Archive for November, 2009
Hotel delinquencies are leading defaults within commercial mortgage-backed securities (CMBS), according to October commentary Monday by Fitch Ratings.
The largest newly delinquent hotel — a $587.7m note corresponding to a $4.1bn Extended Stay America portfolio loan — helped drive US CMBS delinquencies up 54 bps in September to 3.58%.
Specially serviced loans represent 7.5% of Fitch's US CMBS portfolio as of Sept. 30, 2009. Performing loans account for 55% of those loans, while non-performing loans make up the remaining 45%. Fitch said specially serviced loans should include an increasing number of performing loans as recent real estate mortgage investment (REMIC) reforms push current borrowers to seek modification.
"Fitch expects loan performance to continue to deteriorate," the rating agency said in the report. "Hotels are expected to continue to lead defaults as values continue to decline and borrowers will be unwilling or unable to continue to fund debt service shortfalls. The ongoing economic downturn continues to affect the luxury and resort properties, many of which are securitized in recent vintage CMBS."
The projection for continued deterioration in the performance of vintage CMBS arrives in the midst of industry reports that CMBS new issuance is going ahead outside of government support programs like the Term Asset-Backed Securities Loan Facility (TALF).
The industry need for TALF, which provides federal loans for the purchase of both legacy and new issue CMBS, is diminished now compared with the program's start, Lisa Pendergast, head of CMBS strategy and risk at global securities and investment banking group Jefferies, told Dow Jones.
"While legacy TALF is wildly successful, and helped orchestrate significant stability back to market and spreads tightened, TALF's role has diminished for new issuance," she said.
Write to Diana Golobay.
Analysts at Amherst Securities ask the “big question in the mortgage market”: “Will the next wave of defaults be driven by unemployment or by negative equity?”
Ask and answer. In a report published this week, Laurie Goodman and her team demonstrate that negative equity is far more predictive of loan defaults than is unemployment. The question is critical, because the policy response depends on the answer.
That is, if coming defaults are caused by unemployment, then the relevant response, says Goodman, would be to subsidize mortgage payments. On the other hand, if negative equity triggers defaults, then principal reduction must receive a higher priority in modification program waterfalls.
Let me put Amherst’s analysis in context. Goodman is addressing the current design of HAMP (Home Affordable Modification Program). It doesn’t address unemployment; in fact, borrowers must document income to participate. Moreover, HAMP procedures focus on reducing payments by lowering interest rate and extending term. Servicers may also forbear or forgive principal, but they are not required to do so. As a result, principal forbearance and forgiveness are rare in the small universe of HAMP modifications completed by September 1, 2009. According to Treasury data provided to the COP (Congressional Oversight Committee), of 1711 permanent HAMP modifications, only 261 had principal forborne and only 5 had principal forgiven.
This data is summarized in the COP’s October oversight report, An Assessment of Foreclosure Mitigation Efforts After Six Months. However, in the COP’s analysis borrower’s equity is a contributing factor, while unemployment “now appears to be a central cause of nonpayment, further limiting the scope of the program”.
Unemployment, according to the COP, is presently driving a fifth wave of foreclosures. Not so, according to the Goodman’s evidence.
Goodman presents two pieces of evidence to make her point. The first is a matter of timing: default transition rates picked up long before unemployment. (To be precise, Amherst defines a “default” as a loan that becomes 60+ days delinquent for the first time. A 60+ delinquent loan has a low likelihood of cure.) Even among prime loans, small increases in transition rates were evident before the increases in unemployment.
But this simply sets the record straight on the timing of defaults and unemployment. To demonstrate that CLTV matters more than unemployment, Goodman constructed a matrix of transition rates (from 3 month previous) by sixteen unemployment/CLTV buckets within each product sector, Prime, Alt-A, Option ARM and Subprime.
Three conclusions emerged. One, even in the lowest unemployment column, higher CLTVs are associated with markedly higher default transition rates. Two, when borrowers have positive equity, unemployment plays a negligible role. Three, unemployment does impact borrowers with substantial negative equity, but far less than does CLTV. For example, for Alt-A borrowers with current estimated CLTVs > 120%, in a low unemployment area, the transition rate is 2.97%/month, compared to 3.5% in a high unemployment area. For a baseline, consider that the lowest unemployment/lowest CLTV bucket (<8%/<80% respectively) has a transition rate of 0.65%.
