Archive for November, 2009
In October, the delinquent unpaid balance for commercial mortgage-backed securities (CMBS) grew 504% from last year, according to research from Realpoint, which tracks monthly CMBS delinquency trends.
The delinquent balance increased to $32.5bn in October from $31.7bn the month before. In October 2008, the delinquent unpaid balance for CMBS was only $5.3bn. At its low in March 2007, the reported delinquent balance was $2.2bn, according to Realpoint’s report.
Four of the five delinquent loan categories experienced an increase in October with only the 60-day delinquent bucket declining.
But, despite the drop, the total delinquency balance of 90-plus day, foreclosure and real estate owned (REO) buckets grew for the 23rd straight month as it rose 12% from the month before and 572% from last year.
Realpoint anticipates the delinquency percentage for CMBS to increase between 5% and 6% through the Q110. It could approach and surpass 7% through the mid-2010.
On the lending side of commercial real estate, Banc Investment Group (BIG) reported its commercial real estate lending index, which measures lending conditions for community banks, dropped 10.6% in Q309.
“The Index results from the third quarter indicate that bankers will face tough challenges in managing their balance sheet in coming quarters and need to be pro-active in addressing problem loans," said Chris Nichols, president and CEO of BIG, the capital markets subsidiary of Pacific Coast Bankers’ Bancshares.
Write to Jon Prior.
With the average high net worth investor already holding 28% of investments in various types of property, the long-term advantages of this investment type may make wealthy investors reach for another helping of property investments, according to a survey by Barclays Wealth.
The survey of 2,000 high net worth individuals with assets eligible for investment ranging from £500,000 (US$822,000) to in excess of £30m on average allocate 28% of investments in property, Barclays Wealth said.
Individual investors' ideas of the optimal allocation of property in total investment varies, from 6-8% offered by one participant in the survey and a partner at a multi-family office, to 50% preferred by another investor that favors property assets.
“There is no doubt that a certain amount of property can provide return enhancement and diversification benefits in most investors’ portfolios,” says Philip Jeffcock, director of real estate at Barclays Wealth. “The proportion of wealth allocated to property should be reasonable given an investor’s liquidity requirements, and their ability to deal with the possibility that they might have to sell an asset with poor liquidity when things go bad.”
Investors are considering increasing their property allocation, with high net worth investors planning a slight increase over the next two years, Barclays Wealth said. The allocation may increase from 28% to 30% on average, as investors consider property a more attractive long-term investment than other asset classes.
"This suggests continuing uncertainty about the trajectory of financial assets and a desire for more tangible, ‘straightforward’ investments after the turmoil of the financial crisis, which many people perceive to have been caused by complex financial instruments," Barclays said.
Thirty-nine percent of survey respondents indicated they see residential property as a viable investment due to the potential for income through rental. Nearly 29% see the potential for capital gains as a key advantage to investing in residential property. Another 28% of respondents see long-term performance posing an advantage for residential property.
Write to Diana Golobay.
[Update 1 adds memo requesting a trading halt on Nakheel's sukuk.]
The Dubai government, Dubai World’s principal owner, asked creditors last week to delay repayments for at least six months while it restructures more than $60bn in debt, including billions from its real estate firm Nakheel.
On Monday, Nakheel asked Nasdaq Dubai to halt trading on its three Islamic-compliant bonds — called sukuk — "until it is in a position to fully inform the market," according to a Nasdaq Dubai memo obtained by MarketWatch.
Dubai World’s request for more time to repay creditors was a blow to market sentiment around the globe, and while investors wait to see if the United Arab Emirate (UAE)-controlled holding company will reach a deal before it defaults, concerns that its demise would cause systemic market failure seem to have subsided. HousingWire sources indicate domestic real estate investors expect to be cushioned from any shock waves in case of default, though counterparts in the Eurozone are more heavily involved in Dubai real estate projects.
The business unit of Dubai World racked up debt on a number of grandiose land reclamation projects, including a man-made archipelago off the Dubai coast with islands arranged in the shape of the world’s major continental features.
Nakheel has a $3.5bn convertible sukuk — essentially a convertible bond whose terms adhere to Islamic lending practices — that will reach maturity on December 14. Without the six-month extension, Dubai World would likely default on the deal.
