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Archive for February, 2010

Home Prices Will Not go up Anytime Soon, Say Analysts

Friday, February 26th, 2010

The rate at which home prices are dropping may be slowly coming to a halt across the United States, with analysts at Barclays Capital predicting only a 4 or 5% dip left to go before stabilization. But the rate of appreciation on the back side of that bottoming out is likely to "muddle along for the next few years," they say in a weekly letter to investors.

This conclusion is based on expected aftershocks of the "smoothed-out" housing supply model, where millions of potential foreclosures are being averted temporarily with government-backed programs or by suppliers slowing the rate in which foreclosures hit the market. On the positive side, they say this effort actually prevented home prices from falling considerably more.

But the smoothed-out method, while successful on the supply side, is coming at a cost: "The overhang of distressed inventory is a huge negative technical – it suggests that any price rise will probably be met by increased distressed sales," say the securitization analysts in their Residential Credit Strategy report.

"Meanwhile, home prices do seem a little cheap, using fundamental metrics like price/rent and price/income ratios, but not extremely so," they add. "Thus, a meaningful rise in prices would need big changes on both the technical and fundamental fronts."

Home prices dipped only slightly in December, according to Standard & Poor's Case Shiller US National Home Price Index. However, it is the recent drop in new home sales, down 11.2% from December to January, that the analysts find "disappointing."

And in added response to claims that housing is becoming more and more affordable in the United States, the report adds that "affordability indices are not good predictors of future moves in home prices."

Write to Jacob Gaffney.

Posted in Origination/Lending, Secondary Market/Investors, Top Stories | 12 Comments »

Growing Trend of Mortgage Insurance Claim Denials are Costing Servicers

Friday, February 26th, 2010

In the face of dwindling business, with January 2010 showing fewer new policies than any month in 2009, mortgage insurance (MI) companies are increasingly denying claims for defaulted loans that allegedly do not conform to underwriting standards, increasing costs for servicers and investors.

Historically, MI rescission rates were low, generally around 7%, but in recent quarters, that rate has jumped to 25%, associate analyst Aleksandra Simanovsky wrote in the Moody’s Investors Service latest “ResiLandscape” commentary provided to HousingWire.

According to Moody's, the issue came to a head in December 2009, when Bank of America (BAC: 7.29 -0.14%) filed a lawsuit against MGIC (MGIC: 6.24 -0.48%), claiming the insurer improperly denied claims from BofA’s servicer unit. While the lawsuit is still pending, mortgage insurers are becoming more confident in denying partial or whole claims from servicers and Simanovsky wrote the industry can expect continued high rescission rates for the future. That increase, combined with the below-investment-grade ratings of MI companies such as Radian (RDN: 2.66 +2.70%) and MGIC “further constrain any benefits we might allow to the pool policies in RMBS transactions.”

Recently, however, Radian Q409 losses narrowed to $91.9m and MGIC ramped up its level of competition with government-backed mortgage insurance by lowering its mortgage insurance rates for good credit borrowers.

The surge in foreclosures nationwide is creating claims processing delays for both loan and pool policies, and MI companies are requesting more documentation from servicers, and the companies request the documents earlier, sometimes at the point of foreclosure referral, rather than after the foreclosure sale. The earlier reviews enable MI companies to detect origination fraud, including value-differences that potentially can result in denied claims, Simanovsky said.

MI companies are trying to limit exposure in an environment where business continues to decline. According to data released by the Mortgage Insurance Companies of America (MICA), the 14,378 mortgage insurance policies issued in January 2010 had a total value of $4.16bn, and lower in volume and dollar amount than any month in 2009. However, MI cures — the rate of delinquent loans that are brought current — were up slightly in January compared to December. In January, more than 98,000 loans defaulted, the highest rate since January 2009, MICA said.

MI companies are taking a harder look at expenses for property preservation and utility bills and many times, servicers’ claims are denied because the MI companies claim the expenses are not “reasonable and customary.” In addition, servicers are receiving reduced reimbursements on tax and insurance advances that result from extended holding times.

“As unsold home inventories continue to build and as foreclosure and REO timelines grow longer, losses to securitized trusts are expected to increase to the extent that MI companies are not covering such expenses,” Simanovsky wrote.

With servicers conducting extensive loss mitigation strategies, MI companies are often denying claims for modification documentation-preparation fees and accrued interest associated with modification-processing delays. The document preparation and legal operations costs for servicers has increased dramatically, but these expenses, which historically have not been contested, are now being denied by the MI companies as “costs of doing business,” Simanovsky said, adding in cases where modification efforts are not successful, the unreimbursed costs associated with the modification process are assumed by the servicer.

While the BofA-MGIC lawsuit continues to play, Moody’s believes servicers’ rebuttal efforts “will be less forceful and will have little impact on claim denials. RMBS transactions that carry pool policies (partial or full) are likely to receive little benefit from them,” the report said.

Write to Austin Kilgore.

