A Federal Reserve program to spur commercial real estate lending may provide a bit of a jolt, but the amount of financing will likely be limited because the infrastructure needed to produce commercial mortgage-backed securities in bulk is still broken.
The Fed threw a lifeline to the battered commercial real estate sector in June by opening up its consumer and business lending program, the Term Asset-Backed Securities Loan Facility (TALF), to commercial mortgage backed securities (CMBS).
Through the TALF program, investors who buy newly issued CMBS can borrow directly from the Fed. Investors in existing CMBS can also borrow under the program.
While there has been some participation for existing CMBS, there have been no new commercial mortgage bonds available for the program as it takes months to structure new CMBS.
The first new CMBS to be issued as part of the TALF effort is not expected until the later this year. But even once the deals start, there may not be many, and they may be limited to a few real estate investment trusts using their best properties as collateral, such as Developer Diversified Realty (DDR - news).
Banks are uneasy about creating the investment vehicles that helped produce CMBS en masse before the global financial crisis, creating a major stumbling block for the Fed's plan.
The stakes are high. San Francisco Federal Reserve Bank President Janet Yellen said on July 28 that the fate of the $6 trillion market presented a "particular danger zone" for the fragile financial system.
The investment vehicles, known as conduits, were created by the banks to buy and hold loans until they could be packaged into securities. In 2007, the conduits and a hot market allowed dealers to compete for loans for their CMBS issues, which grew as large as $7 billion.
But with credit still strained, banks can't get inexpensive funding for conduits and see a high risk in holding loans at a time the outlook for commercial real estate remains shaky.
Another reason is that the Wall Street investment banks that were the most active in creating conduits have now collapsed or become more risk-averse bank holding companies.
"Goldman Sachs, Morgan Stanley and Lehman, these were all highly leveraged investment banks that had conduits. You just can't do that in the current market," said Walt Schmidt, head of FTN Financial's mortgage strategy group in Chicago.
The Fed extended its facility for commercial real estate financing until June 31, which Schmidt thinks was partly to give the market time to create conduits.
Darrell Wheeler, head of securitized asset strategy at Citigroup in New York says that even with the longer time frame, banks will be wary of warehousing loans in case they can't be packaged into CMBS by June's deadline.
"We see several barriers, but the key issue is timing as any loan originated today has to be securitized by June 31 and nobody feels confident enough that they can do that," Wheeler said.
"Getting a deal aggregated and sold by June 31 is like asking a bunch of bankers to herd cats blindfolded near a cliff," he added. "The cliff being the risk that the market sells off. We need somebody to put a fence by the cliff at least."
FED FOCUS-Fed weighing delayed exit from mortgage purchases
U.S. Federal Reserve officials are thinking carefully about tapering off their purchases of mortgage debt to push the $1.45 trillion program into next year rather than end it on Dec. 31 as planned.
They have not made up their minds, and some worry that the U.S. central bank's intervention in the housing market may be crowding out private lenders.
Another concern is that prolonging asset-buying that expands the Fed's balance sheet may hinder its eventual exit from aggressive expansive monetary policies.
But the U.S. housing market has recently shown signs of stabilizing, and other policymakers feel that their massive purchases of mortgage-backed securities have helped keep home loans flowing while private credit was very scarce.
In addition, the Fed opted at a meeting on Aug. 12 to extend by one month a similar, although much smaller, buying program of longer-dated U.S. government bonds in order to minimize disruption as it steps back from this market.
"I think something similar might be possible for MBS, but no decision has been made," St. Louis Federal Reserve Bank President James Bullard told reporters in Little Rock, Arkansas, on Thursday.
"I think we agreed that on the Treasuries we'd do the tapering thing and see how it works. We can decide some time during the fall how we want to do the MBS," he said.
The Fed has so far bought more than $792 billion of securities issued by government-backed mortgage agencies Fannie Mae, Freddie Mac and Ginnie Mae, at a pace of up to $25 billion a week. In all, it has planned to purchase a total of $1.25 trillion in MBS.
It has also bought $118 billion of mortgage agency debt out of a total $200 billion earmarked.
The current pace of MBS purchases is several times larger than the total weekly level of new issuances in the agency MBS market, indicating the scale of Fed involvement and hinting at the potential for disruption when it pulls out.
Seeking an exit that does not damage a still-fragile market will weigh in favor of slowing the pace of purchases into next year.
"The central issue is what we call the cliff effect, the cliff effect being stopping a program abruptly without signaling to markets a tapering off," Atlanta Federal Reserve Bank chief Dennis Lockhart said on Wednesday.
"I am personally aware of and concerned that market distortions could ensue from a poorly communicated exit from the MBS program, so I think it is very important that we condition the markets for whatever policy we choose to follow," he told reporters in Chattanooga, Tennessee.
Fed officials say the real advantage of the tapering strategy is that it allows markets the time to adjust to the exit, hopefully opening the door for private players to step back in.
The larger the Fed's share of the market in which it is intervening, the more compelling the case to glide its way out with the minimum of disruption.
Fed officials are open-minded about how best to engineer a gradual withdrawal from the mortgage market. They hope private lending will advance as the Fed retreats and that an apparent stabilization in housing is not undermined by a fresh shortage of mortgage credit.
However, there does not seem to be much appetite for expanding the size of the program at this stage.
Lockhart said he was not leaning in that direction, while Richmond Federal Reserve Bank President Jeffrey Lacker said on Thursday that ending the purchases early may even be warranted to avoid over-stimulating the economy.
"I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide," Lacker, a voting member of the Fed's policy-setting committee, told reporters in Danville, Virginia.
They have not made up their minds, and some worry that the U.S. central bank's intervention in the housing market may be crowding out private lenders.
Another concern is that prolonging asset-buying that expands the Fed's balance sheet may hinder its eventual exit from aggressive expansive monetary policies.
But the U.S. housing market has recently shown signs of stabilizing, and other policymakers feel that their massive purchases of mortgage-backed securities have helped keep home loans flowing while private credit was very scarce.
In addition, the Fed opted at a meeting on Aug. 12 to extend by one month a similar, although much smaller, buying program of longer-dated U.S. government bonds in order to minimize disruption as it steps back from this market.
"I think something similar might be possible for MBS, but no decision has been made," St. Louis Federal Reserve Bank President James Bullard told reporters in Little Rock, Arkansas, on Thursday.
"I think we agreed that on the Treasuries we'd do the tapering thing and see how it works. We can decide some time during the fall how we want to do the MBS," he said.
The Fed has so far bought more than $792 billion of securities issued by government-backed mortgage agencies Fannie Mae, Freddie Mac and Ginnie Mae, at a pace of up to $25 billion a week. In all, it has planned to purchase a total of $1.25 trillion in MBS.
It has also bought $118 billion of mortgage agency debt out of a total $200 billion earmarked.
The current pace of MBS purchases is several times larger than the total weekly level of new issuances in the agency MBS market, indicating the scale of Fed involvement and hinting at the potential for disruption when it pulls out.
Seeking an exit that does not damage a still-fragile market will weigh in favor of slowing the pace of purchases into next year.
"The central issue is what we call the cliff effect, the cliff effect being stopping a program abruptly without signaling to markets a tapering off," Atlanta Federal Reserve Bank chief Dennis Lockhart said on Wednesday.
"I am personally aware of and concerned that market distortions could ensue from a poorly communicated exit from the MBS program, so I think it is very important that we condition the markets for whatever policy we choose to follow," he told reporters in Chattanooga, Tennessee.
Fed officials say the real advantage of the tapering strategy is that it allows markets the time to adjust to the exit, hopefully opening the door for private players to step back in.
The larger the Fed's share of the market in which it is intervening, the more compelling the case to glide its way out with the minimum of disruption.
Fed officials are open-minded about how best to engineer a gradual withdrawal from the mortgage market. They hope private lending will advance as the Fed retreats and that an apparent stabilization in housing is not undermined by a fresh shortage of mortgage credit.
However, there does not seem to be much appetite for expanding the size of the program at this stage.
Lockhart said he was not leaning in that direction, while Richmond Federal Reserve Bank President Jeffrey Lacker said on Thursday that ending the purchases early may even be warranted to avoid over-stimulating the economy.
"I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide," Lacker, a voting member of the Fed's policy-setting committee, told reporters in Danville, Virginia.
US steadying, housing no longer drag -Fed's Lacker
Richmond Federal Reserve President Jeffrey Lacker was quoted on Thursday as saying the U.S. economy was stabilising after a painful recession and the shattered housing market will no longer be a drag on economic activity.
"I think the economy is levelling out," Lacker said in an interview with the Danville Register & Bee newspaper. "I think there is reason for hope."
Lacker said that the housing market had picked up about five months ago and would no longer be a drag on economic growth, according to the newspaper, which did not provide a direct quote.
Exports may be picking up and the rate of job loss is slowing, Lacker said. Bank credit tightening seems to have finished and will ease as the job market rebounds, he added.
"It's a time of opportunity, even for people experiencing hard times because of the labour market," Lacker said.
Lacker said consumer spending had stopped falling and remained flat.
On Wednesday, Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economy is in the early stages of a recovery, but it is too early to start considering hiking interest rates.
"I think the economy is levelling out," Lacker said in an interview with the Danville Register & Bee newspaper. "I think there is reason for hope."
Lacker said that the housing market had picked up about five months ago and would no longer be a drag on economic growth, according to the newspaper, which did not provide a direct quote.
Exports may be picking up and the rate of job loss is slowing, Lacker said. Bank credit tightening seems to have finished and will ease as the job market rebounds, he added.
"It's a time of opportunity, even for people experiencing hard times because of the labour market," Lacker said.
Lacker said consumer spending had stopped falling and remained flat.
On Wednesday, Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economy is in the early stages of a recovery, but it is too early to start considering hiking interest rates.
July new US home sales up 9.6 percent
Sales of new U.S. homes surged 9.6 percent in July, another sign the housing market is climbing back from the historic bottom it reached early this year. Driven by falling prices, the fourth-straight monthly increase was greater than expected.
The Commerce Department said Wednesday that sales rose to a seasonally adjusted annual rate of 433,000 from an upwardly revised June rate of 395,000. Sales are now up more than 30 percent from the bottom in January, but are still off nearly 70 percent from the frenzied peak four years ago.
The median sales price of $210,100, however, was down slightly from $210,400 in June and was off 11.5 percent from year-ago levels. Prices are still up from March's low of $205,100.