Dubai has little oil wealth relative to its neighboring emirates, and its economy is driven primarily through trade and tourism ventures. Initial reports indicated that the Dubai government, or Abu Dhabi, Dubai’s oil-rich neighbor state, would back the holding company in the event of a failure, but a government official said Monday that was not the case.
“Dubai World was established as an independent company, it is true that the government is the owner, but given that the company has various activities and is exposed to various types of risks, the decision, since its establishment, has been that the company is not guaranteed by the [Dubai] government,” Abdulrahman al-Saleh, director general of Dubai's Finance Department, said on Dubai TV, according to The New York Times.
Global stock markets declined after the news broke, amid concerns that companies that invested in Dubai World would experience losses, or even worse, that Dubai World’s situation could be the sign of impending doom for other countries with extensive debt. But the decline in the markets has cooled and some analysts believe even if Dubai World were to collapse, it would not cause a systemic failure.
"It is likely to take at least a few days before the implications of the impact of a possible default from Dubai are properly digested but for the present it seems that the market is seeing this negative news as a blow to the global recovery but not one that will push it off course," said Forex.com research director Jane Foley, in a Associated Press report.
The New York Times cited Bank for International Settlements data that shows foreign banks have $130bn of exposure to the UAE, 0.4% of foreign banks’ total cross-border exposure. Banks in the UK lead the world in exposure with $51bn and US banks hold $13bn debt. Dubai World’s largest creditors are domestic banks in Dubai and Abu Dhabi.
Write to Austin Kilgore.
The Federal Reserve continued its slower mortgage bond purchases, buying up $16bn of mortgage-backed securities (MBS) from government-sponsored entities in the week ending November 25.
The Fed's purchases shifted more toward Freddie Mac (FRE: 0.00 N/A), with $6.5bn of Freddie MBS purchased this week, from $5.9bn last week. The Fed bought $6bn from Fannie Mae (FNM: 0.00 N/A), compared with $4.55bn last week. The Fed also bought $3.5bn from Ginnie Mae this week, according to details released by the New York Fed.
The weekly purchases push the running total to $1.03trn, according to weekly commentary by Barclays Capital. Most of the Fed’s net purchases (58%) were issued by Fannie, while Freddie accounts for 33% of net purchases and Ginnie accounts for 9%.
The weekly transactions included no MBS sales. It's part of the ongoing slow-down of the weekly purchases ahead of the program’s anticipated conclusion at the end of Q110.
Write to Diana Golobay.
Federal Housing Administration (FHA)-approved lenders could be required to hold increased net worth, meet stronger approval criteria and be held responsible for the actions of the mortgage brokers they do business with, if a recently proposed FHA rule is enacted.
The rule is designed to reduce risks to the single-family insurance fund, which finances the FHA guarantees of mortgages in case of default. The FHA reported to Congress recently the insurance fund dipped below the Congressional-mandated 2% capital reserve threshold. While FHA officials believes the administration won't need a bailout, the FHA is looking for ways to improve the fund’s footing.
The proposal is the latest is a series of changes, including the hiring of a chief risk officer and other risk management initiatives. It would require FHA-approved mortgagees maintain a minimum $1m in net worth in its first year and at least $2.5m by the third year of the rule’s effective date, up from the current level of $250,000.
These changes are consistent with industry standards and will ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting FHA to mitigate losses and decrease risks to its insurance fund, FHA said.
“With FHA's crucial role in today's housing market, it is critically important that we are able to manage risk and to ensure that our reserves are adequate to cover future losses," said FHA commissioner David Stevens. “We are taking a number of aggressive steps to ensure that we are able to continue to support the housing market in the short-term and provide access to home ownership to the underserved in the long term, while minimizing the risk to the American taxpayer.”
The rule would no longer require third-party mortgage brokers to maintain independent FHA approval, instead FHA-approved mortgagees would assume responsibility and liability for the FHA-insured loans they underwritten and close. FHA said the change would make its guidelines consistent with those of the government-sponsored enterprises (GSEs). FHA added the rule would pave the way for more brokers to work in the space, while also providing increased oversight.