Posted in Servicing/Default, Top Stories | 1 Comment »

As Commercial Real Estate Weakens, Moody's Considers Action on Related CDOs

Friday, February 26th, 2010

The credit rating agency Moody’s Investors Service put a total of $6.2bn of commercial real estate linked CDOs up for possible downgrade today, citing growing concerns over the ability of the underlying assets to continually perform.

The credit rating agency recently found that although commercial real estate (CRE) prices are rising, widespread defaults in the market are weighing down recovery. And while the secondary market deals with a rise in commercial mortgage-backed securities delinquencies, the CDO reviews indicate CRE will continue to drag for the immediate future.

Credit default obligations (CDOs) are structured finance products with returns linked to the fixed income of the assets. They are marked-to-market, and so a weak commercial real estate (CRE) sector drives down the rate and amount at which the securities pay out. Moody’s is taking the action as part of its ongoing surveillance of these CRE CDO transactions, in a move that comes as no surprise—even an actual downgrade would likely be another non-shocker. However, a recent ruling by a bankruptcy judge in the New York, over the payout structures of a Lehman Brothers CDO is also adding to market volatility.

Another major concern, additionally, lies in basic supply-and-demand principles. Holders of CDO paper who may wish to wind down holdings based on today's announcement may only be adding more product into an already strained and abundant marketplace. However, as one market player tells HousingWire, wait-and-see investors may be coming off the sidelines after the successful liquidation of earlier CDOs, for example, the MJX Asset Management $1bn CDO auction at the end of last year on behalf of the trustees of the Declaration Managment Kent Funding platform.

In the information released today, the Goldman Sachs Abacus CDO portfolio will likely receive the most scrutiny. Moody’s placed 42 of its CRE CDO classes up for possible downgrade, affecting more than $1.3bn in structured securities.

Moody’s also reports that the Crystal River CDO contained $193.3m of defaulted assets, roughly 48.4% of the portfolio. The last time Moody’s reviewed the transactions none of the assets had defaulted. Crystal River Capital is a mortgage real estate investment trust (REIT) managed by Brookfield Asset Management.

Moody’s placed 11 classes of CDOs with GS Mortgage Securities Corp. on review for downgrade, roughly $700m in securities. According to the Stanford School of Law, investors filed a lawsuit in early 2009 against GS for misleading statements.

The Moody’s review will focus on potential losses from defaulted collateral and other indicators.

Write to Jon Prior.

Posted in Secondary Market/Investors, Top Stories | No Comments »

Freddie Single-Family Mortgage Book Grows to 4% Delinquent

Friday, February 26th, 2010

Freddie Mac (FRE: 0.00 N/A) mortgage delinquencies continued to rise in January, even though the volume of the GSE's total mortgage portfolio is declining. Furthermore, a credit rating agency hints at deeper woes for the firm as mortgage-backed securities (MBS) investors who bought in at premium rates are now at risk of seeing a drop in their net investment.

The delinquency rate on Freddie's single-family loans grew to 4.03% in January, up from 3.87% in December, according to a monthly volume summary (available to download here). A year ago, the delinquency rate was 1.98%.

At the same time, the total mortgage portfolio decreased at an annualized rate of 1.7% in January.

The new figures arrive as Brian Harris, a senior vice president of the financial institutions group at Moody's Investors Service, warns of other difficulties within agency MBS, like those issued by Freddie. Harris said in monthly commentary provided to HousingWire, that agency MBS investors will likely see their net investment decline because of the recently announced delinquent loan buyouts at both Freddie and Fannie Mae (FNM: 0.00 N/A) Freddie Mac is expected to complete the majority of its repurchases this month, providing capital preservation, however, Fannie's will take some more time, Harris said.

As HousingWire's Linda Lowell previously reported, both government-sponsored enterprises (GSEs) announced moves to buyout delinquent loans — repurchases Harris noted "will preserve the GSEs' capital" in the wake of Financial Accounting Standards (FAS) 166 and 167 implementation.

Freddie's refinance-loan purchase and guarantee volume was $22.6bn in January, down from $27.3bn in December.

Total guaranteed purchase coupons (PCs) and structured securities issued decreased at an annualized rate of 0.5% in January. Freddie reported $36.6bn of purchases and issuances for January. This month's issuance includes $7.2bn of guarantees under the Housing Finance Agencies initiative, Freddie said.

Freddie also announced Friday a move to stop purchasing and securitizing interest-only mortgages on Sept. 1, 2010.

Write to Diana Golobay.

Disclosure: The author holds no relevant investment positions.

Posted in Secondary Market/Investors, Servicing/Default, Slider, Top Stories | 5 Comments »

Lennar Buys 2,700 Plots of Land from Starwood Subsidiary

Friday, February 26th, 2010

Homebuilder Lennar Corp. (LEN: 22.28 +0.68%) finalized a deal to acquire more than 2,700 plots of land, for building new homes in 38 communities across Florida, from residential real estate investment firm Starwood Land Ventures.