Carrying the analysis a step further, Amherst broke the data into owner-occupied and non-owner-occupied (investor and second home) categories. The same patterns emerged. Even for owner-occupied houses, unemployment only has a large impact where CLTV > 120%. For borrowers with very negative equity, unemployment is a catalyst that can kick defaults up, not a cause.
Federal investigators are now saying defective drywall manufactured in China and used to build homes in the Southeast during the housing boom is the cause of serious structural defects in a number of homes.
“We now can show a strong association between homes with the problem drywall and the levels of hydrogen sulfide in those homes and corrosion of metals in those homes,” the US Consumer Product Safety Commission (CPSC) said in a statement (available to download here).
The drywall has long been suspected of causing pipe corrosion and emitting toxic gases, but government agencies have shied away from publicly acknowledging the drywall is the cause of the problems until the claim could be scientifically proven.
An inter-agency task force led by the CPSC and including the US Environmental Protection Agency (EPA), the Centers for Disease Control and Prevention/Agency for Toxic Substances and Disease Registry, and the US Department of Housing and Urban Development (HUD) as well as the Florida and Virginia health departments and the Louisiana Department of Health and Hospitals, among others recently completed tests on 51 homes and three preliminary reports were released detailing the effects of the defective drywall.
According to the reports, hydrogen sulfide gas is the essential component causing copper and silver sulfide corrosion found in the affected homes, along with other factors, including air exchange rates, formaldehyde and other air contaminants.
In ways still to be determined, hydrogen sulfide gas is being created in homes built with Chinese drywall, the report added, and the task force is investigating other non-Chinese drywall to see if they mimic the results found in the defective materials.
More than 2,000 homeowners in 32 states contacted the CPSC with complaints of corrosion, or blackening, of indoor metals, such as electrical components and central air conditioning system evaporator coils and various health symptoms, including persistent cough, bloody and runny noses, headaches, difficulty in breathing and irritated and itchy eyes and skin.
“We now have the science that enables the task force to move ahead to the next phase — to develop both a screening process and effective remediation methods. Ongoing studies will examine health and safety effects, but we are now ready to get to work fixing this problem,” said UCPSC chairman Inez Tenenbaum.
The task force established a team of scientists and engineers to develop a cost-effective identification and remediation screening protocol for homeowners who believe their home may have defective drywall and is working with state consumer groups and federal officials to develop a plan of action to help homeowners.
The drywall was manufactured and used in homes built between 2005 and 2007 and since the problems arose earlier this year, a number of initiatives were proposed to help homeowners with mortgages on defective homes, as well as legislation that would regulate standards for imported construction materials. While homeowners and builders look for recourse, a Fitch Ratings report warns it will be difficult to recovery losses from the foreign drywall manufacturers.
Write to Austin Kilgore.
Mortgage giant Freddie Mac (FRE: 0.00 N/A) warned in a Securities and Exchange Commission (SEC) filing this week it is working to avoid "significant" losses — potentially more than $1bn — related to a now-bankrupt lender/servicer.
Freddie estimated its net potential exposure to loan repurchase obligations of bankrupt Taylor, Bean & Whitaker Mortgage Corp. (TBW) at about $500m as of Sept. 30, 2009.
In addition of the potential loan repurchase exposure, Freddie said in the SEC filing that TBW received and processed borrower funds that it held as servicer for Freddie's benefit. TBW maintained bank accounts primarily at Colonial Bank, where it deposited borrower funds.
Freddie said it filed a proof of claim on $595m against Colonial Bank on Nov. 18, 2009 relating to funds that "should remain" on deposit with Colonial Bank or the Federal Deposit Insurance Corp. (FDIC), which took over Colonial Bank as receiver in mid-August.
The funds — including borrower payments of principal and interest, taxes and insurance received by TBW — are related to mortgages owned or guaranteed by Freddie and previously serviced by TBW, according to the SEC filing. Freddie eventually terminated TBW's eligibility as a seller and servicer for Freddie loans.
Freddie said the losses related to exposure to TBW's bankruptcy "could be significant," although Freddie continues to assess the scope of its exposure. Freddie's $500m net potential exposure to TBW's loan repurchase obligations, combined with the funds relating to the $595m claim against Colonial Bank, indicate total exposure — and potential losses — tops $1bn.