Last month's sales pace was the strongest since September and exceeded the forecasts of economists surveyed by Thomson Reuters, who expected a pace of 390,000 units.
In a kind of Cash for Clunkers effect, homebuyers are rushing to take advantage of a federal tax credit that covers 10 percent of the home price, or up to $8,000, for first-time owners. Home sales must be completed by the end of November for buyers to qualify.
Builders and real estate agents are pressing Congress for that credit to be extended. If it isn't, sales could reverse their upward trend.
Some builders are already seeing sales dip.
At A.F. Sterling Homes in Tucson, Arizona, sales dipped in July because the builder said it couldn't guarantee the homes could be finished in time to qualify, said Randy Agron the company's vice president,
"The real estate market is really a fragile thing," he said. "It's not the right time to take (the tax credit) away."
But still, the economy is healthier now, so sales are unlikely to fall back to the lows of last winter, even if the credit is discontinued, said Wells Fargo economist Adam York,
"People don't have the sense of panic and dread," about their futures, he said.
As sales rise, that's likely to make builders more confident about getting going on new projects, and that's likely to eventually lead to more jobs in the construction industry, which has been hurt badly by the recession.
"These are crucial elements of a sustainable recovery," David Resler, chief economist at Nomura Securities, wrote in a research note.
Each new home built creates, on average, the equivalent of three jobs lasting one year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders.
There were 271,000 new homes for sale at the end of July, down more than 3 percent from May. At the current sales pace, that represents 7.5 months of supply -- the lowest since April 2007. The decline means builders have scaled back construction to the point where supply and demand are coming into balance.
The Commerce Department said Wednesday that sales rose to a seasonally adjusted annual rate of 433,000 from an upwardly revised June rate of 395,000. Sales are now up more than 30 percent from the bottom in January, but are still off nearly 70 percent from the frenzied peak four years ago.
The median sales price of $210,100, however, was down slightly from $210,400 in June and was off 11.5 percent from year-ago levels. Prices are still up from March's low of $205,100.
Last month's sales pace was the strongest since September and exceeded the forecasts of economists surveyed by Thomson Reuters, who expected a pace of 390,000 units.
In a kind of Cash for Clunkers effect, homebuyers are rushing to take advantage of a federal tax credit that covers 10 percent of the home price, or up to $8,000, for first-time owners. Home sales must be completed by the end of November for buyers to qualify.
Builders and real estate agents are pressing Congress for that credit to be extended. If it isn't, sales could reverse their upward trend.
Some builders are already seeing sales dip.
At A.F. Sterling Homes in Tucson, Arizona, sales dipped in July because the builder said it couldn't guarantee the homes could be finished in time to qualify, said Randy Agron the company's vice president,
"The real estate market is really a fragile thing," he said. "It's not the right time to take (the tax credit) away."
But still, the economy is healthier now, so sales are unlikely to fall back to the lows of last winter, even if the credit is discontinued, said Wells Fargo economist Adam York,
"People don't have the sense of panic and dread," about their futures, he said.
As sales rise, that's likely to make builders more confident about getting going on new projects, and that's likely to eventually lead to more jobs in the construction industry, which has been hurt badly by the recession.
"These are crucial elements of a sustainable recovery," David Resler, chief economist at Nomura Securities, wrote in a research note.
Each new home built creates, on average, the equivalent of three jobs lasting one year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders.
There were 271,000 new homes for sale at the end of July, down more than 3 percent from May. At the current sales pace, that represents 7.5 months of supply -- the lowest since April 2007. The decline means builders have scaled back construction to the point where supply and demand are coming into balance.
Freddie Mac July portfolio down,delinquencies jump
Freddie Mac, the second-largest U.S. home funding company, on Tuesday said its mortgage investment portfolio shrank by an annualized 44.5 percent rate in July, while delinquencies on loans it guarantees accelerated.
The portfolio decreased to $799.1 billion, for an annualized 1.2 percent decrease year-to-date, the McLean, Virginia-based company said in its monthly volume summary.
The portfolio size, however, was nearly unchanged on a year-over-year basis. In July 2008, the portfolio was $798.2 billion.
Delinquencies, which increase stress on the company's capital, jumped to 2.95 percent of its book of business in July from 2.78 percent in June and 1.01 percent in July 2008.
The multifamily delinquency rate, however, was unchanged at 0.11 percent in July. A year earlier it was 0.03 percent.
Freddie Mac said refinance-loan purchase volume was $34.1 billion in July, down sharply from June's $50.9 billion.
Activity peaked earlier this year, with March's $52 billion 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 July totaled $11.0 billion, up from the $9.9 billion entered into during the month of June.
The company's total mortgage portfolio decreased at a 3.3 percent annualized rate in July to $2.234 trillion, for an annualized 2.1 percent increase year to date.
In early September 2008, the U.S. government seized control of Freddie Mac and its larger sibling, Fannie Mae (FNM.P - news) (FNM - news), amid heightened worries about shrinking capital at the congressionally chartered companies.
The government has been relying heavily on Fannie Mae and Freddie Mac in its efforts to stimulate the U.S. housing market, which has suffered the worst downturn since the Great Depression, by buying more mortgage loans, easing refinancing and helping homeowners avoid foreclosure.
The portfolio decreased to $799.1 billion, for an annualized 1.2 percent decrease year-to-date, the McLean, Virginia-based company said in its monthly volume summary.
The portfolio size, however, was nearly unchanged on a year-over-year basis. In July 2008, the portfolio was $798.2 billion.
Delinquencies, which increase stress on the company's capital, jumped to 2.95 percent of its book of business in July from 2.78 percent in June and 1.01 percent in July 2008.
The multifamily delinquency rate, however, was unchanged at 0.11 percent in July. A year earlier it was 0.03 percent.
Freddie Mac said refinance-loan purchase volume was $34.1 billion in July, down sharply from June's $50.9 billion.
Activity peaked earlier this year, with March's $52 billion 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 July totaled $11.0 billion, up from the $9.9 billion entered into during the month of June.
The company's total mortgage portfolio decreased at a 3.3 percent annualized rate in July to $2.234 trillion, for an annualized 2.1 percent increase year to date.
In early September 2008, the U.S. government seized control of Freddie Mac and its larger sibling, Fannie Mae (FNM.P - news) (FNM - news), amid heightened worries about shrinking capital at the congressionally chartered companies.
The government has been relying heavily on Fannie Mae and Freddie Mac in its efforts to stimulate the U.S. housing market, which has suffered the worst downturn since the Great Depression, by buying more mortgage loans, easing refinancing and helping homeowners avoid foreclosure.
US housing, confidence data point to recovery
Larger-than-expected gains in U.S. housing prices and consumer confidence on Tuesday lent new weight to views that the economy is emerging from the longest recession since the 1930s.
U.S. single-family home prices rose for the second month in a row in June, according to a closely watched index, and consumer confidence jumped in August.
In addition, President Barack Obama nominated Ben Bernanke to a second term as chairman of the Federal Reserve, removing some niggling doubt from investors' minds. The move promised a consistent approach to monetary policy in the years ahead.
The developments helped buffer the blow of projections for the U.S. budget deficit to reach its highest level in 2009, relative to the total economy, since World War Two.
"The recession appears to be over, with consumer attitudes lagging behind broad economic developments," said Steven Wood, chief economist at Insight Economics in Danville, California.
Major U.S. equities indexes closed higher after briefly hitting new 2009 highs on the day's events. Treasury bond prices initially fell as signs of a resurgent economy reduced interest in safer investments, but later rose after decent demand for an auction of two-year notes.
The Conference Board, an industry group, said consumer confidence climbed to a reading of 54.1 in August from 47.4 in July, handily beating forecasts, on an improved outlook for the job market and the overall economy.
The rise sent the index to its highest level since May. Still, some analysts warned not to get carried away.
"Confidence remains well below its historical average of 95 and it has not even regained the level of 61 seen before the collapse of Lehman almost a year ago," said Paul Dales, U.S. economist at Capital Economics in Toronto.
The weak labor market remains a sticking point to recovery, and especially a revival in consumer spending. Even the Fed has conceded the likelihood of a "jobless recovery," with the unemployment rate staying high long after growth resumes.
Americans saying that jobs were "hard to get" in August dropped to 45.1 percent from 48.5 percent but only 4.2 percent said jobs were plentiful.
"Most of the strength was in the 'expectations' component, so it looks like even though the near-term conditions are still a bit rocky, there is hope for the future," said Kim Rupert, managing director, global fixed income analysis, Action Economics LLC in San Francisco.
HOUSING PRICES IN BROAD-BASED GAINS
Other data supporting recovery hopes came from the Standard & Poor's/Case-Shiller housing price index. The housing market is considered a critical component to an economic recovery.
Prices of U.S. single family homes rose by 1.4 percent in June from May, after creeping up by 0.5 percent in April, suggesting the crippling housing slump is easing.
The Case-Shiller 10- and 20-city indexes have plunged by 54.3 percent and 45.3 percent, respectively, from their 2006 peaks.
June's improvement was broad based, with 18 of 20 metropolitan areas logging gains for the month.
"The most important take-away is the breadth of the rise," said Adam York, economist at Wells Fargo Securities in Charlotte, North Carolina. "The absolute worst is behind us."
Separately, the Federal Housing Finance Authority said U.S. home prices rose by 0.5 percent in June, according to its seasonally-adjusted monthly index, while prices fell by 0.7 percent in the second quarter.
"The S&P/Case-Shiller report dovetails with evidence from the FHFA house price index and the National Association of Realtors existing home sales report, suggesting that house price deflation has bottomed," said Anna Piretti, economist at BNP Paribas in New York.
BEN'S BACK
Bernanke's reappointment, while widely expected, was seen as a plus for markets that feared new uncertainty at a time the U.S. economic ship is finally righting itself.
Fed officials have warned that politicizing the U.S. central bank risked higher long-term interest rates as investors began to fear higher inflation taking root.
"Were Bernanke to be denied a second term in favor of, say, a current White House 'insider,' this would inevitably add to concerns about the blurring of lines between fiscal and monetary policy and the potential compromising of Fed independence," said strategists at analysis firm 4CAST Ltd.
For the time being, though, Bernanke & Company still face deflationary pressure from the huge "output gap" in the U.S. economy created by the deep recession.
"The news that the deflation-conscious Bernanke is going to be at the helm .... provides tentative support to our view that the zero-interest rate policy will remain in place until 2011 at the earliest," said Capital Economics' Dales.
The nonpartisan Congressional Budget Office (CBO) on Tuesday gave updated projections on the likely U.S. budget deficit in fiscal 2009 and beyond.
