Troubled US commercial property loans seen doubling

The amount of troubled U.S.commercial real estate loans may double to $100 billion by year end as delinquencies rise and financing remains hard to find, Fitch Ratings said on Thursday.

Commercial real estate has emerged as one of the biggest threats to a rebound for financial institutions and the U.S. ecomomy, as falling revenue from office buildings, shopping centers and apartments reduce property values. Commercial real estate typically lags residential trends by at least a year.

Mortgages in or near default are being transferred to companies that specialize in the resolution of troubled loans at a blistering pace. The resources of these special servicers will continue to be stretched and open questions as to their abilities to handle the volume, Fitch analysts said.

"Compounding the problem is that many of these loans expected to default are large and complicated loans," Stephanie Petosa, a managing director at Fitch, said in a statement.

Equity in US commercial property may evaporate-report

The equity in $1.3 trillion worth of U.S commercial real estate acquired or refinanced in 2006 through early 2008 is at risk of being completely wiped out by price collapses, according to a report by Real Estate Capital Analytics.

About $2.2 trillion of properties acquired or refinanced after the 2004 start of the commercial real estate bubble have lost value, according to the report, released on Wednesday by the real estate data company. As most those deals were financed with 70 percent to 80 percent or more of debt, the lower value will directly eat away at the equity.

"By the end of 2010 you'll have begun to see terrible, terrible capital structure disintegration," said Philip Blumberg, chairman and chief executive of Blumberg Capital Partners. "The first thing to go is the equity."

About $165 billion of commercial mortgages this year will mature and need to be refinanced or sold. Some $11.8 billion matured in June, according to mortgage data analysis provider First American CoreLogic.

The number of distressed properties in the top 10 markets topped 5,000 in March, the most recent recording period, for the first time since CoreLogic began keeping record in January 2003.

"The maturities haven't really gotten into full play yet," Blumberg said. "We are seeing the early edge of the hurricane of debt in real estate."

Prices for warehouses, office buildings, shopping centers and apartment buildings are down about 37 percent from the peak in 2007, according to Moody's REAL Index. The cost and availability of new loans has dried up, and lenders that will grant loans will do so only at 50 percent to 60 percent of value. Prices have plunged at an increasing rate, dropping 18 percent in the first five months of 2009, Real Capital Analytics said.

Meanwhile, the value has declined even more as rent and occupancy rates have tumbled.

Properties bought or refinanced in 2006 through 2008 have seen a 25 percent decline in value, Real Capital Analytics said.

The value of distressed properties has more than doubled so far in 2009. Some $93 billion of office, industrial, retail, and apartment properties in the United States have fallen into default, foreclosure or bankruptcy this cycle, Real Capital Analytics said.

Struggling hotels and other commercial property types add at least another $31 billion to the total.

Less than 10 percent of the distressed situations that have emerged have been resolved. Lenders have been slow to foreclose and have chosen to instead extend the loans.

Loans originated at the peak of the market in 2007 are seeing the highest levels of default.

U.S. mortgage rates rise second straight week-Freddie Mac

Interest rates on U.S. 30-year fixed-rate mortgages rose 0.05 percentage point in the latest week, its second consecutive weekly increase, a move that does not bode well for the hard-hit 30-year fixed-rate mortgages, according to a survey released on Thursday by home funding company Freddie Mac.

Interest rates on the 30-year fixed-rate mortgage averaged 5.25 percent, with an average 0.7 point, for the week ending July 30, up from the previous week's 5.20 percent.

The mortgage rate was also significantly higher than the record low of 4.78 percent set the week ending April 2.

Freddie Mac started the Primary Mortgage Market Survey in 1971.

"Bond yields rose slightly higher this week on market optimism that the economy may be stabilizing somewhat, and mortgage rates followed," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.

Goldman's real estate gambit

Is history repeating itself at Goldman Sachs?

In late 2006, Goldman shrewdly began backing away from the residential mortgage market. With little fanfare, the firm began aggressively hedging its exposure to home loans, in particular mortgages to borrowers with shaky credit histories.

This savvy and somewhat stealthy strategy enabled Goldman to pawn off lots of its soon-to-be toxic mortgages and mortgage-backed securities on other institutions -- forcing those foolhardy speculators to pay the price when the subprime market blew up.

And much to everyone else's chagrin, Goldman even made money off the housing meltdown when some of its hedges -- specifically a bet that a subprime mortgage index would plunge -- paid off handsomely.

It appears Goldman is following a similar script with U.S. commercial real estate, the next big asset class that many believe is on the verge of disaster.

Goldman recently reported owning $6.4 billion in commercial mortgage loans. It also is holding some $1.6 billion in commercial mortgage-backed securities, or CMBS. That's a big retreat from where it was just two years ago.

And in a sure sign that Goldman expects a good number of commercial real estate borrowers to default, the firm says it marked down the overall value of its commercial mortgages portfolio by nearly 50 percent.

By contrast, regional banks, many of which have disproportionately high exposures to commercial real estate, are being far less aggressive than Goldman in marking down their respective portfolios.

But Goldman, with a $950 billion balance sheet, can afford to take the lead in marking down loans and indirectly putting pressure on other lenders to follow suit, because its overall exposure to commercial mortgages is relatively light.

Goldman used to have a rather large footprint in the commercial real estate market, with some $16.27 billion in loans and $2.75 billion in CMBS on its books in late 2007. That year, Goldman ranked seventh in bundling commercial mortgages into securities, churning out $15.1 billion in so-called CMBS, according to Thomson Reuters.

By the end of 2008, Goldman managed to whittle its total commercial mortgage portfolio down to a less imposing $10.9 billion.

Goldman says in a regulatory filing that it was able to rid itself of a good deal of its "long positions" in commercial mortgages and CMBS through "dispositions," or sales of mortgages to other institutions and investors.

No doubt, Goldman also bundled some of it commercial mortgages into the nine CMBS deals it brought to market in 2007.

To be sure, Goldman has taken more hits on commercial mortgages than it did with residential real estate. The firm has taken at least $3.5 billion in write-downs. But Goldman has been able to easily absorb those losses by posting strong trading gains in bonds, stocks and commodities.

And there's the possibility that Goldman's strategy for hedging its remaining exposure to commercial real estate could pay dividends if the market collapses. Just as it did with residential real estate, Goldman says in regulatory filings that it relies on "cash instruments as well as derivatives" to reduce some of the firm's commercial mortgage exposure.

It should come as no surprise that Goldman won't talk about its hedging strategy. So there's no way to determine whether Goldman traders are betting that an index that serves as a derivative trade on the CMBS market will plunge, just as the one that tracked the subprime-backed securities market did.

So far, the main Markit indexes for tracking the performance of the highest-rated CMBS are off just 10 to 13 points from their respective par values. By comparison, the most widely followed Markit index for tracking the performance of subprime-backed debt dropped by more than 80 points at its nadir.

Right now, the odds of subprime-like collapse in CMBS valuations appear long and that's not good news for anyone selling the index short. But further declines would appear likely given the deep haircut Goldman has taken on its own portfolio of commercial mortgages.

No matter what, it would appear Goldman is in a better position than most banks to weather a further slide in the commercial mortgage market. It could even benefit if the market improves and Goldman gets to write up the value of some of the mortgages it's marked down.

And, if lightning strikes twice, Goldman might even profit while others feel only pain.

Subprime mortgage companies warn on US foreclosures

Companies that service risky residential mortgages are warning U.S. officials that a key program to slow foreclosures may push some financing costs higher and derail their efforts, said a leading subprime firm.

Companies forming the Independent Mortgage Servicers Coalition, service many of the riskiest mortgages made during the housing boom, making them key players in programs to rein in foreclosures. The group collects and distributes payments on more than $700 billion in loans, according to its leader, Carrington Mortgage Services of Santa Ana, California.

Their concerns about financing payments for defaulted homeowners comes as pressure mounts from Congress, regulators and state legislators for servicers to do more for the plan, which aims to slow foreclosures and modify loans. The U.S. Treasury wants the companies to spend more on its resources, including hiring staff and expanding training programs.

At least four servicers from the coalition were among the 25 meeting with the Treasury on Tuesday, where new commitments were forged to increase foreclosure prevention efforts under President Obama's Home Affordable Modification Program.

But manpower isn't the main worry for the independent servicers, which don't include large banks such as Well Fargo & Co. Implementing the program means giving delinquent homeowners more time fix their loans, which to servicers will the boost costs of extending payments to investors as contractually promised.

Matching costs of servicing to public policy is growing increasingly difficult, said Bruce Rose, chief executive officer and general partner of Greenwich, Connecticut-based Carrington Capital Management, LLC, which owns CMS. Rose attended the meeting with Treasury.

"We are in a position where it's a very tough balance act, and that's weighing heavily on us now," said Rose, in an interview on Monday. "This is a classic case of an unfunded government mandate."

