diana Golobay.
RAIT Financial Trust (RAS: 5.72 -1.04%), a publicly-traded real estate investment trust (REIT), this week expanded the operations of its broker-dealer RAIT Securities to encompass a range of services to financial institutions.
RAIT Securities expanded its commercial real estate advisory services to include commercial mortgage servicing.
The firm also added asset valuation, monitoring and reporting, as well as asset acquisition and disposition to its range of services. RAIT Securities will offer restructuring and repositioning of troubled assets as well as asset and property management. The firm also offers strategic advisory and research.
RAIT Financial Trust added Tony Butler, an 11-year veteran of Wachovia Capital Markets, to lead RAIT Securities. Butler is joined in heading up the firm by Sam Greenblatt, who joined RAIT Financial Trust in 2000 when it bought Pinnacle Capital Group, which Greenblatt owned. Pinnacle was a commercial mortgage conduit that structured and sold loans in the secondary mortgage market.
RAIT Financial Trust also added Greg Laughton to the group after Laughton spent nearly seven years at Wachovia Capital Markets.
Write to Diana Golobay.
The Mortgage Investors Coalition called on the Treasury Department to reject a proposal to offer distressed borrowers interest-only payments for a certain length of time as part of the terms of a Making Home Affordable Modification Program (HAMP) workout.
The coalition said a proposal being formed by large banks to allow borrowers the option to make interest-only payments as part of a new HAMP workout plan fails to address the issue of negative equity. Such a proposal is not in the best interest of the housing industry and consumers, said the coalition, a recently formed trade group of asset managers holding more than $100bn in residential mortgage-backed securitizations (RMBS) on behalf of pension funds, college endowments and other investors.
“Modifying homeowners into mortgages that have future payment increases and adjustable interest rates will not improve a homeowner's situation,” said Micah Green, a partner at Patton Boggs and coalition spokesman. “Doing so would ignore the fact that many of these homeowners are already in interest-only or other non-traditional mortgages and owe more on their mortgage than their home is currently worth.”
The coalition acknowledged the frustration at the lack of successful modifications completed, but said efforts should be focused on long-term solutions.
“The Mortgage Investors Coalition believes any changes to HAMP should focus on refinancing homeowners into long term affordable fixed rate mortgages, so homeowners and the housing market don't have the threat of interest rate resets, balloon payments or large payment shocks in the future that could drive additional foreclosures,” Green said.
Write to Austin Kilgore.
[Update 1 corrects Committee vote.]
The House Financial Services Committee, having wrapped up a series of hearings over the Obama Administration's proposed financial regulatory reforms last week, is moving on several discussion drafts that would change the way the US financial sector operates.
The Committee, in a 43-26 vote Thursday, approved financial regulatory reform legislation that would require the comprehensive regulation of over-the-counter (OTC) derivatives like credit default swaps (CDS). The legislation sets a framework for the regulation of swap markets, dealers and major swap participants.
The legislation passed Thursday requires swap dealers and major swap participants to register with regulators and requires clearing organizations to provide transaction information to appropriate regulators. The bill also provides for public disclosure of aggregate data on swap trading volumes and positions in a way that protects the business transactions and market positions of individuals.
The legislation also establishes standards regarding what swap transactions are subject to submission to a clearinghouse.
Fitch Ratings indicated in August the clearing of single-name contracts and CDS indices through such a central counterparty is a a necessary step to reduce overall concentrated risk in the OTC market.
US Treasury Department secretary Timothy Geithner in mid-July testimony blamed a lack of transparency in the market for OTC derivatives — which in 2008 topped a gross market value of more than $20trn — that let companies like AIG over-extend themselves and sell more credit protection for residential mortgage-backed securities (RMBS) than they could cover.
Regulation of the OTC derivatives market was joined Thursday by consideration of another significant piece of financial regulatory reform.
On the same day, Rep. Brad Miller (D-N.C.) and Rep. Dennis Moore (D-Kan.) filed an amendment to the Consumer Financial Protection Agency (CFPA) bill, exempting banks with less than $10bn in assets and credit unions with less than $1.5bn in assets from examination by the new agency. The CFPA would act as examiner for 150 banks with more than $10bn in assets under the amendment and would regulate the types of loan products marketed and sold to consumers.
“Community banks and credit unions who were not the worst actors in bad lending practices have a valid argument that they could be overwhelmed by multiple federal agency examinations, virtually doubling their administrative burden,” Miller said in a statement. “Safeguards remain in place that would allow CFPA to take over enforcement if any bank, no matter what size, has repeat violations.”
A voice vote on the amendment was expected in the House as early as this week.
Write to Diana Golobay.
Revenue from General Electric’s (GE: 19.03 -0.21%) real estate division for the first nine months of 2009 declined 46% compared to 2008, the company said in its Q309 report.
GE Capital Real Estate, which creates real estate debt and equity investment funds for institutional investors as well as finances commercial real estate transactions through commercial mortgages in North America, lost $538m in Q309, compared to profit of $244m in Q308. Year-to-date losses through Q309 were $948m.
