Archive for March, 2010
The Moody’s/REAL Commercial Property Price Index climbed 1 percent from December, Moody’s said today in a report. Values are 40% lower than the peak in October 2007. The index fell 24% from a year earlier.
…
The number of transactions fell 8% to 376 in January from a year earlier and was lower than December, when buyers and sellers tried to complete deals before the year’s end, according to the report.
“A few months of price gains does not necessarily indicate a sustainable trend, particularly in these difficult times,” Moody’s said.
Last week, I wrote about REO volumes and showed how bank-owned real estate was back on the upswing after two quarters of limited inventory—and by the end of last week, so too had most of the financial press. Which is flattering.
This week, I’m going to build from last week’s column to take a more in-depth look at delinquency trending to help you get a feel for where the real estate market is headed next. (I can only hope the message is as widely followed by my journalistic colleagues this week, as well.)
Last week, using data from Lender Processing Services (LPS: 16.78 +1.39%), I highlighted the fact that there are some 7.5 million loans in some stage of delinquency, and noted that problem residential mortgage loans are growing—not shrinking. Take a peek at the below chart, which clearly shows that delinquency and foreclosure inventory is currently double the levels seen in the 1995-2005 decade.
While the pace of delinquencies seems to be slowing somewhat as of late—good news, indeed!—we still face a situation where loans are going bad faster than we can offer a “fix.”
Consider that 2.5 million loans, current at the start of 2009, had become 60+ days delinquent or in foreclosure by the end of January 2010, according to LPS. Compare that to the roughly 2 million loan modifications in process or processed in generally the same time frame—116,000 permanent HAMP mods + 830,000 trial HAMP mods + 1.0 million completed non-HAMP mods.
It’s simple math: 2.5 million is greater than 2.0 million.
And keep in mind that many of the loans modified now will inevitably re-default later, as most modifications bring with them substantial re-default rates—roughly 60% or so, according to most of the data I’ve seen (the Treasury does not report on HAMP re-default rates, by the way).
JP Morgan Chase & Co. (JPM: 37.21 -0.75%), for example, recently suggested to investors that it expects re-default rates on completed modifications to run 35 to 50 percent one year out, reaching as high as 65 percent 3 years out.
So let’s assume the redefault rate over time is untenably optimistic and stays at 35 percent (JPM’s lowest bound, just for the first year). Even in such a scenario, we’ve got a "fix" shortfall of 1.2 million loans on new defaults recorded during 2009 alone. Short sales will help cover some of this gap, absolutely—but as I’ve written before, I do not expect them to be the panacea that many are currently predicting.
Regardless, the point here is that there remains significant distressed housing inventory yet to be cleared off the books—and cleared off the books it must be, one way or another. Which means whether REO or short sale, these properties must eventually come on the market and be sold to somebody in order for there to be recovery.
With that as background, take in recent remarks by the National Association of Realtors’ chief economist Lawrence Yun, discussing January’s 7.6 percent monthly drop in pending home sales: “We will see weak near-term sales followed by a likely surge of existing-home sales in April, May and June,” Yun said in a recent press statement.
“The real question is what happens in the second half of the year. If there is sufficient job creation, housing can become self-sustaining with stable to modestly rising home prices because inventory has been trending downward.”
Because inventory has been trending downward. Read Yun’s quote again, and focus on that very last phrase. Given the numbers I threw out earlier in this column, we’d all better think about what millions of distressed sales will do to inventory, and prices too. We’d better start doing something that the NAR is famously horrible at: considering the supply side of the housing economics equation, rather than simply looking at ways to juice housing demand (read: generate commissions for dues paying NAR members).
And speaking of housing demand, I’m not sure how higher mortgage rates tied to the Fed’s exit from mortgage purchases coupled with a pending expiration of the homebuyer tax credit will translate into an expected “surge of existing-home sales in April, May and June,” as Yun asserts. Both changes to the mortgage market’s inner workings are scheduled to hit in April.
More impartial economists than Yun are watching April as a critical month for U.S. housing. Mark Fleming, chief economist at First American CoreLogic has said that “[t]he big unknown for the 2010 spring selling season continues to be the future of the federal homebuyer tax credit.”
I agree insofar as demand for homes goes, but my concern sits more squarely with the supply side of the housing equation—what, exactly, becomes of millions of units of already distressed residential housing?