The costs of borrowing to finance delinquent payments to bond investors far outweigh expected revenue from incentives paid by the government, Rose said. The government will pay servicers $1,000 for every loan modified, and another $1,000 a year for three years if the borrower stays current.

The group since September has approached the Treasury, the Federal Reserve and Congress for help in funding the temporary "advances" that are fully reimbursed when a loan is modified or foreclosed, Rose said. Help offered through the Fed's Term Asset-Backed Securities Loan Facility (TALF,) which allows for the pooling of advances for sale to investors, has backfired, and is increasing financing costs, he said.

The coalition -- which has grown to include Ocwen Financial Corp, GMAC-RFC, and Fortress Investment Group's, Nationstar Mortgage -- also tried unsucessfully to arrange liquidity via the Troubled Asset Relief Program in 2008.

Standard & Poor's this month delivered a blow to Carrington and other potential issuers of TALF-eligible bonds backed by servicing advances, by sharply discounting the value of the assets that would go into the deals, Rose said. For Carrington, that would mean just 64 cents of every dollar in assets would garner a AAA rating, the blessing required for inclusion in a TALF deal.

That is harsh, Rose said, since advances are first in line for repayment -- ahead of AAA bondholders -- when a bad loan is resolved. There has never been a loss on advances, but S&P told Carrington it will assume 2.0 percent losses and multiply them eight times to reflect high stress scenarios. More discounting is done for interest expense.

S&P's assessment may not only hinder TALF funding, but "significantly" boost Carrington's borrowing costs, Rose said. While one Carrington lender saw S&P's assessment as baseless, another has hit the servicer with a margin call.

S&P ratings and bank credit lines give servicers incentives that run counter to public policy, he said. To reduce discounts assessed by rating companies, and to lower borrowing costs from banks, servicers would have to foreclose faster, not more slowly, as would be required under Obama's plan, he said.

The funding problem could be resolved if TALF issues would accept implicit ratings, which for advances are AAA, since they are senior to the safest bonds in the security, he said.

Unless independent servicers get new liquidity, "this is going to bring (HAMP) to a screaming halt, in at least our shop," he said. "We are running out of capacity."

Carrington has modified about 45 percent of subprime loans in its servicing portfolio that were made from 2005 to 2007.

Canada resale home prices rise in May-survey

Repeat sale prices for Canadian homes climbed for the first time in nine months in May on gains in four of six metropolitan areas, a report on Wednesday showed.

The Teranet-National Bank National Composite House Price Index, which measures the rate of change of prices for single-family homes in six metropolitan areas, rose 0.7 percent in May, the first month-on-month rise since October.

Toronto led with a 2 percent rise in May from the month before, the index showed, followed by a 1.5 percent rise in Montreal. Prices in Halifax, Nova Scotia, saw a 1.3 percent increase, while Ottawa rose 0.7 percent in May.

According to the Teranet-National index, the trend of falling Western Canadian home prices extended into May for an eleventh straight month.

Prices in Calgary, Alberta, fell 2.2 percent in May from April, while those in Vancouver, British Columbia, fell 0.1 percent.

Still, the year-over-year national measure was lower for a sixth straight month in May, with prices down 6.9 percent, while prices were down 8.2 percent nationally from the peak hit in August last year.

The Teranet-National index tracks home prices over time for repeat sales, meaning properties with at least two sales are required in the calculations for this index. The index did not provide actual prices.

Report: Foreclosure Inventory Hits Record Level in June

The nation’s housing markets are clearly developing a bi-polar disorder all their own: fresh evidence of a possible recovery is consistently tempered with equally fresh evidence of continuing trouble ahead. A new report released Wednesday morning by Jacksonville-based Lender Processing Services, Inc. presents the latest mixed bag of results, with fresh evidence that housing might be turning the corner.

Put the emphasis on might.

In particular, roll rates — which measure the volume of loans moving from good to bad, and from bad to worse — improved during June, with new delinquencies dropping to their second lowest level in the last year, the firm said. The percentage of delinquent loans moving from bad to worse declined across all product types, as well. Which is at least some good news for a market that has been in dire need of something positive for the better part of two years running.

But for the nascent improvements now being seen, there remain numerous hurdles that suggest the nation’s housing market isn’t really out of the woods just yet. In particular, foreclosures soared to new record highs in June, LPS found: The national foreclosure inventory rate during June was 2.86%, up 2.5% from one month earlier and a huge increase of 86.1% from year ago levels. Total delinquencies rose as well, to 8.58%, up 44% from one year earlier.

Reflecting the mortgage crisis’ evolution away from all things subprime, prime jumbo mortgages continue to fare the worst, comparatively: foreclosures among good-credit borrowers with high loan balances are up a whopping 580% since Jan. 2008, LPS said.

And it’s not just the overall inventory of foreclosures that is increasing, either: New foreclosures are on the rise, as well. “Foreclosure starts in June increased 1.6 percent to the second highest level on record, while reinstatement and recidivism rates are not yet showing signs of improvement,” LPS said in a statement. Backing this sort of logic up, July ABX remittance data released Tuesday found that modification rates had actually declined slightly during the month among most of the tradeable indexes. (The ABX is a synthetic tradeable index referencing a basket of 20 subprime mortgage-backed securities.)

In other words: fewer borrowers appear to be getting in trouble with their mortgages, and those that are in trouble are moving into foreclosure at a decreased rate. Nonetheless, the number of foreclosures is still growing as servicers begin to work through a backlog of troubled borrowers–which shouldn’t surprise, as HousingWire’s key sources have long suggested such a ramp-up in foreclosure activity would be the outcome of various moratoria put into place earlier this year.

So, is housing in for a recovery in the months ahead? These days, the answer depends upon where you look.

Link to Original Story:
Report: Foreclosure Inventory Hits Record Level in June : HousingWire || financial news for the mortgage market

US housing: mortgage applications drop

U.S. mortgage applications fell for the first time in four weeks, driven by a drop in demand for home refinancing loans as interest rates climbed, data from an industry group showed on Wednesday. Applications for loans to buy a home, an early indicator of sales, were flat. Lack of interest for purchase loans does not bode well for the hard-hit U.S. housing market, which has otherwise been showing signs of stabilization.

US housing chiefs push lenders to expand aid

Senior U.S. housing officials and leading mortgage companies met on Tuesday to set explicit goals for preventing evictions and develop a plan that would improve foreclosure-prevention efforts.

Officials from the Treasury Department and Department of Housing and Urban Development said they hope to see the terms of 500,000 borrowers eased by November.

Michael Barr, the Treasury assistant secretary for financial institutions, helped host a 90-minute meeting with representatives from 25 of the largest servicers.

Since late February, about 200,000 troubled borrowers have seen their mortgage costs lowered under President Barack Obama's effort to halt a crisis of record foreclosures.

"Today's meeting was an opportunity to identify ways to accelerate the program and bring relief faster," Treasury Secretary Timothy Geithner said in a statement.

US May home prices up, annual drop slows 4th month

U.S. single-family home prices rose in May from April, the first monthly increase in nearly three years, suggesting prices may be stabilizing, according to Standard & Poor's/Case Shiller home price indexes on Tuesday.

The index of 20 metropolitan areas rose 0.5 percent in May from April, after a 0.6 percent decline the month before, in contrast with the 0.5 percent drop forecast by economists in a Reuters poll.

The May monthly rise resulted in an annual downturn of 17.1 percent, although this was the fourth straight month that the rate of decline slowed. This follows a 16-month string of record annual declines starting in October 2007 and ending in January.

S&P said its index of 10 metropolitan areas rose 0.4 percent in May after a 0.7 percent drop in April, for an 16.8 percent year-over-year drop.

In May, 17 of the 20 metro areas showed improved annual price changes compared with April. The 10 and 20-city indexes reported positive returns for the first time since summer of 2006.

"To put it in perspective, this is the first time we have seen broad increases in home prices in 34 months," David M. Blitzer, chairman of the index committee at S&P, said in a statement. "This could be an indication that home price declines are finally stabilizing".

June New-Home Sales Surge

New U.S. home sales rose by the largest amount in more than eight years last month, in another sign the housing market is finally bouncing back from the worst downturn in decades.

The Commerce Department said Monday that sales rose 11 percent in June to a seasonally adjusted annual rate of 384,000, from an upwardly revised May rate of 346,000.

It was the strongest sales pace since November 2008 and exceeded the forecasts of economists surveyed by Thomson Reuters, who expected a pace of 360,000 units. The last time sales rose so dramatically was in December 2000.

Sales have risen for three straight months. The median sales price of $206,200, however, was down 12 percent from $234,300 a year earlier and down nearly 6 percent from $219,000 in May.

The report is another encouraging sign that the beleaguered housing sector is finally coming back to life. Last Thursday, the National Association of Realtors reported that home resales posted a monthly increase of 3.6 percent in June.