Spiraling deficit forecasts stretching far into the future have been cited as one element behind a dip in Obama's polling numbers, as Americans start to fear that tax hikes will almost inevitably follow.
The CBO forecast a fiscal 2009 deficit at $1.59 trillion, or 11.2 percent of projected gross domestic product, falling to $1.4 trillion or 9.6 percent of GDP in 2010.
It gave a 10-year deficit forecast of $7.14 trillion against $9.1 trillion.
Separately, the White House raised its forecast for the budget deficit between 2010 and 2019 to a total of about $9 trillion.
U.S. single-family home prices rose for the second month in a row in June, according to a closely watched index, and consumer confidence jumped in August.
In addition, President Barack Obama nominated Ben Bernanke to a second term as chairman of the Federal Reserve, removing some niggling doubt from investors' minds. The move promised a consistent approach to monetary policy in the years ahead.
The developments helped buffer the blow of projections for the U.S. budget deficit to reach its highest level in 2009, relative to the total economy, since World War Two.
"The recession appears to be over, with consumer attitudes lagging behind broad economic developments," said Steven Wood, chief economist at Insight Economics in Danville, California.
Major U.S. equities indexes closed higher after briefly hitting new 2009 highs on the day's events. Treasury bond prices initially fell as signs of a resurgent economy reduced interest in safer investments, but later rose after decent demand for an auction of two-year notes.
The Conference Board, an industry group, said consumer confidence climbed to a reading of 54.1 in August from 47.4 in July, handily beating forecasts, on an improved outlook for the job market and the overall economy.
The rise sent the index to its highest level since May. Still, some analysts warned not to get carried away.
"Confidence remains well below its historical average of 95 and it has not even regained the level of 61 seen before the collapse of Lehman almost a year ago," said Paul Dales, U.S. economist at Capital Economics in Toronto.
The weak labor market remains a sticking point to recovery, and especially a revival in consumer spending. Even the Fed has conceded the likelihood of a "jobless recovery," with the unemployment rate staying high long after growth resumes.
Americans saying that jobs were "hard to get" in August dropped to 45.1 percent from 48.5 percent but only 4.2 percent said jobs were plentiful.
"Most of the strength was in the 'expectations' component, so it looks like even though the near-term conditions are still a bit rocky, there is hope for the future," said Kim Rupert, managing director, global fixed income analysis, Action Economics LLC in San Francisco.
HOUSING PRICES IN BROAD-BASED GAINS
Other data supporting recovery hopes came from the Standard & Poor's/Case-Shiller housing price index. The housing market is considered a critical component to an economic recovery.
Prices of U.S. single family homes rose by 1.4 percent in June from May, after creeping up by 0.5 percent in April, suggesting the crippling housing slump is easing.
The Case-Shiller 10- and 20-city indexes have plunged by 54.3 percent and 45.3 percent, respectively, from their 2006 peaks.
June's improvement was broad based, with 18 of 20 metropolitan areas logging gains for the month.
"The most important take-away is the breadth of the rise," said Adam York, economist at Wells Fargo Securities in Charlotte, North Carolina. "The absolute worst is behind us."
Separately, the Federal Housing Finance Authority said U.S. home prices rose by 0.5 percent in June, according to its seasonally-adjusted monthly index, while prices fell by 0.7 percent in the second quarter.
"The S&P/Case-Shiller report dovetails with evidence from the FHFA house price index and the National Association of Realtors existing home sales report, suggesting that house price deflation has bottomed," said Anna Piretti, economist at BNP Paribas in New York.
BEN'S BACK
Bernanke's reappointment, while widely expected, was seen as a plus for markets that feared new uncertainty at a time the U.S. economic ship is finally righting itself.
Fed officials have warned that politicizing the U.S. central bank risked higher long-term interest rates as investors began to fear higher inflation taking root.
"Were Bernanke to be denied a second term in favor of, say, a current White House 'insider,' this would inevitably add to concerns about the blurring of lines between fiscal and monetary policy and the potential compromising of Fed independence," said strategists at analysis firm 4CAST Ltd.
For the time being, though, Bernanke & Company still face deflationary pressure from the huge "output gap" in the U.S. economy created by the deep recession.
"The news that the deflation-conscious Bernanke is going to be at the helm .... provides tentative support to our view that the zero-interest rate policy will remain in place until 2011 at the earliest," said Capital Economics' Dales.
The nonpartisan Congressional Budget Office (CBO) on Tuesday gave updated projections on the likely U.S. budget deficit in fiscal 2009 and beyond.
Spiraling deficit forecasts stretching far into the future have been cited as one element behind a dip in Obama's polling numbers, as Americans start to fear that tax hikes will almost inevitably follow.
The CBO forecast a fiscal 2009 deficit at $1.59 trillion, or 11.2 percent of projected gross domestic product, falling to $1.4 trillion or 9.6 percent of GDP in 2010.
It gave a 10-year deficit forecast of $7.14 trillion against $9.1 trillion.
Separately, the White House raised its forecast for the budget deficit between 2010 and 2019 to a total of about $9 trillion.
REIT bond rally could reverse on refinancing needs
Bonds of U.S. real estate investment trusts have rallied as thawing credit markets eased concerns over the sector's liquidity and short-term refinancing needs, though the continuing need to refinance maturing debt may spark renewed weakness.
REIT bonds have rallied as the companies shored up liquidity with equity and debt sales, and extended maturities on revolving credit lines.
Spreads on REIT bonds have narrowed to 392 basis points, from more than 500 basis points in July, according to Bank of America Merrill Lynch data. The spreads had widened to over 1000 basis points in April.
"REIT credit spreads have continued to tighten as near and intermediate refinancing risk has subsided largely due to much improved access to capital in the form of a thawing unsecured market, higher equity values, and the potential for CMBS issuance via TALF," CreditSights analysts Craig Guttenplan and Rob Haines said in a report on Tuesday.
REITs are expected to benefit from the government's Term Asset-Backed Securities Loan Facility (TALF), which aims to jump-start the moribund commercial mortgage-backed securities (CMBS) market.
Mall and shopping center owner Developers Diversified Realty Corp said last month it expects to complete its first TALF deal in the fall, making it potentially the first borrower under the program. For details, see (Full story)
The CreditSights analysts said that they believe the majority of REITs that they cover have sufficient cash and credit capacity to meet their unsecured debt through 2012.
"Within our coverage universe, most companies have already reduced their reliance on credit facility borrowings to less than 25 percent usage of the gross capacity as part of the deleveraging process," they said.
However, "while the industry's liquidity situation is less tenuous than it was at the beginning of the year, plenty of headwinds remain," CreditSights said. "Most noteworthy of which is deteriorating underlying commercial real estate fundamentals which increases property level refinancing risk."
Simon Property Group and Kimco Realty Corp are among CreditSights top debt recommendations in the sector.
Standard & Poor's and Fitch Ratings, however, remain concerned about the ability of REITs to refinance coming debt maturities, and have warned about continuing downgrades in the sector.
"Although we acknowledge that recent robust equity issuance and dividend cuts support these companies' deleveraging efforts, we view this activity essentially as a downpayment on the additional capital they will need to comfortably meet their debt maturities and capital investment requirements over the next few years," S&P said in a statement last month.
S&P has downgraded roughly one-quarter of the 58 publicly rated REITs since the beginning of the year, and 40 percent of these companies currently have negative outlooks, the rating agency said.
"Collectively, these rating actions affected companies across most property subsectors and largely reflected our concerns about high leverage and constrained liquidity," S&P said. "We believe these two issues, more than anticipated deterioration in operating portfolio performance, are likely to drive the bulk of negative rating activity going forward."
Fitch Ratings also this month warned that appetite for REIT shares may wane, in spite of the success of recent sales.
"Although there has been broad market acceptance for U.S. equity REIT common equity issuances during 2009, the equity market's willingness to continue to participate in the deleveraging process for REITs is uncertain," Fitch said in a statement.
"Continued liquidity concerns and deteriorating property fundamentals, together with a recessionary U.S. economy and constrained real estate debt capital markets will continue to pose challenges to U.S. equity REITs throughout the remainder of 2009," Fitch said.
REIT bonds have rallied as the companies shored up liquidity with equity and debt sales, and extended maturities on revolving credit lines.
Spreads on REIT bonds have narrowed to 392 basis points, from more than 500 basis points in July, according to Bank of America Merrill Lynch data. The spreads had widened to over 1000 basis points in April.
"REIT credit spreads have continued to tighten as near and intermediate refinancing risk has subsided largely due to much improved access to capital in the form of a thawing unsecured market, higher equity values, and the potential for CMBS issuance via TALF," CreditSights analysts Craig Guttenplan and Rob Haines said in a report on Tuesday.
REITs are expected to benefit from the government's Term Asset-Backed Securities Loan Facility (TALF), which aims to jump-start the moribund commercial mortgage-backed securities (CMBS) market.
Mall and shopping center owner Developers Diversified Realty Corp said last month it expects to complete its first TALF deal in the fall, making it potentially the first borrower under the program. For details, see (Full story)
The CreditSights analysts said that they believe the majority of REITs that they cover have sufficient cash and credit capacity to meet their unsecured debt through 2012.
"Within our coverage universe, most companies have already reduced their reliance on credit facility borrowings to less than 25 percent usage of the gross capacity as part of the deleveraging process," they said.
However, "while the industry's liquidity situation is less tenuous than it was at the beginning of the year, plenty of headwinds remain," CreditSights said. "Most noteworthy of which is deteriorating underlying commercial real estate fundamentals which increases property level refinancing risk."
Simon Property Group and Kimco Realty Corp are among CreditSights top debt recommendations in the sector.
Standard & Poor's and Fitch Ratings, however, remain concerned about the ability of REITs to refinance coming debt maturities, and have warned about continuing downgrades in the sector.
"Although we acknowledge that recent robust equity issuance and dividend cuts support these companies' deleveraging efforts, we view this activity essentially as a downpayment on the additional capital they will need to comfortably meet their debt maturities and capital investment requirements over the next few years," S&P said in a statement last month.
S&P has downgraded roughly one-quarter of the 58 publicly rated REITs since the beginning of the year, and 40 percent of these companies currently have negative outlooks, the rating agency said.
"Collectively, these rating actions affected companies across most property subsectors and largely reflected our concerns about high leverage and constrained liquidity," S&P said. "We believe these two issues, more than anticipated deterioration in operating portfolio performance, are likely to drive the bulk of negative rating activity going forward."