To understand the depth of the problem here: we’ve already got 4.7 million loans either 90+ days delinquent or in foreclosure, according to LPS data. I could legitimately argue that at least 25% of that figure should already have been listed on the market as inventory to be sold via REO or short sale (after all, the average age of a loan in foreclosure is well over one year).
The NAR estimates that there are 2.8 million single-family existing homes available for sale, representing a 7.6 month supply at the annualized, seasonally-adjusted sales rate recorded in January 2010; add the 25% figure I describe to that, and we might in reality be closer to an single-family inventory figure of 4.0 million and 11 months supply.
Here’s the bottom line: any so-called recovery in housing right now is a faux recovery until we work through bloated distressed inventory levels. The sooner we get to work on this, the sooner we get ourselves a long-term and sustainable recovery in U.S. housing.
Paul Jackson is the publisher of HousingWire.com and HousingWire.com. Follow him on Twitter @pjackson.
The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
The $2.59trn of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10% of the economy and raised concerns whether the US deserves its triple-A credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.
“It’s a slap upside the head of the government,” said Mitchell Stapley, the chief fixed-income officer in Grand Rapids, Michigan, at Fifth Third Asset Management, which oversees $22bn. “It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”
Lennar Corp., the third-largest US homebuilder, is investing in failed bank loans and distressed real estate assets to boost revenue as demand for new houses shows few signs of revival.
The Miami-based company’s purchase last month of a share of $3.05bn of delinquent loans seized by the Federal Deposit Insurance Corp. from failed lenders takes the builder into territory so far dominated by private equity firms such as Thomas Barrack’s Colony Capital and Barry Sternlicht’s Starwood Capital Group.
While builders such as Toll Brothers and Meritage Homes Corp. have bought delinquent debt backed by land, aiming to develop it later, Lennar has been the most active in pursuing strategies to benefit from the real estate market’s slump, said John Burns, chairman of John Burns Real Estate Consulting.
“Nobody else is doing what Lennar is doing — nobody,” said Burns, based in Irvine, California.
Up until now, the United States has operated under a "fractional reserve" banking system. Banks have always been required to keep a small fraction of the money deposited with them for a reserve, but were allowed to loan out the rest. But now it turns out that Federal Reserve chairman Ben Bernanke wants to completely eliminate minimum reserve requirements, which he says "impose costs and distortions on the banking system". At least that is what a footnote to his testimony before the US House of Representatives Committee on Financial Services on February 10th says. So is Bernanke actually proposing that banks should be allowed to have no reserves at all?
The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
The truth is that Bernanke is making a mess of the US financial system.
Citigroup is expanding its correspondent lending business, as the bank appears to be re-embracing home lending as the US economy's recovery inches forward.
It was reported on Friday that Citigroup was reversing its original plans to scale back the home lending business, by increasing its purchase of home mortgages and by keeping more loans on its balance sheet.
Citigroup, in an e-mailed statement late Friday, said the move is not a shift in strategy. The company is "committed to growing our mortgage business with a focus on quality and long-term sustainability," a spokeswoman said.
Citigroup has "reengineered quality controls to be best in class and are looking to grow the correspondent channel, in a controlled, deliberate manner, with high-quality lenders who provide superior quality loans," the statement said. "This expansion is an important step to ensuring the foundation for future success is in place."
Madison-based water park resort operator Great Wolf Resorts Inc. plans to sell first-mortgage debt, and use the sale proceeds to pay off debt on three of its properties.
The debt being sold totals $225m that comes due in 2017, subject to market conditions, according to a Great Wolf statement. The company plans to use the proceeds to repay outstanding mortgage debt, totaling $212m, on resorts in Mason, Ohio; Williamsburg, Va.; and Grapevine, Texas. Any proceeds left will be used for general corporate purposes.
Sidley Austin’s London-based international finance group restructured approximately €3.5bn ($4.7bn) of debt including around €1.13bn of commercial mortgage-backed securities (CMBS) notes issued by Fleet Street Finance Two.
The transaction is the first CMBS securitization in Germany to be fundamentally restructured and is one of the largest and most complex restructurings in the German market. The principal reason for the restructuring was the sole underlying tenant, Karstadt, going into bankruptcy in Germany.
The restructuring included an extension of the maturity of the various classes of bonds issued in the CMBS by Fleet Street Finance Two and an increase in the coupon payable to certain classes of bondholders.
“The restructuring of the CMBS Notes could pave the way for the renegotiation of billions of euros of complex property financings,” Sidley Austin said in a statement. “Many investors in CMBS have struggled to restructure these complex financings as the property backing them has plummeted in value.”