There were 281,000 new homes for sale at the end of June, down more than 4 percent from May. At the current sales pace, that represents 8.8 months of supply -- the lowest level since October 2007.

Hundreds of short-sale opportunities.

Fallout from the housing crisis has played a central role in the U.S. recession, now the longest since World War II. Foreclosures have spiked, homebuilders have slashed construction, and financial companies have lost billions.

U.S. home vacancy rate fell to 2.5 pct in Q2

The share of U.S. homes privately owned but empty fell in the second
quarter to levels last seen in mid-2006, a government report on Friday
showed, in a positive sign for the listless housing sector.

The vacancy rate fell to 2.5 percent from 2.7 percent in
the first quarter of 2009, the Commerce Department reported.

High vacancies point to weakness in the homes sector and
the rate has not touched 2.5 percent since the third quarter of
2006.

An elevated vacancy rate is a sign that many homeowners
have moved out of their primary residence even before it was
sold.

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REIT investors move from fear to fundamentals

Many real estate investment trusts (REITs) spent the first
quarter avoiding a financial funeral, but when they report
second-quarter earnings in the next weeks, some may be
feeling a new sense of longevity.

What a difference $14 billion makes.

While the first-quarter earnings season was wracked by
fears about who would follow mall owner General Growth
Properties Inc  GGWPQ.PK  into bankruptcy, second-quarter
reports will likely be dominated by talk about real estate
fundamentals -- rent rates and occupancy levels -- as well as
some hints about moving on and growing.
  "I think that initial widespread fears that you're going to
have (more of) these types of GGP-type blow-ups have left the
building," Green Street senior analyst Andy McCulloch said.
   The $14 billion the REITs raised in massive equity
offerings in the second quarter helped strengthen and stabilize
REIT balance sheets. The unexpected demand lifted the benchmark
MSCI U.S. REIT index  .RMZ  from a low of 271.8 in March to
457.04 on Friday, reflecting confidence in the sector's
long-term survival.
   This earnings season, investors and analysts will be
gauging the damage the U.S. recession has inflicted on demand
for office space, shopping centers, apartments and warehouse
and distribution centers.
   "Overall, the things that we're going to be most focused on
are occupancy and credit of tenancy and how the companies are
going about dealing with these issues," said Robert Gadsden,
Alpine Realty Income & Growth Fund portfolio manager.
   Some investors and analysts fear that apartment REITs --
such as AvalonBay Communities Inc  AVB.N  -- will see occupancy
decline and may lower their forecasts.
   Neighborhood shopping centers, which are anchored by
grocery or drug stores, were thought to be recession-proof. But
after Regency Centers Corp  REG.N  cut its second-quarter
forecast on July 17, some investors see others in the space --
including Kimco Realty Corp  KIM.N , Kite Realty Group Trust
KRG.N  and Weingarten Realty Investors  WRI.N  -- as
vulnerable.
  
MALLS AND OFFICES
So far, mall giants such as Simon Property Group Inc have resisted
granting tenants breaks on their rent.
   "I think that's the area that the market's going to be
focused on for the mall group to see whether there's been any
cracks that are allowing for retailers to get some rent relief
from the landlords," Gadsden said.
   For office companies such as SL Green Realty Corp  SLG.N 
and Mack-Cali Realty Corp  CLI.N , investors want to know how
far some core U.S. markets, such as Manhattan, as well as
suburban markets have deteriorated.
   And looking to industrial companies, such as AMB Property
Corp  AMB.N , investors are waiting for an update on
speculative leases for buildings constructed during the boom.
   Investors said they believe the overall REIT sector will
reflect continuing deterioration.
   "Generally, we're going to be looking for earnings to be
down from last year at a weighed average negative growth rate
in the 5-to-10 percent range," said Jay Leupp, senior portfolio
manager for Grubb & Ellis AGA funds.
   But deciphering results may be complicated by debt
repurchase gains and more shares issued during the equity
offerings.
   "The earnings that we're going to see this quarter and for
the rest of the year are going to have a lot of noise in them,"
Gadsden said.
Still, investors expect REITs to continue trimming their
leverage levels and bolstering balance sheets.
   "Equity is probably not quite as hot a topic as last
quarter, but it's still important," McCulloch said. "Now
everyone is moving on to phase 2 of the re-equitization
process. As far as deleveraging, the REITs still have a long
way to go."
   REIT executives also may try to provide a peek at the more
distant future, now that they are more certain they will have
one.
   "I do think in some sectors we will see some potential
rebound in 2010," Leupp said. "There is going to be the
potential in some sectors for earnings growth and for companies
with healthy enough balance sheets to go on offense and make
high-yielding acquisitions that actually drive earnings
growth."

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Global comm. rent expectations hit new low-RICS

A global depression in rents is looming over the commercial real estate sector, with second quarter market sentiment sinking to the lowest levels seen in five years, the RICS Global Property Survey showed on Monday.

Improved economic data and a slowdown in the correction of real estate prices has failed to offset concerns of shrinking labour markets and an oversupply of space, RICS said, squeezing expectations for rents in almost all world regions.

Some 97 percent survey respondents in Spain and Ireland reported a fall rather than a rise in rents in the quarter to end-June, while those in Singapore and the Ukraine were gloomier still, with 100 percent of respondents citing falling rents.

The findings of the survey, which has been running for five years, make unsettling reading for landlords, many of which are facing rising pressure to offer expensive concessions to attract or keep tenants.

In April, UK real estate investment trust British Land granted a four-year rent-free period to lure Bank of Tokyo-Mitsubishi UFJ and Mitsubishi UFJ Securities International to its Ropemaker office development in the City of London.



BUYER DEMAND

While transaction activity continues to drop in most world markets, a few countries saw an increase in investment interest in the second quarter, RICS said.

Almost 46 percent more respondents reported an increase in bidders in the UK, the market broadly seen as the furthest advanced in its real estate correction.

"The dearth in global finance continues to impede investment activity with transactions in decline across more than 80 percent of countries surveyed," RICS Chief Economist Simon Rubinsohn said.

"However, higher yields may be starting to attract interest particularly in economies such as the UK and Hong Kong where prices have already corrected significantly and borrowing and saving rates are at historic lows," he said.

Modest falls in real estate values were seen in some emerging markets but RICS said tenant demand in China and India had risen for the first time since 2008.

The sharpest swing in sentiment was found in Hong Kong, where 57 percent more Chartered Surveyors reported a rise rather than a fall in commercial real estate values, up from a negative balance of 81 percent last quarter.

"In emerging markets, those countries tied into Chinese trade relationships appear to be weathering the storm better than most, with parts of Latin America and Africa including Mauritius, Nigeria and Ghana holding up relatively well," Rubinsohn said.



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Freddie Mac Offers Incentives on Foreclosed Homes

From now through the end of October, the government-backed lender is offering to cover closing costs on any single-family inventory, up to a limit of 3.5 percent of the selling price. In addition, the company is also offering a two-year warranty">home warranty covering major systems and appliances at no extra charge.

In addition, buyers can also get up to 30 percent discounts on the purchase of new name-brand appliances as well.

Warranty guards against repair costs

The promotional program applies to real estate owned homes sold through the agency's HomeSteps unit, which deals in foreclosed properties that have been turned over to the lender. Called SmartBuy, the program seeks to address one of the major concerns homebuyers have about buying foreclosed property, namely, the potential cost of repairs on a home that may have been poorly maintained or allowed to deteriorate.

According to information provided by Freddie Mac to California real estate agents, HomeSteps already does repairs on about 40 percent of the homes it takes possession of, at an average cost of about $6,000 apiece. The two-year warranty Freddie Mac is offering under the SmartBuy promotion covers such things electrical, plumbing, air conditioning and heating systems, as well as major appliances such as water heaters, stoves, washer and dryers, dishwashers and refrigerators.

Assistance with closing costs

In addition, Freddie Mac will pay closing costs of up to 3.5 percent of the purchase price. For example, on a $200,000 home, the program would pay up to $7,000 in closing costs, not to include the down payment.

To qualify, buyers must complete a SmartBuy Buyer's Closing Cost registration form, available on the HomeSteps web site, and obtain a coupon that must be presented both at the time of the original offer and at closing. Purchase offers must be made by Oct. 30, 2009, with closing taking place by Dec. 31, 2009.

To qualify, a property must be purchased for use as the primary residence of the buyer. Eligible properties include single-family homes in freestanding houses, condominiums, coops or townhouses. Multiunit buildings of up to four units are also eligible as long as one unit is to serve as the primary residence of the buyer.

Rental, vacation properties not eligible

Second and vacation homes, investment properties or property purchased solely for rental purposes are not eligible. There is a minimum purchase price of $25,000.

The home warranty offer is valid only within the 48 contiguous states and Washington, D.C. The closing cost assistance offer is available in all states and in the U.S. territories of Puerto Rico, Guam and the Virgin Islands.

