Archive for March, 2010
General Growth Properties Inc is getting closer to filing a bankruptcy exit plan, with its board planning to meet on Monday to give final approval to the proposal, sources familiar with the matter said.
The plan, which would have General Growth exit as a stand-alone company, is backed by three large investors — Brookfield Asset Management, Fairholme Capital Management and William Ackman's Pershing Square Capital Management, the sources said on Sunday.
General Growth, the second-largest U.S. mall owner, could file the plan in bankruptcy court as soon as after the close of markets on Monday, the sources said, declining to be named because these discussions are not public. The exact timing has not yet been finalized, though, they added.
Potential suitors are likely eagerly waiting the filing, which would give them further details about the plan. It could prove to be the starting gun for them to jump into the fray with rival bids.
"It's kind of a first step," one of the sources said.
The plan would give General Growth a floor for value and other suitors could come up with rival bids that could ultimately change the outcome, the source added.
A look at stories across HousingWire’s weekend desk…with more coverage to come on bigger issues:
While there is no single remedy to solving the housing crisis, Laurie Goodman, a senior researcher at Amherst Securities believes that the Treasury Department’s new principal forgiveness program is a step in the right direction by attacking the real problem facing mortgage finance — negative equity.
“The emphasis on principal reduction is recognition of the fact that the combined loan-to-value ratio is the most important predictor of defaults,” Goodman writes in a research note Friday. “We believe principal reduction programs, if implemented correctly, are apt to dramatically raise the success rate on modifications. Not only is this good public policy and good for borrowers, but it is very positive for the valuation of senior [residential mortgage-backed securities] RMBS securities.
Goodman criticized the first incarnation of the Making Home Affordable Modification Program (HAMP) because it did not address negative equity. According to her analysis, as long as borrowers are deeply underwater, they are unlikely to pay in the long term. Thus, the re-default rate will be very high, and the dead weight costs of foreclosure have not been avoided.
On the topic of negative equity, First American CoreLogic estimates that the typical US homeowner who is in a negative equity position will not experience positive equity until late 2015 to early 2016. In severely depressed markets, the typical borrower in negative equity may not experience positive equity until 2020 or later. CoreLogic added that for the foreseeable future, decline in negative equity is driven slightly more by amortization than by home price appreciation trends.
CoreLogic projects more than 11.3m — or 24% — of all residential properties with mortgages, had negative equity at the end of the fourth quarter of 2009.
The chart above projects the amount of negative equity using CoreLogic short-term forecasts and a baseline view of long-term price trends nationally through 2020. For the typical underwater borrower in the US, it will take until late 2015 or early 2016 for negative equity to disappear.
The Standard & Poor’s (S&P)/Case-Shiller home price index continued to inch up over the past several months on a seasonally adjusted basis, proving to be the outlier among nearly all other measures of home prices. An analyst at Barclays Capital (BarCap) expects a 0.3% month-over-month drop in housing prices when the latest report comes out Tuesday. If the projections are correct, this would translate into a slowdown in the year-over-year pace of decline to -1.3% from -3.1% in December, BarCap said.
In addition, BarCap’s Michelle Meyer projects construction spending to decline 1.2% in February, following a 0.6% drop in January and leave expenditures down about 10% year-over-year. The decline will be across all construction sectors, but driven by the nonresidential sector. Inclement weather in parts of the Northeast and South played a factor in February’s decline, consistent with the drop in housing starts in these regions, Meyer wrote.
Regulators closed four banks Friday at a total cost of $320.3m.
The Georgia Department of Banking and Finance closed Carrollton, Ga.-based McIntosh Commercial Bank. The four McIntosh Commercial branches reopened as branches of West Point, Ga.-based CharterBank. The bank did not pay the FDIC a premium to assume all of the McIntosh Commercial’s $343.3m in deposits and agreed to purchase essentially all of the failed bank's $263.1m in assets. The FDIC estimates the cost to the deposit insurance fund (DIF) will be $123.3m.
The Arizona Department of Financial Institutions closed Phoenix-based Desert Hills Bank. The six Desert Hills branches reopened as branches of Westbury, NY-based New York Community Bank, which did not pay the FDIC a premium to assume all of the $426.5m in deposits of Desert Hills Bank and agreed to purchase essentially all of the failed bank's $496.6m in assets. The cost to the DIF is $106.7m.
The Office of the Comptroller of the Currency (OCC) closed Cartersville, Ga.-based Unity National Bank. The five branches reopened as branches of Little Rock, Ark.-based Bank of the Ozarks, which did not pay the FDIC a premium to assume all of the $264.3m in deposits of Unity National Bank and agreed to purchase essentially all of the failed bank’s $292.2m in assets. The cost to the DIF is $67.2m.
The Office of Thrift Supervision (OTS) closed Key West, Fla.-based Key West Bank. The one branch reopened as a location of Conway, Ark.-based Centennial Bank, which will pay the FDIC a premium of 0.5% to assume all of the $67.7m in deposits of Key West Bank and agreed to purchase essentially all of the failed bank’s $88m in assets. The cost to the DIF is $23.1m.