The land was part of the Florida portfolio of the now-bankrupt builder Tousa that Starwood acquired at auction in late January. The sites are located in entry-level, master planned and golf course communities in the Tampa, Orlando, Jacksonville and Southeast Florida markets. Lennar said it plans to build single-family homes, townhomes and garden villas priced from the low $100,000s.

"We view this deal as a major step forward for Lennar's growth in the state of Florida," said Lennar regional president Fred Rothman.

Miami-based Lennar posted a $35.6m profit in its fiscal year Q409 that ended Nov. 30 and will benefit from a $320m net operating loss (NOL) carryback tax refund. And earlier this month, Lennar said it bought ownership of two loan portfolios with a combined unpaid balance of $3.05bn. The portfolios hold 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.

Starwood Land ventures is the Florida-based subsidiary of Greenwich, Conn.-based Starwood Capital Group, the private investment firm that spun off the Starwood Property Trust (STWD: 19.71 +0.31%) real estate investment trust (REIT). Last week, that REIT purchased a $503m portfolio of performing commercial mortgages from financial services firm Teachers Insurance and Annuity Association, College Retirement Equities Fund (TIAA-CREF).

Write to Austin Kilgore.

Posted in Secondary Market/Investors, Top Stories | No Comments »

Chinese Drywall Bankrupts Construction Firm

Friday, February 26th, 2010

Chinese drywall has driven a South Florida construction company into bankruptcy.

Homestead-based South Kendall Construction Corp. was riding high just a few years ago, completing homes at the Keys Gate subdivision in Homestead.

The company made $4.8 million in gross income in 2008 and $3.8 million in 2007, according to court documents. Then, the homebuilding market crashed and owner Patrick Gleber discovered he had a problem: Dozens of homeowners claimed to have found stinky, high-sulfur Chinese drywall in their homes.

Posted in Around the Web | 1 Comment »

Realtors See Existing Home Sales Slip 7.2% in January

Friday, February 26th, 2010

The re-sale volume of existing homes dropped off 7.2% from December to a seasonally adjusted annual rate of 5.05m units in January, according to the National Association of Realtors (NAR).

Sales of these housing units — including single-family homes, townhouse and condos — are still 11.5% above the January 2009 level, despite the monthly decline.

“Most of the completed deals in January were based on contracts in November and December," said NAR chief economist Lawrence Yun. "People who got into the market after the home buyer tax credit was extended in November have only recently started to offer contracts, so it will take a couple months to close those sales. Still, the latest monthly sales decline is not encouraging, and raises concern about the strength of a recovery.”

Unsold housing inventory at the end of January fell 0.5% to 3.27m units available for sale, representing a 7.8-month supply at the current sales pace.

The national median existing-home price for all housing types was $164,700 in January, unchanged from a year earlier. Distressed homes accounted for 38% of sales last month, and NAR noted they "continue to downwardly distort the median price."

NAR also found first-time homebuyers accounted for 40% of purchases in January, down from 43% in December. Investors took 17% of purchases, up from 15% last month. The rest were repeat buyers.

Write to Diana Golobay.

Posted in Origination/Lending, Top Stories | 1 Comment »

A Tax Loophole for the Rich, a Real Estate Bubble for Everyone

Friday, February 26th, 2010

The Feb. 19 front-page article "Another wave of real estate distress" described the glut of commercial real estate and indicated that "there will be significant bankruptcies among developers and significant failures among community banks."

An Economy & Business article the next day, "Plan to boost tax on 'carried interest' stalls in Senate," described the Senate's lack of will to tax the profits of huge hedge funds, private equity, venture capital and real estate investment firms. The most vocal opponents of the tax are commercial real estate developers, who say raising taxes would "discourage investment in real estate at a time when the economy needs it most." The article further stated, "One of the incentives of investing in real estate is the capital-gains treatment."

Posted in Around the Web | No Comments »

What's Happening With REITs?

Friday, February 26th, 2010

What are we to make of REITs? These trusts, which trade as equities and are essentially collections of real property, or mortgages, became widely reviled when the real estate bubble collapsed in late 2008. Domestic and global REIT mutual funds plunged 39.6% and 46.6%, respectively, according to Morningstar. But REITs joined the S&P in regaining a lot of ground last year, delivering an average return of 20% in 2009.

Despite huge vacancy rates in malls, office buildings and multifamily housing complexes, many REITs in the $250 billion market performed well, particularly in the second half of the year, when they returned just slightly less than the S&P. Domestic and global REIT mutual funds were up an average of 31% and 37%, respectively, according to Morningstar.

Posted in Around the Web | 1 Comment »

Bank Outlines Plans to Double Income

Friday, February 26th, 2010

JPMorgan Chase executives yesterday outlined their plans to double net income from last year's $11.7bn, a goal they expect to reach once credit markets improve and the bank reaps returns from recent acquisitions and investments.

JPMorgan's leaders, speaking at the bank's midtown Manhattan headquarters, stopped short of specifying when they would reach the target for annual profits of $22bn-$24bn – a nod to the uncertain outlook for both the world's economy and looming reforms to financial services regulations.

Posted in Around the Web | No Comments »