Fitch Ratings also this month warned that appetite for REIT shares may wane, in spite of the success of recent sales.
"Although there has been broad market acceptance for U.S. equity REIT common equity issuances during 2009, the equity market's willingness to continue to participate in the deleveraging process for REITs is uncertain," Fitch said in a statement.
"Continued liquidity concerns and deteriorating property fundamentals, together with a recessionary U.S. economy and constrained real estate debt capital markets will continue to pose challenges to U.S. equity REITs throughout the remainder of 2009," Fitch said.
U.S. home prices rose a second straight month- S&P
Prices of U.S. single-family homes rose for the second consecutive month in June, exceeding expectations and adding to evidence that the three-year housing slump is easing, Standard & Poor's reported on Tuesday.
The S&P/Case-Shiller composite indexes of 10 and 20 metropolitan areas both rose 1.4 percent in June from May, almost three times the 0.5 percent increases of the month before. May's increases were the first in nearly three years.
Optimism over a housing recovery blossomed last week after reports showed rising confidence among homebuilder and sales of existing homes rose in July for the fourth consecutive month. Economists expect the sector's recovery could help the nation emerge from recession and further stabilize financial markets that have suffered their worst crisis since the 1930s.
The 10- and 20-city indexes have dropped 54.3 percent and 45.3 percent from their 2006 peaks, respectively.
"This is just another month that supports those that think we have bottomed, or are nearing a bottom," said Jesse Litvak, a managing director in mortgage- and asset-backed securities at Jefferies & Co. in Stamford, Connecticut.
Economists in a Reuters poll expected the 20-city index increased by 0.2 percent in June.
S&P said its U.S. National Home Price Index recorded a 14.9 percent decline for the second quarter, compared with a 19.1 percent year-over-year drop in the first quarter. Versus the first quarter, prices rose by 2.9 percent in the first such increase in three years, S&P said.
Regionally, only Las Vegas and Detroit posted declines in June over May, of 2 percent and 0.8 percent, respectively. Cleveland home prices registered the greatest increases for the past two months, topping 4 percent each time.
The S&P/Case-Shiller composite indexes of 10 and 20 metropolitan areas both rose 1.4 percent in June from May, almost three times the 0.5 percent increases of the month before. May's increases were the first in nearly three years.
Optimism over a housing recovery blossomed last week after reports showed rising confidence among homebuilder and sales of existing homes rose in July for the fourth consecutive month. Economists expect the sector's recovery could help the nation emerge from recession and further stabilize financial markets that have suffered their worst crisis since the 1930s.
The 10- and 20-city indexes have dropped 54.3 percent and 45.3 percent from their 2006 peaks, respectively.
"This is just another month that supports those that think we have bottomed, or are nearing a bottom," said Jesse Litvak, a managing director in mortgage- and asset-backed securities at Jefferies & Co. in Stamford, Connecticut.
Economists in a Reuters poll expected the 20-city index increased by 0.2 percent in June.
S&P said its U.S. National Home Price Index recorded a 14.9 percent decline for the second quarter, compared with a 19.1 percent year-over-year drop in the first quarter. Versus the first quarter, prices rose by 2.9 percent in the first such increase in three years, S&P said.
Regionally, only Las Vegas and Detroit posted declines in June over May, of 2 percent and 0.8 percent, respectively. Cleveland home prices registered the greatest increases for the past two months, topping 4 percent each time.
US housing's solid spring, hotter summer
What some expected to be a spring fling for the U.S. housing market turned into a hotter summer.
Home buying and sales activity typically pick up in the spring as warmer weather boosts activity, but the momentum has continued into the summer, which some take as a sign of long-awaited stabilization in the hard-hit sector.
Improvement in this market bodes well for the U.S. economy, as it points to better demand in the sector where the first signs of the recession took root.
"Seasonality no doubt helped improve housing sales in the spring, but I still think the worst is behind us," said Jeffrey Fisher, professor of real estate and director of the Benecki Center for Real Estate Studies at the Indiana University Kelley School of Business.
Low mortgage rates, high affordability, and the government's $8,000 tax credit for first-time home buyers have helped stabilize the market. Fisher said he does not expect further significant price declines, which should boost consumer willingness to purchase homes.
But with the tax credit set to expire in the fall and distressed properties making up a high proportion of sales, the recent flurry of activity masks uncertainty about the long-term outlook.
David Crowe, chief economist at the National Association of Home Builders in Washington, D.C., said home builders have told him that the first-time home buyer tax credit is bringing in buyers.
"I am concerned that although we do have some increase in demand and production, the momentum is not sufficient to get us past the expiration of the $8,000 first-time home buyer tax credit, and we could see some fall back after November when the credit expires," he said.
OUT OF THE HOUSING WRECKAGE
Nevertheless, this week's housing data suggests that the market is climbing out of the ashes of the three-year slump.
The National Association of Realtors said that sales of previously owned U.S. homes in July rose to an annual rate of 5.24 million units, the highest since August 2007.
Home builders have become more confident, with the National Association of Home Builders/Wells Fargo Housing Market Index in August rising to its highest point since June of 2008. And the Commerce Department said July new housing starts for single-family homes were up five consecutive months.
Housing demand has picked up with help from deep discounts and a brighter economic outlook, which has helped clear inventory and allow builders to increase construction, according to Michelle Meyer, an economist at Barclays Capital in New York.
"There has been a decisive upward trend in the seasonally adjusted data for the past several months, suggesting it is an actual improvement," she said.
However, the NAR said distressed sales -- foreclosures and situations where owners are forced to sell -- accounted for 31 percent of existing sales in July, and the home buyer credit also had a "significant impact" on sales.
While more sales are a welcome development, additional softness in housing may be expected because of what economists are calling "shadow supply," homes that were kept off the market by owners electing not to sell in the real-estate downturn.
They may be ready to unload now, and with additional foreclosures on the way, this shadow supply should weigh on home prices and delay a recovery. This inventory may already be emerging, with the NAR noting a sharp increase in the inventory of existing homes for sale in July.
Late payments on U.S. mortgages increased to a record high in the second quarter, with almost one in eight homeowners delinquent or in the process of foreclosure, according to the Mortgage Bankers Association's National Delinquency Survey.
The NAHB's Crowe said the market should continue to see an oversupply of existing homes as more foreclosures come on the market, he said.
Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pennsylvania, said she does not expect a strong housing market recovery, with foreclosures the biggest obstacle.
"A rise in foreclosures will keep the housing recovery slow and weak and will continue to place downward pressure on house prices until mid-2010, but at least the end is in sight," she said.
Still, the NAHB's Crowe said home builders are having problems obtaining production financing, and many are complaining that sales have been lost as a result of too-low appraisal values.
"The obstacles are plentiful," he said.
Home buying and sales activity typically pick up in the spring as warmer weather boosts activity, but the momentum has continued into the summer, which some take as a sign of long-awaited stabilization in the hard-hit sector.
Improvement in this market bodes well for the U.S. economy, as it points to better demand in the sector where the first signs of the recession took root.
"Seasonality no doubt helped improve housing sales in the spring, but I still think the worst is behind us," said Jeffrey Fisher, professor of real estate and director of the Benecki Center for Real Estate Studies at the Indiana University Kelley School of Business.
Low mortgage rates, high affordability, and the government's $8,000 tax credit for first-time home buyers have helped stabilize the market. Fisher said he does not expect further significant price declines, which should boost consumer willingness to purchase homes.
But with the tax credit set to expire in the fall and distressed properties making up a high proportion of sales, the recent flurry of activity masks uncertainty about the long-term outlook.
David Crowe, chief economist at the National Association of Home Builders in Washington, D.C., said home builders have told him that the first-time home buyer tax credit is bringing in buyers.
"I am concerned that although we do have some increase in demand and production, the momentum is not sufficient to get us past the expiration of the $8,000 first-time home buyer tax credit, and we could see some fall back after November when the credit expires," he said.
OUT OF THE HOUSING WRECKAGE
Nevertheless, this week's housing data suggests that the market is climbing out of the ashes of the three-year slump.
The National Association of Realtors said that sales of previously owned U.S. homes in July rose to an annual rate of 5.24 million units, the highest since August 2007.
Home builders have become more confident, with the National Association of Home Builders/Wells Fargo Housing Market Index in August rising to its highest point since June of 2008. And the Commerce Department said July new housing starts for single-family homes were up five consecutive months.
Housing demand has picked up with help from deep discounts and a brighter economic outlook, which has helped clear inventory and allow builders to increase construction, according to Michelle Meyer, an economist at Barclays Capital in New York.
"There has been a decisive upward trend in the seasonally adjusted data for the past several months, suggesting it is an actual improvement," she said.
However, the NAR said distressed sales -- foreclosures and situations where owners are forced to sell -- accounted for 31 percent of existing sales in July, and the home buyer credit also had a "significant impact" on sales.
While more sales are a welcome development, additional softness in housing may be expected because of what economists are calling "shadow supply," homes that were kept off the market by owners electing not to sell in the real-estate downturn.
They may be ready to unload now, and with additional foreclosures on the way, this shadow supply should weigh on home prices and delay a recovery. This inventory may already be emerging, with the NAR noting a sharp increase in the inventory of existing homes for sale in July.
Late payments on U.S. mortgages increased to a record high in the second quarter, with almost one in eight homeowners delinquent or in the process of foreclosure, according to the Mortgage Bankers Association's National Delinquency Survey.
The NAHB's Crowe said the market should continue to see an oversupply of existing homes as more foreclosures come on the market, he said.
Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pennsylvania, said she does not expect a strong housing market recovery, with foreclosures the biggest obstacle.
"A rise in foreclosures will keep the housing recovery slow and weak and will continue to place downward pressure on house prices until mid-2010, but at least the end is in sight," she said.
Still, the NAHB's Crowe said home builders are having problems obtaining production financing, and many are complaining that sales have been lost as a result of too-low appraisal values.
"The obstacles are plentiful," he said.
Existing homes selling fast - record fast
Sales of existing homes rose in July for the fourth consecutive month, lending support to economists who argue a recovery is near.
Sales of previously owned single-family homes were up 7.2% compared with June and 5% from July 2008, The National Association of Realtors (NAR) reported Friday. The monthly gain was the largest on record for existing-home sales, which NAR has tracked since 1999.
"The housing market has decisively turned for the better," said Lawrence Yun, NAR's chief economist. "A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales."
