Archive for September, 2011
The housing market’s problems aren’t going away, but policy makers and industry officials appear to be running away from them, mortgage-bond pioneer Lewis Ranieri told an audience of financial industry executives on Monday.
Ranieri, considered by many to be the godfather of the U.S. housing-finance market for his role developing the mortgage-backed security, didn’t pull any punches in an address to the North Carolina Bankers Association in Raleigh. The industry and policymakers are engaged in “self-interested bickering” over who will bear the cost of needed overhauls while the housing market is rotting, he said.
Roughly 10.4 million mortgages, or one in five outstanding home loans in the U.S., will likely default if Congress refuses to implement new policy changes to prevent and sell more foreclosures, according to analyst Laurie Goodman from Amherst Securities Group.
At the end of the second quarter, more than 2.7 million long-delinquent loans, others in foreclosure and REO properties sat in the shadow inventory, more than double what it was in the first quarter of 2010 (Click to expand the chart below). With the market averaging roughly 90,000 loan liquidations per month, it would take 32 months, nearly three years, to move through the overhang.
And that number is contingent on no other loans going into default.
"Many analysts looking at the housing problem mistakenly assume it is limited to loans that are currently non-performing (or 60-plus days past due). Such borrowers have a high probability of eventually losing their homes. However, the problem also includes loans with a compromised pay history; these are re-defaulting at a rapid rate," Goodman told a Senate subcommittee Tuesday.
Under a reasonable estimate, which is calculated with more conservative market conditions than what is currently being experienced, Goodman found nearly 2 million re-performing mortgages would default again and another 3.6 million already troubled loans to default as well.
The rest of the 10.4 million estimate is made of always-performing loans at various stages of negative equity. Of the 2.5 million always-performing mortgages with loan-to-value ratios above 120%, nearly half will default. Even 5% of the always-performing mortgages that have some equity left will default, as well, Goodman said.
In August, the Obama administration asked the housing industry for ideas on how to more efficiently sell or unload this overhang, and the Senate heard testimony from various housing players Tuesday. Each, including Goodman, said the government should target private investors.
Robert Nielsen, chairman of the National Association of Homebuilders, said government programs should be revamped to assist small and local businesses in rehabbing and unloading these properties.
Nielsen said Fannie, Freddie and the FHA should avoid bulk sales to large investors that have no stake in the neighborhoods in which these properties are located.
"Local and small businesses that have a stake in the future of the affected communities should be the driving force behind the disposition of the REO inventory. This will result in the creation of jobs and the stabilization of neighborhoods," Nielsen said.
NAHB also urged Congress to extend the current conforming loan limits for Fannie Mae, Freddie Mac and the FHA, which are due to be lowered on Oct. 1.
Stan Humphries, chief economist for Zillow, said the rental market is currently booming and would be able to handle a mass conversion of foreclosures into rentals by investors, but the government, he said, would be wrong in upsetting this dynamic.
"Investors smell a distinct opportunity in this situation: The chance to buy an asset cheaply and rent it out dearly. In fact, close to one-third of the purchases of existing homes this year have gone to all-cash buyers, the bulk of whom are real estate investors," Humphries said. "Any plan that may upset this balance – such as Fannie and Freddie getting into the rental market and creating competition – will have a chilling effect on private investment in the one segment of the housing market that is performing well."
But with a Congress currently gridlocked on nearly every issue, none of the panelists so clearly described the looming housing problem and the consequences of continued inaction like Goodman.
"To solve the housing crisis you must create 4.1 million to 6.2 million units of housing demand over the next six years," she said.
Write to Jon Prior.
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Bank of America Corp.'s sale of mortgage servicing rights to Fannie Mae, a transaction that spurred a congressional inquiry last week, "made sense for both companies," the regulator of the government-controlled mortgage giant told reporters.
"We are certainly concerned about ensuring that these higher risk mortgages are adequately and appropriately serviced, and this was an arrangement that helped to realize that goal," Edward DeMarco, acting director of the Federal Housing Finance Agency, said after remarks at a mortgage conference sponsored by the N.C. Bankers Association.
UBS AG (UBSN)’s directors will meet in Singapore this week following the disclosure of a $2.3 billion loss from unauthorized trading, according to two people with knowledge of the situation.
The board of Switzerland’s largest bank will review the loss and possible management changes, said one of the people, who declined to be named because the gathering is private. The regular meeting was scheduled before the loss emerged, and coincides with the Singapore Formula One Grand Prix, where the firm will be entertaining clients. The Government of Singapore Investment Corp. or GIC, is the company’s biggest investor.
Investors are expecting a widespread rebound in U.S. commercial real estate markets, according to an analysis published Monday by the San Francisco Federal Reserve Bank.
With the two most widely followed measures of commercial real estate prices showing divergent trends since early 2010, economists at the San Francisco Fed turned to capitalization rates as an indicator of expected returns on commercial properties.
“Recent declines in these cap rates appear to be signaling a commercial real estate rebound, indicating improved investor expectations of price growth in the market,” said the San Francisco Fed’s economic letter.
The cap rate measures the ratio of net operating income to the price of a property and serves as a rough approximation of expectations regarding return on a property investment.
It can also be looked at as the commercial real estate equivalent of the price/earnings ratio of a stock, according to the San Francisco Fed: "The rent/price ratio is largely a function of interest rates and expected increases in the property’s price."
After declining from 2004 to 2007 as investor expectations for price appreciation rose, cap rates jumped in 2008. “During the financial crisis, CRE prices dropped about 40% and the market for financing CRE transactions was severely disrupted, resulting in very high CMBS (commercial mortgage-backed securities) yields,” said economists Bart Hobijn and John Krainer in the economic letter.
After the crisis, “yields for top-rated credits more or less returned to normal,” they said. But since the summer of 2010, cap rates have dropped half a percentage point as high-rated CMBS yields have risen about 30 basis points. A basis point is one-hundredth of a percent.
"The decline in cap rates despite the slight increase in interest rates suggests that investor expectations for CRE price appreciation have strengthened," the letter said.
Thus, the behavior of cap rates indicates that the market has priced in a slight rebound in CRE prices," it continued. "This could reflect improved fundamentals, such as expectations that rents will increase, or improved investor sentiment, such as an ebbing of investor risk aversion."
Price appreciation in Kansas City, Minneapolis, Salt Lake City and Austin, Texas, is expected to be about 2% higher than national trends would indicate, said Hobijn and Krainer.
Write to Liz Enochs.