The real estate division is a segment within GE’s Capital Finance subsidiary, which reported earnings of $263m, down from $2bn in Q308, a decline of 87%.
“While it remains a tough environment for GE Capital, we are seeing signs of stabilization,” said GE chairman and CEO Jeff Immelt. “Every segment at GE Capital was profitable with the exception of Real Estate, which is experiencing a tough environment but where we believe the risks are well understood and manageable.
Overall Q309 profit for GE was $2.5bn, down from $4.3bn in Q308.
Write to Austin Kilgore.
First Federal Bank of California, a wholly owned subsidiary of FirstFed Financial Corp., modified more than $1.4bn in residential mortgages in September.
It created workout plans for nearly 3,000 California distressed borrowers as its modification program continued to outperform industry averages, according to a statement.
Due to the modifications, overall loan delinquencies dropped as of Sept. 30, 2009, compared to peak levels. Loans 30 to 59 days delinquent fell to $70.6m, 55% lower than the $157.5m on January 31, 2009. Loans 60 or more days delinquent decreased to $16.8m, or 95% lower than the $431.3m on Feb. 28, 2009. Loans in foreclosure fell 38% to $281.8m from $456.2m on June 30, 2009.
July to September were the busiest months for First Federal Bank of California since it began the modification program in February 2008, nearly 900 mortgages worth $442m were modified. In all, 2,927 mortgages were modified.
The bank said its modifications are also outperforming the national average. The bank said 28.3% of the loans it modified in Q108 were at least 30 days delinquent 12 months after they were modified. The national average is 65.9%, First Federal Bank of California said, according to the September report of the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
First Federal Bank of California credited the better recidivism rate to its strategy of holding the mortgages in its own portfolio and flexibility in working with borrowers.
The 80-year-old bank is based in Southern California and said its successfully modified more than one-third of its option adjustable-rate mortgage (ARM) loan portfolio.
Write to Austin Kilgore.
Bank of America (BAC: 7.29 -0.14%) lost $1bn or $0.26 per share during Q309, compared to a profit of $1.2bn during Q308.
But company year-to-date income through Q309 was $6.5bn, compared with $5.8bn during the same period of 2008. BofA paid $1.2bn in preferred dividends for the quarter, including $893m in dividends to the US government.
The company's net loss on the home loans and insurance segment widened to $1.6bn from a $54m net loss in the year-ago quarter.
BofA funded $95.7bn in first mortgages, selling purchase or refinance loans to nearly 450,000 borrowers, including $23.3bn in mortgages to 154,000 low- and moderate-income borrowers during the quarter. About 39% of all the first mortgages were for purchases.
Year-to-date at the end of Q309, BofA modified the mortgages of approximately 215,000 customers, and an additional 98,000 BofA mortgage customers are in the trial stage of a Making Home Affordable Modification Program (HAMP) workout.
BofA increased its provision for credit losses to $2.9bn “driven by continued economic weakness and lower home prices,” and due to further deterioration in the purchased impaired portfolio BofA holds from its acquisition of Countrywide. The company added $2.1bn to the reserve for credit losses — less than Q209, BofA said, as delinquencies improve in the unsecured consumer portfolios.
All told, BofA reported $9.6bn in net charge-offs in the quarter, $923m higher than in Q209.
“The company's core performance was impacted by a number of non-core items,” said president and CEO Kenneth Lewis. “The market's improved view of Bank of America's credit cost the company due to non-cash marks on liabilities.”
Earnings were also affected by $2.6bn in pretax mark-to-market and credit valuation adjustments on certain liabilities including Merrill Lynch structured notes. BofA reported a $402m pretax charge to pay the US government to terminate its asset-guarantee term sheet.
Write to Austin Kilgore.
Mortgage investor and securitization giant Ginnie Mae issued $39.69bn in mortgage-backed securities (MBS) in September, bringing its running 2009 total to $337bn, a 78% increase from $189bn of issuance in the first nine months of 2008.
Ginnie's September issuance slipped 11% from $44.73bn of MBS issued in August.
Ginnie Mae I single-family pools accounted for more than 55% — $22bn — of September's MBS issuance, while Ginnie Mae II single-family pools made up another 43% — $17bn — of monthly issuance. Multifamily issuance came in over $432m.
"The continuing surge in the issuance of Ginnie Mae MBS is indicative of the key role that we are playing as the economy struggles to recover," said Thomas Weakland, Ginnie's acting executive vice president, in a statement. "Not only are we clearly performing our original mission of expanding affordable housing opportunities for more Americans, we are also expanding sustainable housing opportunities."
Ginnie Mae, which bears the full faith and credit backing of the US government, securitizes mortgages insured by the Federal Housing Administration (FHA).
Write to Diana Golobay.
Fitch Ratings upgraded two real estate investment trusts (REITs) and downgraded as many in Q309, according to the latest “REIT Report Quarterly.”