More information on the program, including localized listings of eligible HomeSteps properties, are available through the HomeSteps web site. Local real estate agents can also provide information on which properties are offered through the program.

A similar program is not currently offered by Fannie Mae, the other major government-backed lender, but it does offer certain incentives through its HomePath unit, which handles Fannie Mae-owned properties.

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Europe ABS market learning to walk again

European asset-backed securities (ABS) market will slowly re-emerge as a funding tool for companies over the coming months, but will remain a niche sector with demand only for highly rated and simple structures.

The simplicity and transparency of two new structured issues -- from Tesco (TSCO.L - news) in June and Land Securities (LAND.L - news) this week -- have ended a two-year drought in supply in ABS.

This has raised hope ABS, used by companies and banks to offload risk on mortgages and property from their balance sheet, may return to favour after being tainted as a major contributor to the U.S. subprime crisis.

The deals have also drawn demand from real money investors, after the former major buyers of ABS, including structured investment vehicles (SIVS), conduits and hedge funds, were forced out of the market during the credit crisis .

While the floodgates for new issuance are not expected to reopen immediately, there is scope for similar fixed-rate, single tranche issues due to strong demand and increased confidence among issuers, experts say.

"It shows that sterling investors have appetite for simple structured transactions, with an underlying credit they are comfortable with and can assess," said James Cunniffe, at HSBC, who managed the Land Securities' Sceptre issue.

"Clearly property is the most straightforward to do, but you might see similar government project infrastructure or government contract issues and maybe this can also be replicated in Europe," he added.

Other structured transactions to re-emerge in the past month include those from utilities Yorkshire Water and Electricity North West, which were also managed by HSBC.



HUGE POTENTIAL

ABS are backed by a wide range of assets including auto loans, commercial and residential mortgages, and credit cards. In their prime, ABS helped drive a massive expansion in credit, were more complex, and backed by thousands of underlying assets.

Few predict those types of deals will return. For now, ABS will remain a niche market.

"Any corporate with a good rating today will be able to raise money this way, but they have to be investment grade and at least single-A to triple-A rated," said Barry Osilaja, European director at Jones Lang LaSalle Corporate Finance.

The Sceptre deal was triple-A rated, while Tesco Property Finance is rated A-.

Ed Panek, ABS Specialist at Henderson Global Investors, said the Tesco and Sceptre deals represented "the first steps towards opening the new issue market, but are not the sparks to get it roaring back to life."

Nonetheless, with recent reports showing less than 12 percent of banks are willing to lend more than 25 million pounds to new commercial property buyers, funding through commercial mortgage-backed securities (CMBS) could prove an attractive alternative. (Full story).

"There's a huge potential to raise money in the way Land Securities has demonstrated because of the security of the government income," said Alex Dawson, head of public sector at Knight Frank, referring to the Sceptre deal, which is backed by government rent.

Tenants have negotiated shorter leases of 15 years or less in recent years, but there is still a significant amount of UK government-tenanted offices on 20- to 30-year leases that are suited to new CMBS, property analysts said.

"Land Securities, British Land, and a lot of other property investors have in their accounts buildings which are let out to the government on long leases, so there are a lot of other places where this could be done," said Knight Frank's Dawson.



NEXT TEST?

The next leg up for the ABS market may well be the take-off of UK government-guaranteed residential mortgage-backed securities (RMBS).

The two-part UK programme, which came into effect in April, is open until October. So far no UK banks have made use of the facility, but there talk that a deal could come in September.

"The next steps are likely to be the government guaranteed UK RMBS deals expected in the third quarter. It will be another good step if they are well received," said Panek.

The success of those deals will not be who issues them, but how the issues perform in the market, he said.

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Freddie Mac June portfolio up, delinquencies jump

Freddie Mac , the second-largest U.S. home funding company, said on Friday its mortgage investment portfolio grew by an annualized 9.3 percent rate in June, while delinquencies on loans it guarantees accelerated.

The portfolio increased to $829.8 billion for an annualized 6.2 percent increase year to date, the McLean, Virginia-based company said in its monthly volume summary. In June 2008, the portfolio was $791.8 billion.

Delinquencies, which increase stress on the company's capital, jumped to 2.78 percent of its book of business in June from 2.62 percent in May and 0.93 percent in June 2008.

The multifamily delinquency rate, however, fell by 0.01 percentage point to 0.11 percent in June. A year earlier it was 0.04 percent.

Freddie Mac said refinance-loan purchase volume was $50.9 billion in June, up from May's $40.3 billion. March's $52 billion was its largest refinance month since 2003.

The net amount of mortgage-related investments portfolio mortgage purchase and sale agreements entered into during the month of June totaled $9.9 billion, up from the $5.3 billion during the month of May.

The total mortgage portfolio increased at a 6.6 percent annualized rate in June to $2.240 trillion.

Freddie Mac said they completed tender offers to repurchase certain short-term and long-term debt securities in June 2009 and consequently their outstanding debt declined to $857.3 billion and their other investments balance declined to $73.3 billion at June 30, 2009.

In September 2008, the U.S. government seized control of Freddie Mac and its larger sibling, Fannie Mae, amid heightened worries about shrinking capital at the congressionally chartered companies.

The current agreement with the U.S. Treasury has the retained portfolio at Fannie Mae and Freddie Mac capped at $900 billion until December 31, 2009 when they are to start declining by 10 percent per year until they reach $250 billion.

The government is now relying heavily on Fannie Mae and Freddie Mac in its efforts to stimulate the U.S. housing market by buying more mortgage loans, easing refinancing and helping homeowners avoid foreclosure. The housing market is in the midst of its worst downturn since the Great Depression.

The hard-hit U.S housing market, however, has been showing signs of stabilization, with sales rising and home price declines moderating in many regions of the country. In fact, according to some indexes, home prices in some regions have risen.

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AIG held off paying bonuses due last week

American International Group Inc AIG.N , the insurer that has received billions of dollars in federal aid, withheld $2.4 million in bonuses that were to be paid to dozens of senior managers on July 15.

The information was disclosed by George Madison, general counsel nominee to the U.S. Treasury, in answer to questions from Sen. Charles Grassley. Grassley disclosed Madison's answer in a statement.

A source close to the matter said Madison's information was correct.

The payments were not made as scheduled because AIG is still working with Washington compensation czar Kenneth Feinberg on a number of issues, the source said.

The payments to about 40 senior executives were for 2008 performance, and were to have been paid on a staggered basis throughout 2009.

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U.S. releases new credit rating rules to curb power

The U.S. Treasury Department said on Tuesday that it hopes new disclosure and conflict of interest rules will curb the power of credit rating agencies that have been blamed for fueling the recent financial crisis.

The Treasury sent an 18-page draft bill to Congress that would prevent credit ratings agencies from consulting for the companies they are responsible for evaluating.

The Securities and Exchange Commission would have new powers to regulate the industry and companies would have to disclose when they go "ratings shopping" in two other provisions of the plan.

"In recent years, investors were overly reliant on credit rating agencies that often failed to accurately describe the risk of rated products," the Treasury said in a statement.

The reform is meant to help "reduce reliance" on credit rating companies, the government said.

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Administrators struggle with big bond blow ups

The fate of billions of pounds of British Commercial Property
is in the hands of a small group of secretive administrators, leaving investors in the dark about the future returns on their bonds.

These companies, known as "special servicers" in the jargon-filled world of securitisation, have been thrust into the spotlight after sharp falls in the value of the commercial property used as collateral against the bonds.

The servicers -- small groups of real estate specialists, lawyers and debt experts -- were never expected to cope with a meltdown of the credit markets and a near-shutdown in the securitisation industry, experts say.

"The documentation ... is there to deal with small issues within the securitisation, not the whole thing imploding," said one special servicer, asking not to be named.

"Nobody ever thought we would be where we are today but we have to use the documentation we have," he added.

Investors hold about 77 billion euros ($109.3 billion) in commercial mortgage-backed securities (CMBS) in Britain, data from Barclays Capital show -- but servicers now struggle with the overly complex nature of the paper.

Such bonds are backed by big office buildings, hotels and shopping centres across the UK, assets which have lost 40 to 50 percent of their value over the last two years.



DEALS DRAG

Restructuring the bonds is often difficult because there are many lenders invested across many tranches, making servicers cautious, particularly as there is little case law around the language used in CMBS documentation.

"What some servicers may not have envisaged is the complications dealing with so many stakeholders across the capital structure," said Steven Ong of law firm Weil Gotshal.

"One of the debates is whether the special servicer should take care of the senior lender, who may want a quick sale, or someone further down the debt structure," Ong said.

The high-profile restructuring of Four Seasons Healthcare -- which owes bondholders more than 1 billion pounds ($1.64 billion) -- is a case in point.

A deal has dragged on for over a year because of difficulties finding agreement amongst 30 lenders across 11 debt tranches (Full story).