TBW filed for relief under Chapter 11 bankruptcy following moves by the Federal Housing Administration (FHA) and Ginnie Mae to prohibit TBW from originating new FHA-insured mortgages or Ginnie securities. Taylor Bean’s bankruptcy came after weeks of unrest after Colonial Bank — a major lender to TBW — confirmed it was complying with an investigation into its mortgage warehouse lending facility.
Colonial Bank, the former banking subsidiary of Colonial BancGroup, was shut down by regulators and its deposits and some assets were assumed by Winston-Salem, N.C.-based Branch Bank and Trust (BBT: 26.95 -0.33%). Colonial BancGroup in August filed for Chapter 11 bankruptcy after noting in past filings the possible inability for the company to continue as “a going concern.”
Write to Diana Golobay.
Barclays Capital, in a joint venture with Goff Capital, acquired Crescent Real Estate Equities Limited Partnership, or Crescent, from Morgan Stanley Real Estate Funding II.
Crescent owns and manages over 17m square feet of office space and investments in resort developments and luxury hotels. Barclays Capital is the investment banking division of Barclays Bank PLC (BCS: 14.09 +1.15%), and Goff Capital Partners is a private investment firm with more than $5bn in assets.
The firm, re-branded as Crescent Real Estate Holdings, appointed John Goff as CEO, marking his return to the firm from when he formerly ran it as vice chairman and CEO until it was sold to Morgan Stanley (MS: 18.56 +2.26%) in 2007.
“Given his extensive knowledge of the Crescent portfolio, John is well suited to manage the company going forward,” said Haejin Baek, managing director and head of commercial real estate capital markets at Barclays Capital.
“The quality of Crescent’s portfolio is strong and I look forward to partnering with the Crescent and Barclays Capital teams to manage the company through the current cycle and ensure that we are well positioned for the market recovery,” Goff said.
Write to Jon Prior.
US home prices were down 8.9% in Q309 compared to Q308, according to the Standard & Poor’s (S&P) Case-Shiller National Home Price Index, better than the year-over-year quarterly declines of 14.7% in Q209 and 19% in Q109.
The S&P/Case-Shiller monthly 10-city and 20-city composites experienced year-over-year declines of 8.5% and 9.4%, respectively in September. That’s better than the 10-city and 20-city composite declines of 10.6% and 11.3% experienced in August and continues a trend of generally improved monthly declines throughout 2009.
“We have seen broad improvement in home prices for most of the past six months,” said David Blitzer, Standard & Poor’s index committee chairman. “However, the gains in the most recent month are more modest than during the seasonally strong summer months.”
Blitzer added fewer cities experienced month-over-month improvements in September than in August, but Cleveland was the only city in the 20 markets the index measures that didn’t experience an annual improvement. The 10-city and 20-city composites had less than double-digit declines for the first time in 21 months.
San Francisco and Washington DC experienced six consecutive months of positive gains, followed by Chicago, Minneapolis and San Diego each experiencing five consecutive months of positive price gains. Las Vegas remains the most depressed market, where prices have declined for 37 straight months and experienced a peak-to-trough decline of 55.4%.
Write to Austin Kilgore.
A day after Bank of America (BAC: 7.29 -0.14%) released details of the 100,000 mortgage workouts it offered through a homeownership retention program so far, Citigroup (C: 30.87 +1.61%) said it provided workouts for 130,000 distressed homeowners in Q309.
The dollar amount of worked-out mortgages reached $20bn, and the total amount of loss mitigation actions for borrowers serviced by Citi grew 85% from Q308, according to the report.
Along with its participation in the Home Affordable Modification Program (HAMP), Citi attributes the performance to its own program, the Homeowners Assistance Program, which provides modifications, extensions, forbearances and reinstatements.
The data reveals loss mitigation successes outnumbered foreclosures by more than 15 to one, almost four times the rate it reported in Q308.
Under HAMP, the US Treasury Department provides capped incentives to servicers for the modification of loans on the verge of foreclosure. CitiMortgage, the servicing and lending arm of Citigroup, started HAMP trial modifications for 40% of its 221,916 loans eligible under the program through October, according to the latest Treasury report. That total jumped from 23% through September, and it’s the second highest percentage of all participating servicers.
