Archive for March, 2010
The continued economic pressure on the commercial real estate market — beleaguered under high unemployment and low occupancy — is dragging down commercial mortgage performance. But as rental rates continue to decline, real estate companies and tenants see potential to buy commercial property at distressed prices.
The performance of commercial mortgages continued to decline among most investor groups in Q4 2009, according to quarterly data from the Mortgage Bankers Association (MBA).
The 30+ day delinquency rate on loans held in commercial mortgage-backed securities (CMBS) rose 1.63 percentage points to 5.69%. The 60+ day delinquency rate of multifamily loans held or insured by Fannie Mae (FNM: 0.00 N/A) rose 1 basis point to 0.63%. The 90+ day delinquency rate on multifamily loans held or insured by Freddie Mac (FRE: 0.00 N/A) rose 4 bps to 0.15%:
"Delinquency rates are likely to remain under pressure until job and other economic growth returns to levels that will have a material impact on demand for commercial real estate space," MBA said in its report (download here).
Originations, like property sales, grew slowly over the year. MBA found commercial and multifamily mortgage originations were 50% higher in Q4 2009 than in Q1 2009 as origination grew. Commercial mortgage debt outstanding fell 1.7% from the previous quarter and is down 2.8% from the same time last year, MBA said.
Vacancy rates rose among major property groups, to 19.7% of all office properties in Q409, 19.2% among retail properties and 8.6% of multifamily properties. In the quarter, asking rents dropped 8% for office and retail properties and 6% for multifamily property.
Although commercial real estate values and rents are expected to decline further in the near term, the market environment looks ripe for purchase opportunities, according to a Deloitte Financial Advisory Services survey of 327 executives from both real estate companies and tenant renting commercial real estate.
“The commercial real estate market continues to be adversely affected by one of the deepest recessions in decades. Increased unemployment has resulted in less demand for office space, reduced rents and an overall decline in commercial property values,” said E.J. Huntley, a principal at Deloitte Financial Advisory Services. “Right now, commercial real estate executives are weighing their options, determining if the time is right to invest while prices remain depressed and before interest rates begin to rise.”
Roughly three-quarters (75%) of respondents to the Deloitte survey expect commercial property values and asking rents to shrink this year. Two-thirds of respondents expect full recovery in the market in two to three years, with one-third expecting that recovery in four years or more.
In the mean time, buying opportunities exist. Nearly half of respondents said lower prices make buying more financially advantageous than renting, Deloitte said. Half of executives at real estate companies and nearly 40% of tenants renting commercial real estate indicated their companies are already considering potential acquisitions.
Maturing commercial mortgage debt remains a significant hurdle to recovery in coming years. Deloitte said 70% of executives responding companies have debt maturing over the next three years on property in real estate portfolios. Two-thirds of these plan to refinance the debt, which might be made difficult under tighter credit conditions. Of those respondents with debt maturing over the next three years, 14% said they planned to raise equity as part of refinancing.
Write to Diana Golobay.
Disclosure: the author holds no relevant investment position.
The recent conversations I've been having around the proposed covered bond act (read HousingWire magazine for the inside scoop) are pointing to two major concerns: the legal framework and the assets involved.
The legislation, of course, is meant to clear some of the hurdles to the first concern.
Yet, after reading the proposed bill, I was taken by the sheer asset variety available: student loans, credit cards, autos and more. First structured in Europe in the late 1700s, covered bonds are typically collateralized by mortgages or loans linked to municipals, as the strength of the issuer is considered stronger than in corporates. But with the new bill, the European method is taking on a decidedly American form, one that is filled with options.
So here's the conflict: is the offering of so many types of assets meant to provide an alternative to securitization, which in the past was used to finance the origination of loans in these areas? This makes some sense as securitization is no longer as cheap to structure and the assets cannot be moved readily off-balance sheet.