July home sales hit an annualized rate of 5.24 million proprieties, marking the first breach of the 5 million annualized rate mark since last September, when they hit 5.1 million. Since then, they have stayed in a very narrow range, bouncing between between January's low of 4.49 million and October's high of 4.94 million.
The July performance far exceeded expectations: A consensus of real estate experts had forecast sales of 5 million.
Low prices
Of course, homes should be selling. Prices have fallen more than 32% from their peaks, set in the summer of 2006. Plus, mortgage rates near historic lows makes the cost of purchasing a home lower than they've been in nearly 20 years.
"In some recovering markets like San Diego, Las Vegas, Phoenix and Orlando, the demand for foreclosed and lower priced homes has spiked, and a lack of inventory is becoming a common complaint," Yun said.
Overall though, the national inventory rose by more than 7% to 4.09 million units. That will continue to keep prices low, according to Mike Larson, a housing analyst with Weiss Research.
"There's a bifurcation of the market," he said. "There's excess supply putting downward pressure on prices and people respond to the lower prices by buying homes."
Housing is its most affordable in many years, he pointed out. "Falling prices is not part of the problem, they're part of the solution," he said.
Hurting home sales have been stubborn increases in job losses. More than 6.7 million jobs have been lost since the beginning of 2008.
That's one reason why Robert Dye, a senior economist for PNC Financial Services (PNC, Fortune 500), is keeping his optimism in check.
"I wouldn't go overboard on this number," he said. "The economy is still healing and will continue to run into some bumps. But it does bode very well for the future and shows buyer confidence is increasing."
There is one potential bump, however: The looming end of the first-time homebuyers credit. The credit gave first-time homebuyers an up to $8,000 refund on their taxes if they close on a deal before Dec. 1. That credit has been motivating buyers, and when it expires, demand could dry up.
"Just like with the cash-for-clunkers program, we run the risk of a letdown as the program runs its course," Dye said.
Where homes are selling
Regionally, the strongest market was the Northeast, where sales soared by 13.4% to an annualized rate of 930,000. That was 3.3% higher than last July. The median price of homes sold during the month was $236,700, off 15% from last year.
Midwest sales rose 10.9% to a 1.22 million rate, 8% higher year-over-year. Prices there have sunk 5.9% over the past 12 months to a median of $157,200.
In the South, sales were up 7.1% from June and 5.4% from last July to a rate of 1.95 million. Price have dropped 7.1% to $164,500 over the past 12 months.
The only region reporting a slip in sales was the West, where they fell 1.7% to a rate of 1.13 million. That was ahead of last July, however, by 1.8%. The median price there was $202,300, a whopping 28% below what is was a year ago.
Sales of previously owned single-family homes were up 7.2% compared with June and 5% from July 2008, The National Association of Realtors (NAR) reported Friday. The monthly gain was the largest on record for existing-home sales, which NAR has tracked since 1999.
"The housing market has decisively turned for the better," said Lawrence Yun, NAR's chief economist. "A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales."
July home sales hit an annualized rate of 5.24 million proprieties, marking the first breach of the 5 million annualized rate mark since last September, when they hit 5.1 million. Since then, they have stayed in a very narrow range, bouncing between between January's low of 4.49 million and October's high of 4.94 million.
The July performance far exceeded expectations: A consensus of real estate experts had forecast sales of 5 million.
Low prices
Of course, homes should be selling. Prices have fallen more than 32% from their peaks, set in the summer of 2006. Plus, mortgage rates near historic lows makes the cost of purchasing a home lower than they've been in nearly 20 years.
"In some recovering markets like San Diego, Las Vegas, Phoenix and Orlando, the demand for foreclosed and lower priced homes has spiked, and a lack of inventory is becoming a common complaint," Yun said.
Overall though, the national inventory rose by more than 7% to 4.09 million units. That will continue to keep prices low, according to Mike Larson, a housing analyst with Weiss Research.
"There's a bifurcation of the market," he said. "There's excess supply putting downward pressure on prices and people respond to the lower prices by buying homes."
Housing is its most affordable in many years, he pointed out. "Falling prices is not part of the problem, they're part of the solution," he said.
Hurting home sales have been stubborn increases in job losses. More than 6.7 million jobs have been lost since the beginning of 2008.
That's one reason why Robert Dye, a senior economist for PNC Financial Services (PNC, Fortune 500), is keeping his optimism in check.
"I wouldn't go overboard on this number," he said. "The economy is still healing and will continue to run into some bumps. But it does bode very well for the future and shows buyer confidence is increasing."
There is one potential bump, however: The looming end of the first-time homebuyers credit. The credit gave first-time homebuyers an up to $8,000 refund on their taxes if they close on a deal before Dec. 1. That credit has been motivating buyers, and when it expires, demand could dry up.
"Just like with the cash-for-clunkers program, we run the risk of a letdown as the program runs its course," Dye said.
Where homes are selling
Regionally, the strongest market was the Northeast, where sales soared by 13.4% to an annualized rate of 930,000. That was 3.3% higher than last July. The median price of homes sold during the month was $236,700, off 15% from last year.
Midwest sales rose 10.9% to a 1.22 million rate, 8% higher year-over-year. Prices there have sunk 5.9% over the past 12 months to a median of $157,200.
In the South, sales were up 7.1% from June and 5.4% from last July to a rate of 1.95 million. Price have dropped 7.1% to $164,500 over the past 12 months.
The only region reporting a slip in sales was the West, where they fell 1.7% to a rate of 1.13 million. That was ahead of last July, however, by 1.8%. The median price there was $202,300, a whopping 28% below what is was a year ago.
Prime Mortgages Going Sour
At the end of the second quarter, 4.3% of all residential mortgages were in some part of the foreclosure process, up from 3.85% at the end of the first quarter and 2.75% a year ago. In addition, on a seasonally adjusted basis, 9.24% of all mortgages were delinquent (behind by at least one payment), up from 9.12% at the end of March, and just 6.41% at the end of June 2008.
Both were records since the Mortgage Bankers Association (MBA) started keeping track back in 1972. On a non-seasonally-adjusted basis, the delinquency rate was not quite as bad at 8.86%, but still a record.
That means that 13.16% of all residential mortgages (NSA basis) are in trouble. With about 51 million houses with mortgages in the country, that means 6.71 million bad mortgages out there. With the number of people out of work still rising, the problem is likely to continue to get worse for quite a while.
The chief economist for the MBA expects that foreclosures will not peak until the end of 2010. I suspect he might be a little bit on the optimistic side, but that projection is reasonable. If someone is also in a house where the value of the house is less than the amount of the mortgage, the probability that they will continue to pay the mortgage falls rapidly.
If they are also out of work while they are underwater, then continuing to pay their mortgage is simply not an economically rational thing to do. Far better to simply live rent- and mortgage-free until the sheriff shows up at the door. Given the overwhelming case-load, that can often be well over a year (though it varies greatly by location).
Once upon a time, people liked to think that the mortgage problems were contained to the subprime market. It was just a problem of irresponsible people on the wrong side of the tracks. That is clearly no longer the case.
While as a percentage, subprime mortgages are still much more likely to be delinquent or in foreclosure than are prime mortgages, there are far fewer subprime mortgages than prime mortgages. In absolute numbers, there are far more bad prime mortgages than bad subprime mortgages.
The graph below (from http://www.calculatedriskblog.com/) shows just how bad the loans are going sour on the people who had good credit when they took out the mortgages.
The percentage of prime loans in foreclosure jumped to 3.00% at the end of the second quarter vs. 2.49% at the end of March. The percentage delinquent rose to 6.41% from 6.06% at the end of March.
On a percentage basis, subprime loans continue to be an absolute horror show. At the end of the quarter more than one in four (25.35%) subprime loans were delinquent (up from 24.95% at the end of the first quarter) and 15.05% were somewhere in the foreclosure process, up from 14.34% the quarter before.
Thus, the combined troubled mortgage rate is now over 40% on subprime loans.
Both were records since the Mortgage Bankers Association (MBA) started keeping track back in 1972. On a non-seasonally-adjusted basis, the delinquency rate was not quite as bad at 8.86%, but still a record.
That means that 13.16% of all residential mortgages (NSA basis) are in trouble. With about 51 million houses with mortgages in the country, that means 6.71 million bad mortgages out there. With the number of people out of work still rising, the problem is likely to continue to get worse for quite a while.
The chief economist for the MBA expects that foreclosures will not peak until the end of 2010. I suspect he might be a little bit on the optimistic side, but that projection is reasonable. If someone is also in a house where the value of the house is less than the amount of the mortgage, the probability that they will continue to pay the mortgage falls rapidly.
If they are also out of work while they are underwater, then continuing to pay their mortgage is simply not an economically rational thing to do. Far better to simply live rent- and mortgage-free until the sheriff shows up at the door. Given the overwhelming case-load, that can often be well over a year (though it varies greatly by location).
Once upon a time, people liked to think that the mortgage problems were contained to the subprime market. It was just a problem of irresponsible people on the wrong side of the tracks. That is clearly no longer the case.
While as a percentage, subprime mortgages are still much more likely to be delinquent or in foreclosure than are prime mortgages, there are far fewer subprime mortgages than prime mortgages. In absolute numbers, there are far more bad prime mortgages than bad subprime mortgages.
The graph below (from http://www.calculatedriskblog.com/) shows just how bad the loans are going sour on the people who had good credit when they took out the mortgages.
The percentage of prime loans in foreclosure jumped to 3.00% at the end of the second quarter vs. 2.49% at the end of March. The percentage delinquent rose to 6.41% from 6.06% at the end of March.
On a percentage basis, subprime loans continue to be an absolute horror show. At the end of the quarter more than one in four (25.35%) subprime loans were delinquent (up from 24.95% at the end of the first quarter) and 15.05% were somewhere in the foreclosure process, up from 14.34% the quarter before.
Thus, the combined troubled mortgage rate is now over 40% on subprime loans.
Times stay tough for Canadian commercial property
Money was scarce and deals few in Canada's commercial real estate market in the first half of the year and recovery is likely to lag the turnaround in the residential sector, according to two reports released on Monday.
CB Richard Ellis (CBRE), the world's largest commercial real estate services firm, said the number of commercial transactions completed from January to June was 1,569, down 38 percent from 2,542 in the same period last year.
The value of the transactions shrank by 51 percent to C$4.9 billion ($4.4 billion) in the first half from C$10 billion in the year-before period, CBRE said in its Mid-Year National Investment Report.
"The global recessionary impact on the commercial real estate market has yet to run its course," said John O'Bryan, vice-chairman, CBRE.