Write to Austin Kilgore.
Since the inception of the Home Valuation Code of Conduct (HVCC) in May 2009, there has been much discussion, and misinformation, about the benefits and harm caused by the controversial agreement with the New York Attorney General’s office and the Federal Housing Finance Agency.
This agreement, originally made with the Office of Federal Housing Enterprise Oversight, requires Fannie Mae and Freddie Mac to only accept appraisals ordered from parties independent of the loan production process. Essentially, this means, anyone that may get paid by a successful closing of the loan cannot order the appraisal.
In the past six months while the Realtor and mortgage broker associations point fingers at appraisal management companies for their use of incompetent appraisers who don’t understand the local markets, appraisers are complaining that banks are abdicating their regulatory requirements to obtain credible appraisals by forcing them to go through appraisal management companies at half of their normal fee.
Banking regulations allow banks to utilize the services of third party providers like appraisal management companies, but ultimately hold the bank accountable for the quality of the appraisal. Unfortunately, the banking regulators have yet to express a concern that there is a problem with the current situation.
I need to state that appraisal management companies can provide a valuable service to the lending industry by ordering appraisals, managing a panel of appraisers, performing quality reviews of the appraisals, etc. However, banks have been enticed by appraisal management companies to turn over their responsibility for ordering appraisals with arrangements that ultimately do not cost them anything.
The arrangement works like this: The bank collects a fee for the appraisal from the borrower and orders an appraisal from the appraisal management company, which in turn assigns the appraisal to be done by an independent appraiser or appraisal company. During this process the appraisal fee paid by the borrower gets paid to the appraisal management company who retains approximately 40% to 50% and pays the appraiser the remainder. So for the $400 appraisal fee being charged to the borrower, the appraiser is actually being paid $160-$200 for the appraisal. Absent an appraisal management company, the reasonable and customary fee for the appraisers service would be $400, not the $160 to $200 currently being paid to appraisers.
Rules within the Real Estate Settlement Procedures Act (RESPA) have allowed this situation to occur, despite prohibitions against receiving unearned fees, kickbacks and the marking up of third party services, like appraisals. RESPA clearly states, “Payments in excess of the reasonable value of goods provided or services rendered are considered kickbacks.”
Banks are allowed to collect a loan origination fee. This fee is intended to cover the costs of the bank related to underwriting and approving a loan. Ordering and reviewing an appraisal is certainly a part of that process. Understanding that banks ultimately have the regulatory requirement to obtain the appraisal for their lending functions, why is it that borrowers and appraisers are paying for these services that are outsourced to appraisal management companies? Does the borrower benefit from a bank hiring an appraisal management company? Does an appraiser benefit from a bank hiring an appraisal management company? The answer to those three questions is a very resounding no! Clearly the only one in the equation that benefits is the bank, so why shouldn’t the banks be required to pay for the outsourcing of the appraisal ordering and review process?
It is here where I believe the solution for the appraisal industry exists. Since banks are the obvious benefactor from the appraisal management company services, the regulators should require that the banks, not the borrowers or appraisers, pay for the services received. This one small change in the current business model would allow appraisers to receive a reasonable fee for their services and in turn they should be held more accountable for the quality and credibility of the appraisals they perform.
Appraisal fees would be competitive among appraisers in their local markets, much like the professional fees charged by accountants, attorneys, dentists and doctors. Appraisal management companies would suddenly be thrust into a more competitive situation where their services can be itemized and their quality and price be compared to those of competing providers. This will ultimately lead to lower fees and improved quality of services to the banks.
The banks will then have a very quantifiable choice: Do they continue to outsource their obligations to an appraisal management company and pay for those services or do they create an internal structure to manage the appraisal ordering and review process? Either way, the banking regulators need to hold the banks more accountable at the end of the process.
When all of the previously discussed elements are present, I believe the appraisal industry will be functioning the way it was intended. Appraisal independence will be enhanced and borrowers will be rewarded with greater quality and reliability in the appraisal process. This one small change may not have been enough to prevent the wide spread decline in housing values during the past three years. However, it is exactly the change that is needed, in addition to the HVCC, to stop the current finger pointing and address the poor quality and non-independent appraisals that have been and are still rampant in the industry.
Tony Pistilli is a Certified Residential Appraiser and the vice-chair of the Real Estate Appraiser Advisory Board at the Minnesota Department of Commerce.
Want more news and perspective on valuations and the HVCC? Check out HW Focus, included in the April edition of HousingWire magazine. The inaugural edition of this supplement is a comprehensive overview of the valuation industry.
The current state of the mortgage market is promoting owner-occupants to default, according to research released today, in an indication of the growing moral hazard behind government-led homeowner rescue programs.
When the analytics firm Equifax looked at the November 2008 vintage of mortgages, it found that owner occupants default at a lower rate than investors or borrowers with second homes. But the vintage studied was in the pre-HAMP era of course, and since then, borrowers are now taking advantage of a new market, one that is especially favorable for owner-occupants, according to Amherst Securities.