Covered bonds, with its dual recourse and on-balance sheet structures, are also pricey to maintain. But traditionally, covered bonds spoke more to the sovereign wealth investor, not the private ABS investor, with ratings pegged to the issuer.
But with the timing and market in consideration (after all, we are still waiting for the new private label RMBS), is the covered bond act telling us that mortgages are no longer the best-structured finance investment out there? The mere consideration of alternatives suggests this is true.
But think about it. With Americans walking away (or thinking about it) from their mortgages and showing a preference to paying their auto notes and credit cards, is the oldest structured finance vehicle in Europe, looking for launch in America, providing us the ultimate sign of the times?
According to a report from lawfirm Patton Boggs, investors are looking for some sort of incentive, and could use some convincing.
“Investors provide the capital that make securitization markets work yet the lessons learned over the last three years demand greater transparency and empowerment of investors for them to be comfortable buying mortgage products in the future,” said Micah Green, a partner at the lawfirm.
So if it's a question of investor confidence, we need to ask if investors will no longer accept investing in mortgages, if the issuer itself doesn't backstop the losses.
Because, they may not, if given the option not to.
Investors seem remarkably relaxed about the end on Wednesday of the Federal Reserve’s $1.25trn program to buy mortgage-backed bonds guaranteed by Fannie Mae and Freddie Mac.
Just a few months ago, many worried that, without the central bank’s continued intervention, home loans could become expensive enough to scare off prospective buyers and send the market into a renewed slump. Now they are regarding the Fed’s exit as little more than a minor blip. But that could be a sign that complacency is seeping back into the financial system.
Granted, there are reasons to explain investors’ sanguine view, and timing has much to do with it. For starters, a lot of traditional buyers of these agency mortgage bonds have either stayed on the sidelines or bought far fewer bonds than their portfolio allotments allow. They, along with index funds, now account for 18% of the market, down from 25% before the Fed stepped in, according to Credit Suisse.
Treasury Secretary Timothy Geithner testified Tuesday on a plan to reform Fannie Mae and Freddie Mac, the government-sponsored enterprises now in limbo. But we don’t have to wait years to reform the mortgage system; a better approach could be introduced right away.
The business model of Fannie Mae and Freddie Mac is fundamentally unsound. These public-private partnerships were supposed to serve the public interest and the interest of shareholders. But this was never properly defined and reconciled.
Management’s interests were more closely allied with those of shareholders. They had an incentive to lobby Congress — both to expand homeownership and to protect and use their government-sponsored duopoly status.
The GSEs extended their activities from insuring and securitizing mortgages to building highly leveraged portfolios of securities by taking advantage of their implicit government backstop. They profited from the growth without bearing the risk of collapse: Heads they win, tails you lose.
The Supreme Court handed a victory to the $11trn mutual fund industry by endorsing a 1982 legal standard to decide the fairness of fund fees, a ruling that gives companies considerable freedom to set investment adviser charges.
The justices unanimously adopted the standard in a 1982 US appeals court ruling that fees are excessive only when they are so high they could not be the result of arm's-length bargaining and bear no reasonable relationship to the services provided.
Industry executives and attorneys described the high court's ruling as a big win because it limits the potential that Congress or lower courts could force fund firms to reduce the roughly $90bn they collect in fees every year.
As of March 31 the Federal Reserve is no longer buying mortgage-backed securities (MBS), terminating a large component of its effort to stabilize and stimulate the economy. The Fed poured $1.25trn into purchasing risky bundles of housing loans, providing capital for troubled lenders and investors in the mortgage-backed market.
The Fed's purchasing program provided much-needed liquidity for government-run mortgage financing companies Freddie Mac and Fannie Mae to buy bank loans issued to home buyers. The program also allowed mortgage rates to remain abnormally low, which let borrowers make more manageable payments and new home buyers to purchase properties. Indeed rates have been low: 30-year fixed mortgage rates at 5% interest and adjustable mortgage rates with interest in the low 4s.