In contrast, sales of existing homes are on a tear with the most recent figures showing a sixth straight monthly rise. (Full story) Market watchers have credited a rebound in residential property sales, supported by low mortgage rates, with helping to put the Canadian economy on the road to recovery.
But in the commercial market, tight lending conditions and a lack of investor appetite for mortgage-backed securities are some of the obstacles that remain, PricewaterhouseCoopers said in a report.
PwC said that suburban office, hotel and industrial properties are among the most vulnerable in this kind of downturn.
"The credit crisis and ensuing recession have dragged commercial real estate markets into very trying times, marked by value losses, rising foreclosures, and reduced property revenues," said Frank Magliocco, partner and leader of PwC's Real Estate practice in Canada.
"There is simply scarce money and therefore limited buyers."
LIGHTER VOLUME
Nine major markets highlighted in the CBRE report showed lighter transaction volumes at midyear than at the same point a year earlier.
For example, Toronto generated C$1.3 billion worth of transactions, the highest of any market surveyed, on 287 completed deals. That compares with C$3.7 billion on 676 deals in the first six months of 2008.
There were 149 sales in the Calgary market worth C$471 million in the first half, down sharply from investments of C$2.2 billion a year earlier, when there were 281 transactions.
CBRE said Canada's commercial real estate market remains tied closely to global economic conditions and that foreign investment activity has been "predictably affected by the global recession almost nationwide".
CB Richard Ellis (CBRE), the world's largest commercial real estate services firm, said the number of commercial transactions completed from January to June was 1,569, down 38 percent from 2,542 in the same period last year.
The value of the transactions shrank by 51 percent to C$4.9 billion ($4.4 billion) in the first half from C$10 billion in the year-before period, CBRE said in its Mid-Year National Investment Report.
"The global recessionary impact on the commercial real estate market has yet to run its course," said John O'Bryan, vice-chairman, CBRE.
In contrast, sales of existing homes are on a tear with the most recent figures showing a sixth straight monthly rise. (Full story) Market watchers have credited a rebound in residential property sales, supported by low mortgage rates, with helping to put the Canadian economy on the road to recovery.
But in the commercial market, tight lending conditions and a lack of investor appetite for mortgage-backed securities are some of the obstacles that remain, PricewaterhouseCoopers said in a report.
PwC said that suburban office, hotel and industrial properties are among the most vulnerable in this kind of downturn.
"The credit crisis and ensuing recession have dragged commercial real estate markets into very trying times, marked by value losses, rising foreclosures, and reduced property revenues," said Frank Magliocco, partner and leader of PwC's Real Estate practice in Canada.
"There is simply scarce money and therefore limited buyers."
LIGHTER VOLUME
Nine major markets highlighted in the CBRE report showed lighter transaction volumes at midyear than at the same point a year earlier.
For example, Toronto generated C$1.3 billion worth of transactions, the highest of any market surveyed, on 287 completed deals. That compares with C$3.7 billion on 676 deals in the first six months of 2008.
There were 149 sales in the Calgary market worth C$471 million in the first half, down sharply from investments of C$2.2 billion a year earlier, when there were 281 transactions.
CBRE said Canada's commercial real estate market remains tied closely to global economic conditions and that foreign investment activity has been "predictably affected by the global recession almost nationwide".
Daily Business Buzz:U.S. July housing starts fell 1.0 pct
| Starts and building permits with percent changes, seasonally adjusted annual rates in 1,000s of units: | ||||
| PCT CHANGE | Jul | Jun | May | Yr / Yr |
| Starts | -1.00% | 6.50% | 15.00% | -37.70% |
| Permits | -1.80% | 10.00% | 4.00% | -39.40% |
| RATE | Jul | Jun | May | Yr / Yr |
| Starts | 581 | 587 | 551 | 933 |
| Permits | 560 | 570 | 518 | 924 |
| Seasonally Adjusted Annual Rates in 1,000s of Units: | ||||
| STARTS | Jul | Jun | May | Yr / Yr |
| Single | 490 | 482 | 409 | 632 |
| Multiple | 91 | 105 | 142 | 301 |
| PERMITS | Jul | Jun | May | Yr / Yr |
| Single | 458 | 433 | 406 | 575 |
| Multiple | 102 | 137 | 112 | 349 |
| Actual Starts and Permits (1,000's) | ||||
| Jul | Jun | May | Yr / Yr | |
| Starts | 56 | 59 | 52 | 87 |
| Permits | 54 | 60 | 48 | 86 |
| REGIONAL BREAKDOWN | ||||
| STARTS | % | Rate | ||
| Northeast | -16.3 | 67 | ||
| Midwest | 12.9 | 114 | ||
| South | -1.4 | 276 | ||
| West | -1.6 | 124 | ||
| PERMITS | % | Rate | ||
| Northeast | -5.2 | 55 | ||
| Midwest | 14.1 | 105 | ||
| South | -9.2 | 277 | ||
| West | 7 | 12 | ||
Daily Business Buzz: Fed extends TALF for commercial real estate
The U.S. Federal Reserve moved on Monday to boost credit to the ailing
market for commercial real estate by extending to mid-2010 an emergency lending
program.
The step is seen as crucial by the industry because lending on office,
retail and apartment buildings has been chilled since the onset of the credit
crunch in 2007, and as the recession curbs revenue. The sector has hurt bank
earnings, and is seen by Fed officials as a danger to economic recovery if
borrowers with maturing loans find no other outlet than default.
The Fed said its Term Asset-Backed Securities Loan Facility for newly
issued commercial mortgage-backed securities, a program that has yet to get off
the ground, will be extended to June 30, 2010 from Dec. 31
Daily Business Buzz:US commercial real estate lending reemerging-Citi
Competition in commercial real estate lending is reemerging on the U.S. west coast, possibly marking an early sign that the financing drought that has wreaked havoc with the sector is easing, Citigroup Inc analysts said on Friday.
The lack of financing has been a chief cause of falling values on office, retail and apartment buildings since 2007, forcing sales at depressed prices. To avoid that, lenders have been busy extending or renegotiating loans, aiming to mitigate investor losses.
Tight credit has exacerbated the effect of the U.S. recession, which has increased vacancies and reduced rents to a point where revenue is falling short of debt payments.
But recent signs of "aggressive" competition to fund office properties, including from insurance companies and foreign banks, mean borrowers could find it tougher to seek breaks on existing loans, the analysts, led by Darrell Wheeler, said in a research note. With more access to funding, they argued, prices would be buoyed, making foreclosures viable alternatives.
The analysts did not specify what banks or insurers were competing to lend on the California properties.
Maguire Properties Inc, one of the largest commercial landlords in Southern California, on Monday was the latest to voluntarily declare it would default, in a move that Citibank said may be an attempt to secure easier loan terms.
Other financing alternatives for commercial property are also in the works, including securities sales made possible by a Federal Reserve lending program, Wheeler said. Opportunity funds are now in position to buy real estate assets without debt, he added.
"These disposition options would not have existed just two months back, so market conditions are changing very quickly," Wheeler said.
Real estate companies, including Simon Property Group Inc, Mack-Cali Realty Corp and Macquarie Group have also raised unsecured debt at "reasonable" yields, he said. Federal Realty Investment Trust raised money with unsecured debt, common stock and a loan, he added.
Maguire, which may be motivated to maintain control of its "class A" office buildings, may end up raising equity to exchange for lower interest rates on the loans, the analysts said. A liquidation of assets, which would create losses for bondholders, is unlikely, they said.
With increased financing, "valuations for these assets should quickly recover if the economy is recovering, and we now expect the number of voluntary defaults will start to drop off," they said.
Overall delinquencies will likely continue rising for the near term, however, according to Citigroup.
The lack of financing has been a chief cause of falling values on office, retail and apartment buildings since 2007, forcing sales at depressed prices. To avoid that, lenders have been busy extending or renegotiating loans, aiming to mitigate investor losses.
Tight credit has exacerbated the effect of the U.S. recession, which has increased vacancies and reduced rents to a point where revenue is falling short of debt payments.
But recent signs of "aggressive" competition to fund office properties, including from insurance companies and foreign banks, mean borrowers could find it tougher to seek breaks on existing loans, the analysts, led by Darrell Wheeler, said in a research note. With more access to funding, they argued, prices would be buoyed, making foreclosures viable alternatives.
The analysts did not specify what banks or insurers were competing to lend on the California properties.
Maguire Properties Inc, one of the largest commercial landlords in Southern California, on Monday was the latest to voluntarily declare it would default, in a move that Citibank said may be an attempt to secure easier loan terms.
Other financing alternatives for commercial property are also in the works, including securities sales made possible by a Federal Reserve lending program, Wheeler said. Opportunity funds are now in position to buy real estate assets without debt, he added.
"These disposition options would not have existed just two months back, so market conditions are changing very quickly," Wheeler said.
Real estate companies, including Simon Property Group Inc, Mack-Cali Realty Corp and Macquarie Group have also raised unsecured debt at "reasonable" yields, he said. Federal Realty Investment Trust raised money with unsecured debt, common stock and a loan, he added.
Maguire, which may be motivated to maintain control of its "class A" office buildings, may end up raising equity to exchange for lower interest rates on the loans, the analysts said. A liquidation of assets, which would create losses for bondholders, is unlikely, they said.
With increased financing, "valuations for these assets should quickly recover if the economy is recovering, and we now expect the number of voluntary defaults will start to drop off," they said.
Overall delinquencies will likely continue rising for the near term, however, according to Citigroup.
Daily Business Buzz: Goldman sees long road to recovery for REITs
Goldman Sachs said it is cautious on real estate investment trusts (REITs) as it sees a long road to recovery, and downgraded SL Green Realty Corp and AvalonBay Communities Inc.
Commercial real estate (CRE) refinancing remains challenging, fundamentals will lag the economy, and loan defaults should rise sharply, the brokerage said, adding that CRE trends are just starting to soften and will remain weak into 2011.
"We anticipate a decline in funds from operations of more than 10 percent for REITs next year, on top of the 15 percent to 20 percent expected decline in 2009," the brokerage wrote in a note to clients. "Hence, 2011 should be the bottom with growth resuming thereafter."
Goldman, which downgraded SL Green to "neutral" from "buy," said shares of the midtown Manhattan's largest office landlord have exceeded its new six-month price target of $24.
"Having seen a large spike in the shares, we still believe SL Green is well positioned for long-term growth as NYC office rents eventually recover from the 30 percent to 40 percent decline amid the current downturn," the brokerage said.