More bonds will enter special servicing because of tenant defaults and upcoming loan maturities, rating agencies warn, with swathes of CMBS -- particularly amongst low-rated UK property-backed bonds -- being downgraded.

Looming loan maturities will boost the flow of CMBS deals requiring the attention of the special servicers.

"A further eight large UK CMBS loans are scheduled to mature between now and the end of the year," said Fitch's Gioia Dominedo and the number will rise to about 30 in 2010.



OPPORTUNITY FOR SOME

Stepping in where others are overburdened, real estate broker CB Richard Ellis (CBG - news) has set up a special servicing arm, which was recently appointed to deal with a portfolio of trophy property assets owned by billionaire Simon Halabi.

It now wields the power to decide how to restructure the 1.4 billion pounds ($2.30 billion) of debts backing the portfolio, or sell the properties, which include Aviva's City of London headquarters building (Full story).

Such mandates also offer lucrative fees up to 1 percent of the value of the bonds that may amount to tens of millions of pounds from a single transaction.

CBRE won the mandate after bondholders replaced Hatfield Philips, one of the sector's largest players.

Hatfield Philips, based on the 34th floor of Citi's Canary Wharf skyscraper in London, is special servicer on almost 5 billion pounds of UK CMBS debt, according to Fitch Ratings.

CBRE and Hatfield Philips both declined to comment on the role of the special servicer.

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US foreclosures at record high in first half 2009 despite aid

U.S. home foreclosure activity galloped to a record in the first half of the year, overwhelming broad efforts to remedy failing loans while job losses escalated.

Foreclosure filings jumped to a record 1.9 million on more than 1.5 million properties in the first six months of the year, RealtyTrac said on Thursday.

The number of properties drawing filings, which include notices of default and auctions, jumped 9.0 percent from the second half of 2008 and almost 15 percent from the first half of last year.

"Despite everybody's best efforts to date we're not really making any headway against the problem," Rick Sharga, senior vice president at RealtyTrac in Irvine, California, said in an interview.

Loans that were temporarily frozen by various state and federal programs, which mostly ended in March, started pushing through the process in the past three months.

One in every 84 households with loans got at least one foreclosure filing in the first half of this year.

"I don't think this suggests the economy is any worse than anyone expected but I certainly don't think it shows by itself any signs of improvement," Sharga said.

President Obama's housing rescue is gaining momentum in refinancing troubled borrowers with higher-rate loans and modifying untenable terms for others.

But the programs have been off to a slow start and in some cases will be too late or not enough to help severely struggling homeowners, industry analysts agree.

Private sector efforts to alter loans terms have made headway but are facing an uphill battle as the unemployment rate heads to double digits.

Problems emanating from loans made when standards were much looser have taken a back seat to defaults stemming from job losses and wage cuts.

"Unemployment-related foreclosures account for much of this increased activity, and the high number of borrowers who find themselves owing more on their mortgages than their homes are now worth represent a potentially significant future risk," James J. Saccacio, RealtyTrac chief executive, in a statement.

In June, as home prices continued to fall, albeit more slowly, foreclosure filings rose 5.0 percent from May and 33 percent from a year earlier.

June's foreclosure activity was the third highest on record, and the fourth straight month of filings on more than 300,000 properties.

"If we're really going to slow down the inflow of new foreclosure activity we are probably going to need to see more aggressive and more integrated activity between the lending community and the government," Sharga said.

The Treasury Department asked the largest 25 mortgage servicers last week to appoint a special liaison to work directly with government officials aiming to thwart defaults. To read more on administration efforts, see (Full story).

RealtyTrac forecasts about 4 million total filings this year on 3.2 million households with loans, which means little improvement from the first-half performance. The prior record was 3.1 million filings last year, up from a more typical year when about 800,000 foreclosure actions would be made.

The highest unemployment rate in nearly 26 years is the biggest factor keeping homeowners from staying current on monthly payments, Sharga said.

But there could also be a whiplash caused by "the big white elephant in the middle of the room" -- option ARMs, or adjustable rate mortgages with the option to make minimum payments. "A lot of them are going to be seriously upside down, probably at least 40 percent upside down."

That would mean a borrower owes at least 40 percent more on the mortgage than the home is worth.

A new U.S. program enabling borrowers are up to 25 percent upside down to refinance their loans would not be enough to help most option option ARM holders, Sharga said.

States where sales and prices soared most in the five-year housing boom early this decade stayed hardest hit in the first half of 2009.

Nevada remained the state with the highest foreclosure rate, with one in every 16 housing units with a loan getting a foreclosure filing. Arizona, Florida and California followed.

Other states in the top 10 were Utah, Georgia, Michigan, Illinois, Idaho and Colorado.

California was the state with the highest total number of foreclosure filings in the first half, with actions taken on 391,611 properties, or one in every 34 housing units with mortgages.

Big real estate writedown potential overhangs GE

The potential for multibillion-dollar writedowns in General Electric Co's (GE - news) $84 billion real estate portfolio is emerging as one of the key questions about the future of its GE Capital unit.

Deepening concerns about global liquidity -- given a prolonged U.S. recession, tight credit around the world and the rapidly declining value of U.S. commercial real estate -- have led GE investors to question the company's method of valuing its real estate holdings, an issue some say speaks to an overall lack of transparency at GE.

"What GE is doing is not recognizing any impairment of any significance on this stuff," said Jack De Gan, chief investment officer with Harbor Advisory Corp, which owns GE shares.

"(GE is) hoping they can ride through this recession using held-to-maturity type accounting on everything, not mark it down, and wait for the market to recover under it so they don't have to charge earnings."

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The financing needed to roll over a lot of the commercial debt coming due in the next few years is not available. Much of the company's commercial real estate equity is not worth what GE paid for it -- especially assets bought near the market peak in 2006 and 2007.

De Gan said GE should recognize the deterioration in commercial real estate markets and mark down its $84 billion portfolio by 2 to 5 percent. That would add up to "an awfully big potential charge that's being kicked down the road," he said.

He contrasted GE with Goldman Sachs Group Inc (GS - news), which marks its assets to market in every accounting period, and which he said provided a high level of transparency this week at a time when investors are deeply concerned about liquidity.

"Substantial unrealized losses related to GE Capital's real estate investments could ultimately result in material impairment charges," Standard & Poor's said Friday.

UNDER PRESSURE

GE Real Estate, part of the vast conglomerate's GE Capital division, posted a loss of $237 million for the latest quarter.

Its assets represent about 15 percent of GE Capital's overall assets. Overall, GE's quarterly second-quarter profits topped expectations but sales fell short of forecasts.(Full story)

"We continue to see pressure in the commercial real estate book," Chief Financial Officer Keith Sherin told investors Friday.

In an interview with Reuters, Sherin said GE evaluates whether properties are impaired on a quarterly basis, and took $100 million in real estate impairments in the latest quarter.

In April, the company said it did not have adequate visibility to predict the degree of losses in its commercial loan portfolio, but noted it expected a tough commercial real estate cycle given continued job losses.

To be sure, GE has said it plans to hold on to its portfolio and therefore does not need to mark it down under accounting rules. Valuing assets is hard when transaction volumes are down dramatically.

Also, GE says many of its loans were underwritten at conservative loan-to-value ratios, while its real estate equity holdings are well diversified in markets that GE says it understands. Occupancy is "good," it says, and GE is aggressive about renewing leases at the best possible terms.

GE said $6.1 billion of its real estate debt portfolio matures this year, of which $1.6 billion has a loan-to-value ratio above 85 percent. Should prices be down 15 percent or more, such loans would be underwater.

GE has also argued that almost half its debt portfolio is secured by multiple properties in multiple locations, reducing risk. It has far less exposure to construction and development loans than large money-center banks and avoids riskier areas like mezzanine loans, shopping malls and resorts. As a result, GE's delinquencies and default rates are far below those of banks.

But they're rising. GE's real estate delinquencies -- warning signs that precede defaults -- almost doubled in the second quarter to 4 percent, from 2.2 percent in the first.

"We actually play in one of the safest parts of the debt industry for commercial real estate," Ron Pressman, chief executive officer of GE Real Estate, said at a March presentation aimed at easing investors' worries about GE Capital. "We think losses from the commercial real estate portfolio will in fact be manageable."

Another "deep dive" into GE Capital's operations is set for July 28.

JOBS MATTER

While the U.S, housing market has stabilized somewhat after a protracted downturn, the commercial real estate market still faces expected declines in property prices and defaults.

There is also the question of overall U.S. employment. Demand for commercial real estate lags employment, which itself is a lagging economic indicator, suggesting this could be a long downturn.

The 9.5 percent U.S. unemployment rate is already higher than the adverse case for the economy GE cited in March and is expected to keep rising. As employment drives demand for office buildings, retail and other commercial real estate, a poor jobs picture will remain a factor for several quarters.

"With expectations of rising unemployment and higher delinquencies and losses in the quarters ahead, we believe profits at GE Capital will remain under pressure," analysts at William Blair & Co said in a research note.