Recent improvements in financial markets indicate some positive momentum in REIT credit, Fitch wrote. Since March 2009, 11 Fitch-rated REITs accessed the unsecured debt market totaling $7.9bn and have executed bond tender offers of $3.4bn, as well as common equity issuances totaling $9.6bn, reducing leverage and increasing liquidity.
Fitch revised UK REIT Brixton’s rating watch to positive from negative on the heels of a “firm offer” from the SEGRO this summer. The deal is expected to close by the end of 2010, but a material delay in SEGRO’s bid or its withdrawal, Fitch warned it would likely downgrade Brixton “by at least one notch.”
Fitch also upgraded Ventas (VTR: 58.82 -0.27%) and its subsidiaries Ventas Realty and Ventas Capital Corp. ratings outlooks from stable to positive, noting the healthcare REIT has a liquidity surplus of more than $850m from March 31, 2009 to Dec. 31, 2010.
“The upgrades stem from Fitch’s view that Ventas’ liquidity, leverage, and unencumbered healthcare property operating metrics have improved to levels consistent with a triple-B rating following several capital markets transactions in a difficult market environment,” Fitch wrote.
Fitch downgraded iStar Financial’s (SFI: 7.26 +1.11%) issuer default rating (IDR) to double-C from B negative, unsecured revolving credit facilities to ‘C/RR5’ from ‘B–/RR4,’ senior unsecured notes to ‘C/RR5’ from ‘B–/RR4,’ convertible senior floating-rate notes to ‘C/RR5’ from ‘B–/RR4,’ and preferred stock to ‘C/RR6’ from ‘CC/RR6.’
The downgrades come over concerns the REIT’s weakened liquidity position will lead to some kind of default.
“The quality of iStar’s loan portfolio continues to deteriorate. Given the reduced capital availability in the commercial real estate debt capital markets, Fitch expects a further increase in both provisions for loan losses and non-accrual loans for the remainder of 2009, the report said.
“Capital access challenges and weakening property-level fundamentals have decreased the ability of iStar’s borrowers to repay loans, as many borrowers historically have refinanced their loans via the secured debt markets or have sold assets,” the report added.
Fitch also downgraded the Brookfield Asset Management’s (BAM: 30.40 -0.59%) IDR, its unsecured line of credit and its senior unsecured notes to triple-B from triple-B positive.
“The lower ratings reflect Fitch’s concerns as to the overall sustainability of cash flows from BAM investments within its diversified business portfolio, particularly given its large exposure to commercial real estate and the wholesale power markets,” Fitch said. “Given that BAM’s investment positions are structurally subordinate to sizable levels of asset and subsidiary level financing in most of its business platforms, Fitch believes that cash flows from these investments are at greater risk given challenging market conditions in its key industries.”
Fitch affirmed the ratings of 14 other REITs, but made outlook modifications from stable to negative on one of the 14, changes from negative to stable on two of the 14.
The outlook on the entire REIT sector remains negative, because despite recent opportunistic actions to reduce financial pressures, liquidity concerns and deteriorating property fundamentals will continue to pose challenges, Fitch said.
Write to Austin Kilgore.
Struggling construction companies in the United States should not peg any hopes on getting much back from suppliers of Chinese drywall, if they plan to seek recourse through litigation, according to Fitch Ratings.
But that is not stopping those living inside the property from doing the same thing.
Lawsuits filed against domestic home builders claim the imported drywall emits sulfur gases, damaging air conditioning coils, electrical plumbing components and other materials, and cause health problems, Fitch wrote, leading the US Consumer Products Safety Commission (CPSC) to launch an investigation.
In contrast, builder Lennar (LEN: 22.28 +0.68%) used Chinese drywall in a small percentage of Florida homes built from November 2005 to November 2006, and sued Germany-based building supplies firm KnaufGips KG and its Chinese affiliates.
But builders will have little recourse against the Chinese manufacturers, Fitch said, because they will likely ignore lawsuits filed against them in US court, as civil judgments in US courts are not enforced in China. Domestic builders do not have this option when disgruntled home owners file for compensation.
In addition, international lawsuits are too costly and time consuming. But, Fitch said, lawyers may bring suits against US investment bankers who financed the Chinese companies and/or seize ships that brought the drywall to the US.
More than 550 people in 19 states filed Chinese drywall-related complaints with the CPSC. The surge in imported drywall began in 2005 due to the housing boom and the rebuilding efforts after Hurricanes Katrina and Wilma, Fitch said. While the bulk of the Chinese drywall ended up in south Florida, it was also shipped to Alabama, California, Louisiana, Mississippi, and Virginia, among other states.
The Gypsum Association estimates US builders imported 309m square feet of Chinese drywall from 2004 to 2007 — enough to build 35,000 homes. But that number could be higher as many homes were built with a combination of domestic and imported drywall.
Fitch said builders like Lennar have already begun taking modest charge offs related to Chinese drywall repairs and large and small builders, subcontractors, and an international building supplier risk exposure to claims.
Write to Austin Kilgore.