The rule proposal comes as FHA loan limits will stay at their elevated level in 2010. In a mortgagee letter issued last week, FHA confirmed the move and outlined guidelines for lenders, including affirmation that low-cost market floors and high-cost market ceilings will remain unchanged next year. The limits for conforming jumbo loans eligible for purchase by the government-sponsored enterprises (GSEs) was set at $417,000 for single-family homes by the Economic Stimulus Act of 2008 (ESA) and the Housing and Economic Recovery Act of 2008 (HERA), but were set to expire at the end of 2009. Now, the limits won't expire until the end of 2010.
Write to Austin Kilgore.
The US Treasury Department and the Department of Housing and Urban Development (HUD) launched a campaign to convert more trial modifications under the Home Affordable Modification Program (HAMP) into a permanent status.
Under HAMP, the Treasury allocates capped incentives to participating servicers for the modification of loans on the verge of foreclosure. According to the latest report, more than 650,000 trials modifications are underway. Saxon Mortgage Services leads all servicers by providing trials to 44% of its eligible portfolio, according to the report.
More than 375,000 borrowers are on track for a permanent modification by the end of the year, according to Michael Barr, assistant secretary for financial institutions at the Treasury.
“We remain highly focused on getting these families to a permanent mod. It’s up to the banks to do their part. They have not done a good enough job in getting borrowers into permanent modifications,” Barr said, echoing comments made over the weekend.
He added that servicers shown to be underperforming in the December report on permanent modifications could expect serious consequences though he would not give specifics.
Phyllis Caldwell, the new chief of Treasury’s Homeownership Preservation Office (HPO) said that the top eight servicers sent specific plans to convert more trials into a permanent modification. Missing documentation continues to plague the conversion rate. Caldwell said that 37% of borrowers in a trial have submitted some documents, while 20% have sent in nothing to the servicer. The rest, she said, had provided all required documents and are waiting on the banks to convert their modification.
Throughout December, Caldwell said, the servicers will report to the Treasury twice a day with updates on their conversion efforts.
“We will be sending SWAT teams to these shops to help,” Caldwell said.
The “SWAT teams” refer to the account liaisons from the Treasury and the mortgage giant Fannie Mae (FNM: 0.00 N/A), which will be assigned to the servicers to monitor progress and report back to the Administration.
Servicers that do not meet the obligations under the servicer participation agreement with HAMP will be subject to monetary penalties and sanctions.
Write to Jon Prior.
Investor demand for non-agency or private-label residential mortgage-backed securities (RMBS) is overwhelming the current supply, according to global asset management firm Smith Breeden Associates.
Appetite for private-label brought prices for some prime and Alt-A RMBS mortgages as much as $10-20 since the March lows, while some tranches in the ABX index — representing a range of subprime securities — rose more than 25% since March.
Investors include dealers, hedge funds, real estate investment trusts (REITs), banks, insurance companies and money managers.
Smith Breeden attributed some of this revival to the Treasury Department's Public-Private Investment Program (PPIP). Program managers, having raised enough private capital and Treasury equity and debt to wield $16bn in purchasing power, are ready to put capital to work.
But non-agency RMBS is seeing little new production and heavy borrower defaults, indicating "non-agency RMBS securities are going away" for now, Smith Breeden said.
Write to Diana Golobay.
Mortgages in the three-month trial period of a Making Home Affordable Modification Program (HAMP) workout plan are eligible for the same risk weighting treatment as mortgages with permanent modifications, according to final rule revisions issued by the Federal Deposit Insurance Corp. (FDIC).
In a final rule issued earlier this month, the FDIC said mortgages fully secured by first liens and meet other criteria previously weighted at 50% — meaning the lender takes on that much risk and can recover at least that much in the event the loan defaults — can keep the same weighting.
A mortgage risk weighted at 100% prior to modification should continue to be weighted at 100% during and after the trial period, including loans 90 or more days delinquent and in nonaccrual status. But, the FDIC said, a 100% weighted loan can return to 50% after a sustained period of repayment performance.
In addition, if the borrower does not successfully complete the trial period and the loan is not permanently modified, the loan still qualifies for the 50% risk weighting if it meets the conditions to be a qualifying mortgage loan under the general risk-based capital rules, FDIC said. If not, it should be weighted at 100%.
Under HAMP, the Treasury Department provides financial incentives to mortgage servicers who modify the loans of borrowers on the verge of foreclosure.
Write to Austin Kilgore.