Non-agency investors trying to navigate through the murky values of mortgage bonds could take note, according to the Equifax report, as owner-occupancy is considered to be a “key determinant” of loan and deal performance. Investors used to rely on such loan-level data, but when mortgage fraud increased during the current housing crisis, the information became unreliable.
Equifax analysts evaluated a specific sample of loans that were outstanding in November 2008. The 12-month default rate for loans identified as a principal residence at origination was 4.5%, compared to 6.5% for investment properties and 5.5% for second homes.
Analysts found that the trend continued for seasoned loans. According to the report, 18% of loans reported as owner-occupied at origination were no longer labeled as such. Those properties defaulted at a rate of 7%. However, the 66% of those loans were owner-occupied and defaulted at a rate of only 3.7%. To Equifax, the remaining 16% of loans had unclear owner-occupancy status but had a 5.3% default rate.
Investors also need to know what properties are eligible for modification. The US Treasury Department launched the Home Affordable Modification Program (HAMP) in March 2009 to provide incentives to servicers for the modification of loans on the verge of foreclosure. Only owner-occupied mortgages are eligible for the program.
According to the research firm Amherst Securities, HAMP changed the economic environment to a friendlier place for owner-occupants. The Treasury today even launched an initiative to reduce the principal of a loan under the program.
The graphs above show owner-occupied borrowers and investors had similar default transition rates until early 2009. But in early 2009 – HAMP launched in March 2009 – behavior for owner-occupied borrowers began to weaken.
“[T]he environment for borrowers who own investor properties has changed much less than for owner-occupied borrowers,” according to the Amherst report. “[T]hey can live in their house rent free during the time it takes to establish if they qualify for a HAMP mod. And if they qualify, they can stay in the program for at least 3 months, even if they do not make a single payment.”
Write to Jon Prior.
The Federal Reserve is open to selling some of the securities now on its books as part of its withdrawal from its unconventional efforts to prop up the economy, Chairman Ben Bernanke said Thursday, in a change of tone on how the Fed will execute its exit strategy from crisis-era interventions.
Over the past 15 months, with the Fed's short-term interest rate target near zero and the economy in horrible shape, the central bank bought more than $1.7trn in long-term assets to push rates down further. The purchases of those assets — including mortgage-backed securities, debt in companies like Fannie Mae and Freddie Mac, and long-term Treasury bonds — helped swell the Fed's balance sheet from about $800bn before the crisis to $2.3trn last week.
Bernanke, testifying Thursday before the House Financial Services Committee, said that "if necessary," the Fed "has the option of redeeming or selling securities" bought during the crisis.
In a letter to the US Senate Committee on Banking yesterday, 21 trade groups representing the various dimensions of the mortgage finance business voiced concerns that current considerations on regulatory reform may be moving too quickly – without taking into account the potential adverse consequences these new mandates may render unto the economy-at-large.
“There are serious concerns about the future viability of these markets given that the combined impact of legislative, regulatory and accounting changes could effectively shut down private lending and investing,” said Brendan Reilly an SVP of government relations at the Commercial Real Estate Finance Council (formerly the CMSA), one of the institutions that signed the letter.
“Reforms cannot be made in a vacuum," he adds. "There needs to be close examination of what these changes in totality mean for credit availability, jobs and the overall economy."
At the center of the reform, is the bill introduced by Sen. Christopher Dodd, (D-Conn.) one of two parties the letter is specifically addressed to, along with ranking member Sen. Richard Shelby (R-Ala.).
The 5% risk retention section of the Dodd bill would require originators and securitizers to retain a percentage of every loan made, in order to keep some skin in the game. The reasoning behind this provision is that all parties remain tied to any losses and, therefore, hedge themselves against risk through greater transparency, underwriting, due diligence, etc. Over time, however, the trade groups warn this will limit lending capacity by constricting balance sheet activity.
In the midst of the Dodd bill, new Financial Accounting Standards 166 and 167 are providing additional regulatory capital guidelines. From a standpoint of timing, the implementation of the standards now is straining an already highly-challenged structured credit market. One the letter claims is responsible for providing 40% of necessary funding in the country for the last 15 years.
Currently, credit capacity remains constrained despite enormous borrower demand and significant loan maturities while asset values continue to decline in an economy of flagging employment and low business expansion.
For example, the letter estimates that $1trn in commercial mortgage loans alone will mature in the next few years. Servicing these loans is vital to economic improvement, especially in the CMBS market, Reilly adds.
“The CMBS market is critical to a recovery because the primary banking system does not have enough capacity to handle the upcoming CRE debt maturities,” he said.
To back up their point of centralizing reform efforts, the letter to the Senate committee contains two notable quotes. Federal Reserve Gov. Elizabeth Duke, for example, observes that “as policymakers and others work to create a new framework for securitization, we need to be mindful of falling into the trap of letting either the accounting or regulatory capital drive us to the wrong model.”
Followed by a quote from Comptroller of the Currency John Dugan who said, “if we do not appropriately calibrate and coordinate our actions, rather than reviving a healthy securitization market, we risk perpetuating its decline."
Neither quote is footnoted with the context in which it originated.
The other trade groups listed as author are as follows:
Write to Jacob Gaffney.
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