GE's core real estate business finances the purchase of property by other parties and holds a debt portfolio of about $48 billion.

A second part of its business invests in some 3,200 office and apartment building and other assets, worth about $33 billion, while another operation provides financing to owner-occupied commercial real estate for small to medium-sized businesses -- an area where struggling lender CIT Inc (CIT - news) is a major player, whose real estate exposure has helped push it to the verge of bankruptcy. (Full story)

While a core part of GE Capital supports the parent company's sales of wind turbines, locomotives, medical imaging machines and other expensive equipment, GE Capital has also expanded over the years into tangential areas like insurance and real estate.



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Resuscitating real estate: Agnes T. Crane

Bring out the defibrillators for commercial real estate.

The commercial real estate market is still dead -- at least the part the Federal Reserve has targeted to resuscitate lending for developers and owners of office buildings, hotels and other commercial property.

It's time for the government to come up with a faster, simpler plan to revitalize lending before "CRE" becomes the next dreaded financial acronym.

Two months after the Fed announced it would try to stoke lending in the commercial real estate sector, there are still no new deals in the commercial mortgage-backed securities market. Even interest in using the program for purchases of older bonds backed by commercial loans has been lukewarm -- it didn't even break the $1 billion mark this week.

This isn't reassuring, given the drought of financing available for developers and owners of hotels, office buildings and other commercial property that need to refinance maturing debt.

Big banks and real estate industry lobbyists are already starting to draft proposals for the government to consider.

Here's my two cents: Adopt a straight-forward government guarantee facility, much like the Federal Deposit Insurance Corp's program. Then make sure to earmark the funding specifically for the refinancing of commercial loans that would stand up under conventional lending standards -- not those based on rosy projections common during the real estate boom.

This wouldn't, and shouldn't, save loans that are severely underwater thanks to bad underwriting, but it would ensure that those with good credit can get the financing they need.

A guarantee would be quicker and cleaner to implement, would make financing costs much more reasonable for qualifying borrowers and could go beyond the narrow scope of the commercial mortgage-backed securities market.

It would also help cushion the blow for regional banks that are heavily exposed to such loans, and maybe, just maybe for the likes of General Electric (GE - news), which needs real estate prices to stabilize, if not rebound, to avoid taking a big hit on its $84 billion portfolio.

On Friday, GE Capital took $76 million in impairment charges in the second quarter against the portfolio. The fear is that the company will eventually be forced to realize much bigger losses if the commercial real estate market doesn't improve.

The U.S. commercial real estate market is a $6.7 trillion behemoth supported by $3.5 trillion of debt that comes in many forms, including commercial mortgage-backed securities that house loans in tradable bonds.

The Fed, and soon Treasury through the private-public investment scheme known as PPIP, is hoping a revitalization of the relatively small $700 billion commercial mortgage bond market will have the knock-on effect of lowering interest rates and thereby making financing more affordable.

It's had some success with consumer-related lending after its Term Asset-Backed Securities Loan Facility (TALF) helped reopen the asset-backed securities market where student loans, credit card debt and other types of consumer debt are packaged and sold.

The thing about the CMBS market, though, is it takes months to get going even under the best conditions. New deals aren't expected to hit the market until August at the earliest. And even then, no one is expecting to see the kind of multi-billion dollar deals common during the credit boom for quite some time.

A guarantee program could get money flowing much more quickly by allowing banks to raise funds in the already open corporate bond market. Essential to the program, however, would be a mandate that the funds raised under the program could be used only for commercial real estate lending.

It's time to consider some other options to open up the market before time runs out.

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U.S. housing market bottom may be in sight - FITCH

The long-awaited bottoming of the U.S. housing market may be in sight, but a recovery could take as long as 18 months and will likely be muted, Fitch Ratings said in a report on Wednesday.

"Single family housing starts and new home sales seem to be indicating a trough, albeit at very low levels by historical comparisons," said Bob Curran, lead author of the report.

In its report, Fitch said that pent-up demand for new homes has been building for the past few years while home prices have been sharply declining since the housing bubble burst over two years ago.

Meanwhile, this year's spring selling season was notably stronger than the winter and "seasonally adjusted new home sales and single-family housing starts appear to have stabilized in recent months," the report said.

Fitch cautioned that even with fewer competitors builders will continue to be challenged and need to maintain tight controls over costs and expenses between now and the end of 2010.

"The early stages of this recovery may be more muted than average recoveries of the past," Curran said. Housing weakness will continue through "most, if not all, of 2009, despite recent government initiatives."

The agency expects that builders will continue to either cut back on or stabilize their land purchases for at least the next six months."

The agency said it will hold a conference call on Friday, July 17 and 11 a.m.

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Mounting bills force condo associations into bankruptcy

At least seven Florida condo associations have filed for bankruptcy since the real estate market took a nose dive -- and there may be more on the way.

For a growing number of strapped condo associations, bankruptcy could be the last defense against their hallways going dark and their spigots running dry.

In one of the most recent Chapter 11 filings, the creditors of Maison Grande in Miami Beach are planning to meet Tuesday to discuss the bankruptcy.

A rare occurrence in better days, such filings now are seen as a last-ditch bid by associations to shield themselves from bill collectors and find a way out of mounting financial problems.

While an association is in bankruptcy, utilities can't cut off the power or turn off the water, problems that have already surfaced at some South Florida condos.

''Without question it's being talked about and asked about,'' said Robert White, a managing director for KW Property Management in Coral Gables, ``especially in some of these associations that have delinquencies that exceed 30 percent. They're looking for options about how to solve the problem.''

Maison Grande, a complex of 502 luxury condos in Miami Beach at 6039 Collins Ave., filed for Chapter 11 protection in June after Dorten developers sued the association for about $658,000 in back payments on a recreational lease for the pool and parking areas. Chapter 11 bankruptcy offers private companies protection from creditors while they reorganize their debts, restructure contracts and find new sources of revenue.

Forty-four units are in foreclosure at the Maison Grande, and about 165 owners are two months or more past due on association payments.

Also last month, Legacy Park town home association in the Central Florida city of Davenport filed for Chapter 11. Among its biggest creditors: Comcast, which says the association owes $105,305 for a past-due cable bill.

With the weak economy, many condo associations -- which are classified as not-for-profit corporations -- find bills are piling up as units enter foreclosure and homeowners stop paying association fees, putting enormous financial strain on residents left holding the bill.

A RISKY ALTERNATIVE

Still, filing for bankruptcy is a costly endeavor -- and may not be a cure. It's unclear whether any Florida association has successfully reorganized in bankruptcy in recent years.

Bankruptcy attorney Thomas Lehman with Tew Cardenas in Miami said he wasn't sure how bankruptcy could benefit associations, because their only assets are the property's common areas and, possibly, their ability to assess individual unit owners.

Corporations need an exit strategy when filing Chapter 11, Lehman said. He added it wasn't clear how an association having trouble covering basic monthly services could reorganize. They also have nothing to sell off, except common areas such as the lobby and rec room.

''They're better off trying to negotiating with vendors to come up with an out-of-court restructuring plan,'' Lehman said.

Last month a Miami bankruptcy court dismissed a bankruptcy petition by View West Condo in Kendall essentially because its creditor, Z Roofing, won a state case upholding its lien and forcing a special assessment on unit owners to pay a balance of more than $100,000 for repairs.

''The thing about a condo association is that often times their main asset is really only its accounts receivable from unit owners paying maintenance fees or assessments,'' said Carla Barrow, an attorney who represented Z Roofing in the matter.

The company also won approval from a state court to foreclose on individual unit owners who failed to pay their share of the assessment.

Filing of the petition did little to protect the association, Barrow said, because it still owed the roofing company for the work, as well as $50,000 in legal fees and court costs -- not to mention fees owed to its own attorney.

PUNISHING THE PAYERS

While a condo association's ability to repay creditors by levying special assessments could be a stumbling block, Lisa Magill, an attorney with condo firm Becker & Poliakoff, said a high rate of fee delinquencies could make that less of an issue.

''If you have nonpayers, and those who are paying don't have the ability to pay more and you have a signification number of owners that have abandoned the property, your ability to levy assessments is limited,'' Magill said. There comes a point when paying owners may also throw in the towel and stop payments if their assessments rise too much.

Despite the potential pitfalls, Magill said there are benefits to be gained by filing.

Bankruptcy protection allows debtors to renegotiate onerous leases, like the one saddling Maison Grande. It could also delay, and even prevent, creditors from seizing assets and garnishing bank accounts.

Utilities and other vendors would have to get court permission to drop services, said Robert Kaye, a partner with Kaye & Bender law firm in Fort Lauderdale, which represents close to 700 homeowner associations.

After several months of investigating the matter, residents of St. Andrews condo in Miramar decided against filing bankruptcy earlier this year, even though nearly half its unit owners at the time were in foreclosure and the association had fallen behind on several bills.