Since the start of the foreclosure crisis in 2007, Citi has worked with roughly 715,000 homeowners – a total origination value of almost $79bn.
From its lending side, Citi processed nearly 175,000 mortgage applications worth $25bn and originated $14bn in mortgage loans in Q309.
"Importantly, even in this environment,” said Sanjiv Das, president and CEO of CitiMortgage, “we continue to extend mortgage credit to people of various socioeconomic backgrounds to fund home buying across the country.”
Write to Jon Prior.
Falling house values plunged nearly 10.7m of all residential properties with mortgages into negative equity as of September, according to quarterly data by First American CoreLogic, the property and ownership information provider subsidiary of The First American Corp. (FAF: 14.98 +0.07%).
As of the end of Q309, 23% of all mortgaged residential properties — or nearly one in four — were "underwater," or worth less than the outstanding mortgage.
This quarter's data includes a model that factors in loan amortization and utilization rates for home equity lines of credit (HELOCs). Without accounting for either factor, the Q309 negative equity rate would have been 33.8%, CoreLogic said.
Another 2.3m mortgages were approaching negative equity as of September, with less than 5% equity. Together, the rate of negative and near-negative equity accounted for nearly 28% of all mortgaged residential properties.
"The rise in negative equity is closely tied to increases in pre-foreclosure activity," CoreLogic said in the quarterly report. "At one end of the spectrum, borrowers with equity tend to have very low default rates. At the other end, investors tend to default on their mortgages once in negative equity more ruthlessly: their default rate is typically two to three percent higher than owner-occupied homes with similar degrees of negative equity."
The report adds: "For the highest level of negative equity, investors and owners behave very similarly and default at similar rates."
The majority of underwater borrowers shared key characteristics in the Q309 report. Most loans were originated between '05 and '08, with '06 representing the peak year with 40% of loans in negative equity. Many underwater borrowers bought newly built homes and relied on adjustable-rate mortgages.
Negative equity mortgages are concentrated in Nevada with 65% negative equity in the state, Arizona with 48%, Florida with 45%, Michigan with 37% and California with 35%. In terms of actual numbers of mortgages, California and Florida had the largest numbers of negative equity mortgages with 2.4m and 2m respectively. These 4.4m loans account for 42% of all negative equity loans, according to CoreLogic.
Write to Diana Golobay.
Mortgage giant Freddie Mac (FRE: 0.00 N/A) recorded $32.18bn of mortgage purchases and issuances in October, down from $32.93bn a month earlier as the volume of refinance loan purchases fell.
October's purchases and issuances bring the 2009 year-to-date total to $476.35bn, according to a monthly summary of the agency's portfolio.
Purchase and guarantee volume of refinance loans slipped nearly 16% to $18bn from $21.4bn in September.
The total mortgage portfolio increased at an annualized rate of 0.7% in October. The aggregate unpaid principal balance of Freddie's mortgage-related investments portfolio slipped to $770.1bn from $784.2bn at the end of September.
The single-family delinquency rate rose 21 bps to 3.54% in October, while the delinquency rate for multifamily loans inched up 1 bp to 0.12%. At the same time last year, 1.34% of the single-family and 0.01% of the multifamily portfolio was delinquent.
Write to Diana Golobay.
Despite an interim final rule approved by the Board of Governors of the Federal Reserve, "ambiguities" remain regarding the notice that must be given mortgage borrowers within 30 days of their loans being sold or transferred for securitization, according to global law firm K&L Gates.
Section 404 of the Helping Families Save Their Homes Act of 2009, which requires written notice of the transaction, took effect in May without clear guidelines, K&L Gates said. The Fed's interim final rule enforces the requirement under the Act, called Regulation Z, by clarifying the scope of the disclosure requirement.
"Section 404 does not expressly authorize the Board to issue regulations interpreting its scope, but the Board nevertheless decided to issue the Interim Rule under its general [Truth in Lending Act] rulemaking authority," K&L Gates said in an alert.
But several ambiguities remain, despite the regulations on Section 404's scope. The interim final rule does not clearly address whether Mortgage Electronic Registration System (MERS) registration needs to be included in the notice, for example.
HousingWire previously reported on the interim final rule, which was released around the same time that eight federal regulatory agencies released a final model privacy notice form that aims to make it easier for consumers to understand how their information is collected and shared among financial institutions.
Write to Diana Golobay.