I know, I know. Subprime is so, like, 2007. And most of the financial press has moved onto sexier mortgage words like "option ARMs," or "FHA loss reserves."
That said, I thought it would be interesting to dive back into subprime waters, taking a granular look at individual deal performance using November remittance data from that old standby, the ABX. (For those that don't recall, the ABX index was launched by Markit in 2006 to track the private-party subprime RMBS market — and it allowed some hedge funds an easy mechanism to short the market for subprime mortgages.)
We decided to take a look all 81 different deals across the 2006 and 2007 vintages within the ABX, comparing month-to-month percentage changes in both 60+ day delinquencies (not yet in foreclosure) and properties in foreclosure status.
What we found is a telling picture of a subprime market on hold, but far from reaching a bottom. Blue bars represent month-over-month trending in 60+ day delinquencies for each of the 81 deals, while red bars represent month-over-month trending in foreclosures.
Click the image to see full-size version
Because this sort of chart technique might be foreign to some readers, the zero axis point represents no change between October 2009 and November 2009 data. Any data points in positive territory reflect a percentage increase month-over-month, while data points in negative territory reflect a percentage decrease month-over-month.
Surprised? Only if you thought the subprime mess was over with.
What's beyond clear here is that the volume of 60+ day delinquencies is almost universally on the rise, while foreclosure volume is far more erratic and more likely to be on the downswing — the effect of various government programs designed to prevent foreclosure at all costs, while unemployment continues to take its toll on borrowers' ability to pay their mortgage. That effect can be seen even more clearly in declining REO inventories tied to these 81 subprime deals, below.
Click the image to see full-size version
Right now, securities holders have benefited somewhat from a modest rebound in prices, and banks have booked some market gains on the increased valuations assigned by trading activity in their Q3 earnings. But this data seems to suggest pretty plainly that any such gains might best be interpreted as transient — unless you believe that the Federal balance sheet has ample room to absorb an increasing number of troubled borrowers.
In either case, I don't see a backup in 60+ day delinquents (subprime and elsewhere) as a sign of clear market recovery for housing or mortgages. And it's precisely this growing backlog of newly-troubled borrowers that has me scratching my head when the NAR blindly projects a 4 percent gain for home prices next year. I'm very positive on the ability of our housing and mortgage markets to emerge stronger, but that's a long-term sort of outlook. Don't be fooled in the short-term by what John Mauldin has taken to calling The Statistical Recovery.
For subprime mortgages, it appears Yogi Berra was right: this really is like deja vu, all over again.
Paul Jackson is the publisher of HousingWire.
In the latest twist to the ongoing ACORN saga, a California branch of the community outreach organization is considering changing its name, according to a Politico report.
The report cites a memo it claims was found among a horde of papers a blogger and former Republican candidate for the California State Assembly recovered from a Dumpster outside a San Diego office of ACORN, or the Association of Community Organizers for Reform Now. The memo tells ACORN members the group is considering a name change and solicits comments.
“The name ACORN has been dragged through the mud, and we are coming across a number of people and groups who want to work with us, want to support the work we have been doing, but feel that they can only do so if we change our name,” the memo says.
The blogger, Derrick Roach, said he is a licensed private investigator and conducted surveillance on the office after a video released on the Internet purportedly showed ACORN Housing employees advising a couple who claimed to be a pimp and prostitute on how to establish a brothel and evade taxes.
ACORN fired the employees in the video and called it an isolated incident not consistent with the group’s standards. It even created a public relations campaign the “Faces of ACORN,” profiling employees that it said are helping disadvantaged people.
Among the documents Roach said he recovered from the trash include employment documents for individuals paid to encourage voter action. In the name-changing memo, a bullet-point list provides the pros and cons for keeping the ACORN name. The group said its spent “39 years building the reputation and track record of ACORN,” and abandoning the name might imply the group did something wrong or allow “the right-wing attackers to say they won.” The memo also notes that fund raising has become more difficult, as is working with elected officials who “are worried that the same people who are attacking us, will attack them, if they work with us,” the memo says.
Tuesday, Republican Reps. Darrell Issa of California and Lamar Smith of Texas will host a Republican Congressional forum on ACORN, where the name changing memo will be one of the topics discussed.
Write to Austin Kilgore.
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