William Quigley, who served on his association's budget advisory committee, said the association determined that filing for bankruptcy would cost more money that it would save. They were told, he said, it would cost about $30,000 to pay lawyers just to file the petition, not to mention costs going forward.

''Now you are going to have to assess the community to file rather than working out what you owe to your vendors,'' Quigley said.

In the end, the association decided to level with vendors and find ways to begin slowly paying off past due balances.

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DJ To Tempt Buyers, Toll Dusts Off Adjustable-Rate Mortgages

Toll Brothers Inc. (TOL) is dusting off one of the housing boom's popular sales strategies: This weekend, the luxury home builder rolled out its twist on adjustable-rate mortgages - tempting buyers with 3.75% for seven years on conforming loans.

While the company is one of the first to revive the product since the sector's implosion, it's a move likely to be copied, despite the loan type's history.

"Anytime the buyer sees the word 'ARM' they're afraid," said Stephen Melman, the National Association of Home Builders' director of economic services.

During the boom, consumers were lured by loans that offered shockingly low rates, only to see them reset, sometimes quickly, with crippling payments. Those betting on climbing house values to aid refinancing have been disappointed, as prices continue to fall. But Toll's offer - the latest in a long line of profit- eroding incentives to come from builders - didn't spark talk of another housing bust.

The company, one of the industry's most respected, says there's nothing exotic about this offer, available in many communities nationwide for contracts inked on or after last Saturday. Following the rate-lock period, the mortgage rates annually at 225 basis points over LIBOR, so the rate could even fall. The loan's lifetime cap is 8.75%, though "LIBOR would have to go up dramatically from where it is today," said Don Salmon, chief executive of TBI Mortgage Co., Toll's mortgage subsidiary.

For a true jumbo loan, the 7/1 ARM rate is 4.75%, with a 275 basis-point margin over LIBOR. There are no points to pay. Borrowers, who have to have a 720 credit score and put 20% down, can later refinance or sell the residence without penalty.

Horsham, Penn.-based Toll said it just ended its best week for traffic since early June.

"If traffic is up, they're really an industry leader, then. I think they're going to reach a lot of people who say 'Man, this makes sense for us,'" said Melman, who took out a 7/1 ARM in 2003. "I think they hit a home run on this thing."

Of course, it's too early to say if the rate will be enough to boost sales amid an elevated and swelling count of foreclosured properties, which pose stiff competition because they typically sell at steep discounts. Lending standards also remain strict, with even well-qualified buyers having difficulty getting a loan.

Because Toll caters to the move-up crowd, many would-be buyers have to sell an existing home, not all that easy in the current downturn.

This deal would make sense for consumers not looking to stay in a residence beyond seven years. And, because Toll caters to a wealthier clientele, this could appeal to those who could afford a higher rate but see the lower introductory percentage as financially savvy.

"What could be is the numbness from the subprime crisis might be receding, with an educated consumer realizing this could be a great deal if your personal situation fits," Melman pointed out.

That's good news for consumers, but, as with all incentives, Toll pays a cost. To offer lower rates, builders offer an upfront cash payment to the investor who buys the mortgage in a "buy down." It is treated as a cost of sale for the builder. Toll would not say how much this program costs.

Still, its margins remain among the sector's best, though they have fallen from their peak.

Because builders copy each other's marketing moves, others could soon roll out their own ARM version. As they limp through the worst downturn in decades, builders have tried everything to sell a home, including throwing in free upgrades, paid closing costs, vacations and even trying a down payment lay-a-way plan. Earlier this year, Toll shocked the industry with a rate fixed at 3.99% for the loan's life. Hovnanian Enterprises Inc. (HOV) did the same. At one point, Lennar Corp. (LEN) shaved its rate to 3.625%.

"The ARMs," Toll's Salmon said, "Haven't gotten a lot of attention recently."

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Faulty Appraisal Process Harming Housing and the Economy, Says NAHB

Twenty-six percent of builders are seeing signed sales contracts fall through the cracks because appraisal on house values are coming in below the contract sales price, according to a nationwide survey conducted by the National Association of Home Builders (NAHB). "Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down house values. This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery," said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla. The survey showed that nearly 60 percent of the builders are reporting that inadequate appraisals are causing serious problems in the market, with the biggest problem being comparables of new single-family homes that are too often based on foreclosures and distressed sales. "Lost home sales are killing jobs, deepening the housing slump and hurting local economic activity," said Robson, adding that construction of 100 single-family homes adds 324 local jobs, $21.1 million in local income and $2.2 million in taxes and other revenue for local governments with the first year. Of those who are reporting house appraisal problems, 54 percent said that the appraised house values were actually less than the cost of building the home. Robson said that foreclosure and distressed sales should not be used without appropriate adjustments to reflect the expenditure that would be required to bring them up to the condition and quality that represents a reasonable alternative for the home buyer. In what Robson called a step in the right direction, Freddie Mac on July 10 issued a Guide Bulletin publicly stating that it does not require appraisers to use Real Estate Owned, foreclosures or short sales in selecting comparable sales to provide an accurate opinion on house values based on market data. Freddie further stipulated that appraisers must "certify that comparable sales chosen are those most similar to the subject property." While the appraisal practices currently in use are taking a heavy toll on the housing market, they are also further exacerbating economic distress by affecting the availability of acquisition, development and construction (AD&C) credit, and causing problems for many attempting to avoid foreclosure. Falling appraised values for land and subdivisions under development have led some financial institutions to stop lending to developers and builders, to demand additional equity and even to call performing loans, Robson said. "If the spigot for housing production loans is cut off, there can be no housing recovery, and this has major implications for the economy as a whole," said Robson. NAHB is calling on housing and federal financial regulators to adopt clear, concise regulatory guidance that will allow appraisers to develop realistic house valuations based on sales that are truly comparable. In neighborhoods where the comps include a large number of short sales or foreclosed properties, appraisers should have the option of expanding the geographic area or extending the time frame for eligible sales to get a more representative picture of the house values sold in the area. "You can`t compare a well-constructed new home with a foreclosed property that has been vacant for months and was probably neglected for a long time before it was vacated," said Robson. "Acting now to establish proper regulatory guidelines for those who use a distressed or foreclosed property as comps when determining house values will help to stabilize home prices and home sales and put people back to work." ABOUT NAHB: The National Association of Home Builders is a Washington, D.C.-based trade association representing more than 200,000 members involved in home building, remodeling, multifamily construction, property management, subcontracting, design, housing finance, building product manufacturing and other aspects of residential and light commercial construction. Known as "the voice of the housing industry," NAHB is affiliated with more than 800 state and local home builders associations around the country. NAHB's builder members will construct about 80 percent of the new housing units projected for 2009.

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S&P Provides Revised Loss Projections On '05-'07 US Alt-A RMBS

Standard & Poor's Ratings Services today provided its revised projected losses for U.S. residential mortgage-backed securities (RMBS) transactions backed by Alternative-A (Alt-A) collateral issued in 2005, 2006, and 2007. These loss projections are for the underlying collateral of these transactions.

The weighted average projected loss for the 2005 vintage transactions is approximately 10.00% of the original pool balance, and 80% of the loss projections range from 3.18% to 16.72%. The weighted average projected loss for the 2006 transactions is approximately 22.50%, and 80% of the loss projections range from 9.42% to 31.93%. The weighted average projected loss for the 2007 transactions is approximately 27.00%, and 80% of the loss projections range from 12.03% to 41.99%.

For the complete list of projected losses for the individual transactions, please see "Revised Projected Losses For U.S. Alternative-A RMBS Transactions Issued In 2005, 2006, And 2007," published July 13, 2009, on RatingsDirect, at www.ratingsdirect.com. The list is also available on Standard & Poor's Web site, at www.standardandpoors.com. Select "Ratings," then "Structured Finance," and then "Residential Mortgage-Backed Securities." Locate the list under the "News and Commentary" tab.

A key component of our loss projection analysis for U.S. RMBS transactions is our default curve, which we initially discussed in an article titled "Standard & Poor's Revised Default And Loss Curves For U.S. Alt-A RMBS Transactions," published Dec. 19, 2007. We have since revised some of the initial curves. For information on the revisions, see "S&P Updates Its Default And Loss Assumptions For U.S. Fixed-Alt-A RMBS Transactions," published Sept. 25, 2008, and "Standard & Poor's Revises 2005 Vintage U.S. Alternative-A RMBS Loss Assumptions And Default Curve For Option ARM Transactions," published Feb. 23, 2009.

We also applied our latest loss severity assumptions, which we discussed in "Criteria | Structured Finance | RMBS: Standard & Poor's Revises U.S. Subprime And Alternative-A RMBS Loss Assumptions For Transactions Issued In 2005, 2006, And 2007," published July 6, 2009. We observed average loss severities ranging from 33% to 76% for the 2005 vintage; 32% to 79% for the 2006 vintage; and 41% to 77% for the 2007 vintage.