On AvalonBay, the brokerage said the stock is now trading at one of the highest multiples in the REIT universe. It downgraded the owner and builder of apartments to "sell" from "neutral."
"We have been cautious on apartments for all of 2009 and continue to expect weak operating results in the next few quarters," Goldman said.
Public REITs are in a much better position compared with the private commercial real estate market, given lower leverage and the ability to issue common shares to deleverage, even as asset sales are still difficult to complete, the brokerage said.
"We remain cautious on industrial and apartment REITs, and favor regional malls and select downtown office REITs," Goldman said.
The brokerage expects industrial demand to remain anemic in the second half of 2009, but said a rebound in the inventory cycle and minimal near-term supply levels bode well for moderating rent and occupancy declines.
Goldman added Taubman Centers Inc to its conviction buy list and raised its six-month price target on the stock of the luxury mall owner and developer to $33 from $28.
Taubman's quality regional mall portfolio with high credit tenants should aid a faster recovery than peers, the brokerage said, adding: "Taubman is our best buy idea due to its conservative balance sheet."
Goldman upgraded AMB Property Corp to "neutral" from "sell," saying the owner and developer of warehouses and distribution centers is the best positioned industrial REIT for an improving global economy. The brokerage raised its price target on the stock to $20 from $15.
It kept its "sell" ratings for Duke Realty Corp and ProLogis , saying it sees higher potential dilution from each company's ongoing efforts to deleverage.
Commercial real estate (CRE) refinancing remains challenging, fundamentals will lag the economy, and loan defaults should rise sharply, the brokerage said, adding that CRE trends are just starting to soften and will remain weak into 2011.
"We anticipate a decline in funds from operations of more than 10 percent for REITs next year, on top of the 15 percent to 20 percent expected decline in 2009," the brokerage wrote in a note to clients. "Hence, 2011 should be the bottom with growth resuming thereafter."
Goldman, which downgraded SL Green to "neutral" from "buy," said shares of the midtown Manhattan's largest office landlord have exceeded its new six-month price target of $24.
"Having seen a large spike in the shares, we still believe SL Green is well positioned for long-term growth as NYC office rents eventually recover from the 30 percent to 40 percent decline amid the current downturn," the brokerage said.
On AvalonBay, the brokerage said the stock is now trading at one of the highest multiples in the REIT universe. It downgraded the owner and builder of apartments to "sell" from "neutral."
"We have been cautious on apartments for all of 2009 and continue to expect weak operating results in the next few quarters," Goldman said.
Public REITs are in a much better position compared with the private commercial real estate market, given lower leverage and the ability to issue common shares to deleverage, even as asset sales are still difficult to complete, the brokerage said.
"We remain cautious on industrial and apartment REITs, and favor regional malls and select downtown office REITs," Goldman said.
The brokerage expects industrial demand to remain anemic in the second half of 2009, but said a rebound in the inventory cycle and minimal near-term supply levels bode well for moderating rent and occupancy declines.
Goldman added Taubman Centers Inc to its conviction buy list and raised its six-month price target on the stock of the luxury mall owner and developer to $33 from $28.
Taubman's quality regional mall portfolio with high credit tenants should aid a faster recovery than peers, the brokerage said, adding: "Taubman is our best buy idea due to its conservative balance sheet."
Goldman upgraded AMB Property Corp to "neutral" from "sell," saying the owner and developer of warehouses and distribution centers is the best positioned industrial REIT for an improving global economy. The brokerage raised its price target on the stock to $20 from $15.
It kept its "sell" ratings for Duke Realty Corp and ProLogis , saying it sees higher potential dilution from each company's ongoing efforts to deleverage.
More U.S. home sellers cutting prices - Trulia
One in four U.S. homes for sale on Aug. 1 had their prices marked down at least once since landing on the market, data compiled by real estate website Trulia.com showed on Friday.
A total of 24.4 percent of homes had their prices reduced in July, up from June's 23.6 percent. The average discount was 10 percent from the original price, or $40,173 of a median house value, Trulia.com said in its monthly price report obtained exclusively by Reuters prior to its release.
The average markdown dropped slightly from June's 10.4 percent, Trulia said.
These lowered prices, however, are not necessarily a negative.
"Competition heats up in the summer as more inventory comes onto the market," Pete Flint, Trulia co-founder and CEO, said in an interview with Reuters.
"Sales are increasing but prices are still falling," Flint said.
"Homes that are priced competitively are the ones that are selling in today's market," he said.
Nationwide, in dollar terms, $27.8 billion has been reduced for all homes for sale on the market on Aug. 1 and this number has increased by $700 million during the past month, Trulia said.
Of the luxury homes, categorized by those costing $2 million or more, 25 percent have seen a reduction, up from 24.3 percent. The average decrease for a luxury home was 14 percent off the original asking price, the data showed.
For homes listed for less than $2 million, 25 percent have seen a reduction, up from 24 percent. The deduction, however, was only 9 percent off the original asking price, the data showed.
"Inventory levels continue to grow in the luxury market," Flint said. "As inventory levels grow, I expect price reductions to continue to grow in the luxury segment."
Cities showing significant increases in percentage of listings with price cuts from June 1 to Aug 1 include Fresno, California and Colorado Springs, Colorado, which showed a 67 percent and 27 percent increase in price reductions, respectively, Trulia said.
Kansas City, Missouri; Oklahoma City, Oklahoma; and Albuquerque, New Mexico showed a 25 percent, 24 percent and 22 percent increase in price reductions, respectively, during this time period, the data showed.
Cities showing signs of recovery, with significant declines in percentage of listings with price reductions from June 1 to Aug 1, include Dallas, Texas and Las Vegas, Nevada, which showed 42 percent and 33 percent fewer price reductions, Trulia said.
Louisville, Kentucky; Los Angeles, California; and Washington, D.C. showed 33 percent, 19 percent and 17 percent fewer price reductions, respectively, during this time period, the data showed.
A total of 24.4 percent of homes had their prices reduced in July, up from June's 23.6 percent. The average discount was 10 percent from the original price, or $40,173 of a median house value, Trulia.com said in its monthly price report obtained exclusively by Reuters prior to its release.
The average markdown dropped slightly from June's 10.4 percent, Trulia said.
These lowered prices, however, are not necessarily a negative.
"Competition heats up in the summer as more inventory comes onto the market," Pete Flint, Trulia co-founder and CEO, said in an interview with Reuters.
"Sales are increasing but prices are still falling," Flint said.
"Homes that are priced competitively are the ones that are selling in today's market," he said.
Nationwide, in dollar terms, $27.8 billion has been reduced for all homes for sale on the market on Aug. 1 and this number has increased by $700 million during the past month, Trulia said.
Of the luxury homes, categorized by those costing $2 million or more, 25 percent have seen a reduction, up from 24.3 percent. The average decrease for a luxury home was 14 percent off the original asking price, the data showed.
For homes listed for less than $2 million, 25 percent have seen a reduction, up from 24 percent. The deduction, however, was only 9 percent off the original asking price, the data showed.
"Inventory levels continue to grow in the luxury market," Flint said. "As inventory levels grow, I expect price reductions to continue to grow in the luxury segment."
Cities showing significant increases in percentage of listings with price cuts from June 1 to Aug 1 include Fresno, California and Colorado Springs, Colorado, which showed a 67 percent and 27 percent increase in price reductions, respectively, Trulia said.
Kansas City, Missouri; Oklahoma City, Oklahoma; and Albuquerque, New Mexico showed a 25 percent, 24 percent and 22 percent increase in price reductions, respectively, during this time period, the data showed.
Cities showing signs of recovery, with significant declines in percentage of listings with price reductions from June 1 to Aug 1, include Dallas, Texas and Las Vegas, Nevada, which showed 42 percent and 33 percent fewer price reductions, Trulia said.
Louisville, Kentucky; Los Angeles, California; and Washington, D.C. showed 33 percent, 19 percent and 17 percent fewer price reductions, respectively, during this time period, the data showed.
Foreclosure plague: No cure yet
The foreclosure plague continued to devastate last month.
There were more than 360,000 properties with foreclosure filings -- including default notices, scheduled auctions and bank repossessions -- an increase of 7% from June and 32% from July 2008, according to RealtyTrac, an online marketer of foreclosed homes. In fact, one in every 355 U.S. homes had at least one filing during July.
"July marks the third time in the last five months where we've seen a new record set for foreclosure activity," said James J. Saccacio, chief executive officer of RealtyTrac. "Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we're seeing significant growth in both the initial notices of default and in the bank repossessions."
The jump occurred as several foreclosure moratoriums phased out. They were initiated by many states to give the administration's foreclosure-prevention efforts time to work. But for many help did not come: The modification and refinancing programs have met with less success than hoped.
"It's starting to reach more and more people, but we have to do better and make sure the program reaches the millions of folks we intended it to reach," said Jared Bernstein, an economics adviser to vice president Biden.
The picture would be even worse, however, without the programs.
"Each of these programs nips away at the problem of excess supply," said Doug Duncan, cheif economist for Fannie Mae, "and fights against declining prices. ... The hope is that the aggregated programs will result in less loss than would happen in the free market."
Out of their homes
RealtyTrac statistics revealed that more than 87,000 properties were repossessed by lenders, effectively sending many families out of their homes. There have been a total of 464,058 repossessions -- or REOs in industry parlance -- so far this year (through the end of July).
"We're seeing more option ARM resets, triggering defaults and more prime loans, which are failing due to job losses," said RealtyTrac spokesman Rick Sharga.
That is resulting in more filings on higher priced homes, for two reasons: 1. option ARMs were typically used for more expensive properties; 2. borrowers using prime loans generally had better credit and were able to afford more expensive houses.
Best and worst
The worst hit areas continue to be in the "sand states," with California posting the highest number of total filings, 108,104, and Nevada posting the highest rate of foreclosure at one for every 56 homes.
The other hardest hit states are Arizona, at one filing for every 135 homes, and Florida, at one for every 154. Las Vegas, with one for every 47 homes, had the highest rate among metro areas. That's Sin City's 31st consecutive month topping the list.
These were bubble states, where home prices soared and banks financed mortgages for anyone who could fog a mirror.
"We're seeing the highest levels of foreclosures in the markets that had the highest appreciation [during the boom] and the worst lending practices," said Sharga. 
Citi's dirty pool of assets
Hard as it may be to believe, shares of beleaguered Citigroup are on fire.