We continue to incorporate each transaction's current delinquency (including 60- and 90-plus-day delinquencies), default, and loss trends in our projections. Specifically, we weigh the impact on credit enhancement of potential losses from the loans 60- and 90-plus-days delinquent, coupled with the losses projected from the default curve.

We assume that the loans currently classified as real estate owned (REO) will be liquidated over the next eight months and that loans in foreclosure will be liquidated over the next 15 months. We form our estimate of the lifetime projected losses by adding these losses to the actual losses that the transactions have experienced to date.

2009 Reuters Limited.


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U.S. House Prices up 1.6% in May According to IAS360 House Price Index

Integrated Asset Services(R), LLC (IAS(R)) (www.iasreo.com), a leader in default management and residential collateral valuations, today released its IAS360(TM) House Price Index (HPI). Based on the timeliest and most granular data available in the industry, the benchmark index for national house prices gained 1.6% in May.

The latest IAS report, which reflects the largest one-month increase in the IAS360 HPI since July of 2005, follows a fractional gain in April. The index had previously fallen more than 19% from its high-water mark in June of 2007.

U.S. house prices are still down 10.5% year over year, but all four of the U.S. census regions reported positive numbers for May. In order of gains, the Northeast was up 3.2%, the Midwest 1.9%, the South 1.1%, and the West 0.9%. The South was the only census region down in April.

"Two months' worth of positive data hardly signals a turn in the national housing market," said Dave McCarthy, President and CEO of Integrated Asset Services, "but we have to be encouraged by what we're seeing in several important counties and neighborhoods."

In fact, the IAS360 HPI reported gains in May for nine of the nation's 10 largest metropolitan statistical areas (MSAs), a notable turnaround from just two months ago when Denver was the only region in the nation with positive performance. For its part, Denver added another 0.4% in May, while Boston and Chicago followed solid April numbers with increases of 3.7% and 1.5%, respectively. The gains in the West, meanwhile, were particularly apparent with San Francisco up 3.0%, Los Angeles 2.8%, and San Diego 1.2%. Only the Las Vegas housing market continued to slide with a drop of 0.9% for the month.

"We're seeing a mix shift in home sales and that's manifesting itself as increased pricing," said John Burns, CEO of John Burns Real Estate Consulting. "For a while, the bulk of homes sales were distressed properties in declining neighborhoods." Home affordability combined with tax credits have proven compelling. Sales are shifting back to more traditional submarkets and neighborhoods. That said, there is still a lot of downward pressure on pricing due to foreclosures and recent changes in the appraisal process. We aren't out of the woods yet."

"With all of the political and regulatory uncertainties combined with rising unemployment and foreclosure inventories, it's too soon to speculate that a housing recovery is really here," said McCarthy. Rumblings of a flood of properties could be about to hit the market, due to poorly performing Mortgage Backed Securities, bought by banks and mortgage investors.

The IAS360 House Price Index is a comprehensive housing index tracking monthly change in the median sales price of detached single-family residences across the U.S. The index, based on all arms-length transactions, tracks data of 15,000 neighborhoods, that roll up to report on the changes in 360 counties, nine census divisions, four regions, and the nation overall. The IAS360 House Price Index is delivered on a monthly basis.

Integrated Asset Services offers full service, end-to-end mortgage service solutions including valuation and data analytics. Its i-Series collateral valuation platform http://www.iasreo.com/iseries.html) delivers a comprehensive combination of collateral valuation services that individually offer distinct and critical data, and when combined, a complete view of market volatility, local expert opinions and subject value. The company's data analytics provide vital data on the U.S. residential housing market.



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US mortgage aid for jobless homeowners in foreclosure

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President Barack Obama is mulling new ways to delay foreclosure for jobless homeowners who are unable to keep up with monthly payments, an administration official said on Monday.

The official told Reuters it was reasonable for policymakers to consider options for loan forbearance -- allowing borrowers to delay, defer or skip payments -- that are more effective than those currently available in the private sector.

The number of failing home loans has been climbing for three years as a risky borrowers have defaulted on their easy-to-get loans, property values have sunk and the unemployment rate has climbed.

But the official said the idea, which is still evolving, was difficult from a policy perspective and carries potential hazards. It could help more people struggling with economic difficulty, but it also could create perverse incentives that distort the housing market, said the official, who did not want to speak on the record about internal administration debates.

The official said such a program would be in keeping with other measures to help workers who have lost jobs in the current recession.


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US small business funding dry, getting drier

Concerns over the future of CIT Corp -- major lender to small businesses -- which provides capital in situations where many commercial banks fear to tread, makes small business advocates wary about the next few months.

Since small business is typically a major driver of the U.S. economy, any barrier to this sector's recovery could mean a longer, slower U.S. economic revival, and could limit the effectiveness of the government's stimulus dollars.

CIT has tried various capital-raising plans, including growing its retail bank and selling assets and stock, to pay off maturing debt and avoid further ratings downgrades.

CIT said it was talking to the U.S. government to gain access to funding, but that there was no guarantee the Federal Deposit Insurance Corp would approve its application to join the Temporary Liquidity Guarantee Program. That has exacerbated a liquidity crunch and led CIT To explore a possible bankruptcy filing, The Wall Street Journal said.

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"The CIT crisis takes a lending source that's been relatively active in a very tight credit market and eliminates one more source of capital," said Ken Gaebler, president of Gaebler Ventures LLC, a consultancy that helps entrepreneurs raise capital and acts as a business incubator.

CIT's failure, if it happens, would pull existing lines of credit, forcing creditors to seek alternative funding.

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"Good question," Gaebler said. "Everybody we talk to says, (that) despite anything you heard about stimulus programs loosening credit, people are very shy to make business loans."


'SCARY'

"This to me is very scary," said Michael Alter, president of SurePayroll, which handles payroll for some 20,000 small businesses. "CIT may be too big to fail."

The first thing small business owners did on Monday, upon reading of the problems at CIT, was max out their credit lines, Alter said. That only puts more pressure on CIT.

The U.S. government may need to organize an orderly selloff of CIT assets, injecting enough liquidity to keep CIT operating while shutting off new loans, he said. CIT's loan portfolio includes many healthy loans that could attract an investor, adding that the sale of investment bank Bear Stearns could serve as a model.

"The cost of these guys failing is much greater than the cost of government intervention," Alter said.

Tight credit curtails investment and makes it harder for owners to set succession plans or exit their business. It may also curb the effectiveness of stimulus programs if companies that could carry out stimulus work cannot afford to bid.

Small businesses has accounted for between 60 and 80 percent of all U.S. job creation over the past decade, according to the Small Business Administration, and include half of total jobs in the private sector.

"We're having a difficult time getting external funding," said Charles Roberts, chief executive of Ames Rubber Corp in Hamburg, New Jersey, which makes custom rubber components for office equipment and safety products like gas masks.

Roberts' 60-year-old, privately held company employs 200 workers. It needs to borrow $1 million to $2 million to invest in inventory and take advantage of demand for its products from the military and other customers. But lenders are focused on past cash flows, not potential future returns.

"There should be money out there now, given what the government has given the banks, but why isn't it flowing freely at the moment?" Roberts asked.

The issue could be most acute for retailers, an area where CIT specializes.

Reliant on fourth-quarter holiday sales, retailers need credit to tide them over during the other three quarters, said Melinda Crump, spokeswoman for Sageworks Inc, which tracks the financials of thousands of privately-held U.S. companies.

"If their access... is cut off, it can really impact their ability to get them to that good quarter," Crump said.

CREDIT = JOBS?

The International Franchise Association estimated that every $1 million lent to franchise small businesses creates 34 jobs and $3.6 million in annual economic output. But the group predicts a 40-percent decline in such lending this year, leading to the direct loss of 50,000 jobs.

Most government initiatives have contained few, if any, provisions targeting small business lending, and loan availability is the worst since April 1980, the National Federation of Independent Business (NFIB) says.

Of the 6 million U.S. businesses that employ at least one person, some 60 percent require loans, so the loss of a market player holding a few hundred thousand small loans would have a noticeable impact, said NFIB Chief Economist William Dunkelberg.

Credit is "a pain in the butt no matter when you have to do it, but right now capital is a little short," he said.

The NFIB advocates creating a government-financed job creation fund that would purchase pieces of pools of small business loans, and has recommended suspending income taxes for six months to spur consumer spending.

To be sure, while credit is both dearer and tougher to get, it comes at a time when demand is low, and for many that is the bigger issue. An NFIB survey found 5 percent consider credit their No. 1 problem, compared to 35 percent who said so in 1982. Its June survey, to be published Tuesday, is expected to show improved business conditions, Dunkelberg said.

Even if new credit were available, it takes time to replace existing credit lines, likely meaning more small business bankruptcies in coming months.

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