The stock of the de facto U.S. government-owned bank is up some 300 percent after it cratered at around $1 back in early March.
The over-caffeinated stock maven Jim Cramer keeps calling Citi a "buy, buy, buy" on his nightly CNBC television show. Even the more sober-minded writers at Barron's are pounding the table a bit, predicting Citi shares could double in price in three years."
Time out! It's far too soon for anyone but stock flippers and fast money hedge funds to buy Citi right now.
That's because there's still a world of hurt for Citi in the $83.2 billion in subprime mortgage-backed securities, corporate loans, home loans and commercial real estate mortgages that the bank's finance team has stuffed neatly into something called the "Special Asset Pool."
But there's nothing special at all about these assets. This cesspool of toxic securities and floundering loans is the worst of the stuff that's been stinking up Citi's balance sheet.
And these rotting securities and loans represent a good chunk of the $300 billion in problem assets the federal government is guaranteeing under its bailout of the giant bank.
Yet what the cheerleaders for Citi sometimes forget is that the struggling bank must absorb up to $39.5 billion of the "first loss" on those troubled assets. To date, Citi says it has incurred $5.3 billion in losses on this pool of toxic assets -- meaning the bank has another $34 billion in losses to soak up before the taxpayers start footing the bill.
And the way things look today, Citi is looking at a good deal more losses to come from its Special Asset Pool.
For starters, Citi still sits on a rather sizable portfolio of subprime-backed collateralized debt obligations -- the dubious securities that helped spark the financial crisis.
At last count, Citi valued its CDO portfolio at $9.6 billion, a 56 percent decline from the value the bank placed on those securities last summer. To protect itself against a potential default on those CDOs, Citi has hedged its exposure with some $4.5 billion in credit default swaps.
But unfortunately for Citi, it didn't buy those insurance-like derivatives from American International Group, another big bailout recipient.
If Citi had been shrewd enough to have done business with AIG, it would have been able to sell its CDOs at face value to an entity set up by the Federal Reserve, just like Goldman Sachs, Deutsche Bank, Merrill Lynch and other big banks did. In a flash, Citi's CDO problem would have disappeared.
Citi, however, had the misfortune of purchasing its CDS from Ambac Financial Group, a bond insurer that many see as being on its last legs. The bond research firm CreditSights says Ambac "may run out of capital sometime in 2013."
Many others think Ambac's demise could come much sooner. On August 7, Ambac, which trades around $1, reported a larger than expected $2.4 billion second-quarter loss.
A collapse of Ambac would render the CDS that Citi holds on its CDOs all but worthless.
To date, Citi, which declined to comment on its CDO exposure, has written down the value of those insurance-like derivatives by more than $1 billion, according to regulatory filings.
Even if Ambac survives in some fashion, Citi is likely looking at additional write-downs on those contracts, and potentially on the underlying CDOs they are supposed to insure.
Citi also could take more hits on some $6.2 billion in private equity investments and $8.5 billion in loans that financed debt-laden buyouts. The bank also reports having some $10 billion in Alt-A mortgages -- a home loan that's a step above subprime -- and $8.3 billion in still largely untradeable auction-rate securities.
To be fair, Citi has been aggressive in writing down the value of its $10 billion in so-called Alt-A home loans to $1.7 billion. The bank has been equally aggressive in reducing its exposure to commercial real estate loans. The bank has marked down the bulk of its $28 billion in commercial real estate-related assets to $5.1 billion.
So it would require substantial defaults in both categories of loans for Citi to incur large losses.
But to say Citi isn't going to suffer any more losses in this pool of toxic assets is way premature. And none of this analysis has focused on the $183 billion in loans to cash-strapped consumers on Citi's books that could still go bust.
In short, the safest bet on Citi shares is still a short one.
The stock of the de facto U.S. government-owned bank is up some 300 percent after it cratered at around $1 back in early March.
The over-caffeinated stock maven Jim Cramer keeps calling Citi a "buy, buy, buy" on his nightly CNBC television show. Even the more sober-minded writers at Barron's are pounding the table a bit, predicting Citi shares could double in price in three years."
Time out! It's far too soon for anyone but stock flippers and fast money hedge funds to buy Citi right now.
That's because there's still a world of hurt for Citi in the $83.2 billion in subprime mortgage-backed securities, corporate loans, home loans and commercial real estate mortgages that the bank's finance team has stuffed neatly into something called the "Special Asset Pool."
But there's nothing special at all about these assets. This cesspool of toxic securities and floundering loans is the worst of the stuff that's been stinking up Citi's balance sheet.
And these rotting securities and loans represent a good chunk of the $300 billion in problem assets the federal government is guaranteeing under its bailout of the giant bank.
Yet what the cheerleaders for Citi sometimes forget is that the struggling bank must absorb up to $39.5 billion of the "first loss" on those troubled assets. To date, Citi says it has incurred $5.3 billion in losses on this pool of toxic assets -- meaning the bank has another $34 billion in losses to soak up before the taxpayers start footing the bill.
And the way things look today, Citi is looking at a good deal more losses to come from its Special Asset Pool.
For starters, Citi still sits on a rather sizable portfolio of subprime-backed collateralized debt obligations -- the dubious securities that helped spark the financial crisis.
At last count, Citi valued its CDO portfolio at $9.6 billion, a 56 percent decline from the value the bank placed on those securities last summer. To protect itself against a potential default on those CDOs, Citi has hedged its exposure with some $4.5 billion in credit default swaps.
But unfortunately for Citi, it didn't buy those insurance-like derivatives from American International Group, another big bailout recipient.
If Citi had been shrewd enough to have done business with AIG, it would have been able to sell its CDOs at face value to an entity set up by the Federal Reserve, just like Goldman Sachs, Deutsche Bank, Merrill Lynch and other big banks did. In a flash, Citi's CDO problem would have disappeared.
Citi, however, had the misfortune of purchasing its CDS from Ambac Financial Group, a bond insurer that many see as being on its last legs. The bond research firm CreditSights says Ambac "may run out of capital sometime in 2013."
Many others think Ambac's demise could come much sooner. On August 7, Ambac, which trades around $1, reported a larger than expected $2.4 billion second-quarter loss.
A collapse of Ambac would render the CDS that Citi holds on its CDOs all but worthless.
To date, Citi, which declined to comment on its CDO exposure, has written down the value of those insurance-like derivatives by more than $1 billion, according to regulatory filings.
Even if Ambac survives in some fashion, Citi is likely looking at additional write-downs on those contracts, and potentially on the underlying CDOs they are supposed to insure.
Citi also could take more hits on some $6.2 billion in private equity investments and $8.5 billion in loans that financed debt-laden buyouts. The bank also reports having some $10 billion in Alt-A mortgages -- a home loan that's a step above subprime -- and $8.3 billion in still largely untradeable auction-rate securities.
To be fair, Citi has been aggressive in writing down the value of its $10 billion in so-called Alt-A home loans to $1.7 billion. The bank has been equally aggressive in reducing its exposure to commercial real estate loans. The bank has marked down the bulk of its $28 billion in commercial real estate-related assets to $5.1 billion.
So it would require substantial defaults in both categories of loans for Citi to incur large losses.
But to say Citi isn't going to suffer any more losses in this pool of toxic assets is way premature. And none of this analysis has focused on the $183 billion in loans to cash-strapped consumers on Citi's books that could still go bust.
In short, the safest bet on Citi shares is still a short one.
US mortgage rates rise, may curb demand
U.S. mortgage rates rose in the latest week as Treasury yields climbed, a move that may dampen home loan demand.
Interest rates on U.S. 30-year fixed-rate mortgages averaged 5.29 percent for the week ending Aug. 13, up from the previous week's 5.22 percent, according to a survey on Thursday by home funding company Freddie Mac.
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.
"Long-term fixed-rate mortgage rates rose slightly over the past week while initial rates on adjustable-rate mortgages (ARMs) were little changed," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.
Mortgage rates remained above 5 percent for an eleventh straight week. Experts say mortgage rates at 5 percent and below are what is necessary to make a significant impact on home loan demand.
Indeed, higher rates have dampened demand for home loan refinancing, a reversal from earlier this year when rates below 5 percent caused refinancing activity to surge.
Treasury yields, which are linked to mortgage rates, have risen recently, with mortgage rates responding in kind.
The rise in rates is a negative for the U.S. housing market, which has been showing some signs of stabilization, with sales rising and home price declines moderating in many regions of the country.
In fact, home prices in some regions have risen.
Thirty-year mortgage rates had been on a downward trend for most of this year after the Federal Reserve unveiled its plan to buy mortgage-backed debt in late November. But the Fed met resistance in the bond market in recent months.
The U.S. government has embarked on an aggressive plan to bring mortgage rates down to levels that will spur demand and help the hard-hit housing market begin to recover.
The Federal Reserve has set a goal to buy up to $1.25 trillion of agency MBS, $300 billion of Treasuries and $200 billion of agency debt in 2009. The purchases are more than half-way completed and are part of efforts to lower borrowing costs.
The battered U.S. housing market, which has suffered the worst downturn since the Great Depression, is both the source and a major casualty of the credit crisis. A setback for the market could prolong a turnaround for the United States, the world's largest economy.
Interest rates on U.S. 30-year fixed-rate mortgages averaged 5.29 percent for the week ending Aug. 13, up from the previous week's 5.22 percent, according to a survey on Thursday by home funding company Freddie Mac.
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.
"Long-term fixed-rate mortgage rates rose slightly over the past week while initial rates on adjustable-rate mortgages (ARMs) were little changed," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.
Mortgage rates remained above 5 percent for an eleventh straight week. Experts say mortgage rates at 5 percent and below are what is necessary to make a significant impact on home loan demand.
Indeed, higher rates have dampened demand for home loan refinancing, a reversal from earlier this year when rates below 5 percent caused refinancing activity to surge.
Treasury yields, which are linked to mortgage rates, have risen recently, with mortgage rates responding in kind.
The rise in rates is a negative for the U.S. housing market, which has been showing some signs of stabilization, with sales rising and home price declines moderating in many regions of the country.
In fact, home prices in some regions have risen.
Thirty-year mortgage rates had been on a downward trend for most of this year after the Federal Reserve unveiled its plan to buy mortgage-backed debt in late November. But the Fed met resistance in the bond market in recent months.
The U.S. government has embarked on an aggressive plan to bring mortgage rates down to levels that will spur demand and help the hard-hit housing market begin to recover.
The Federal Reserve has set a goal to buy up to $1.25 trillion of agency MBS, $300 billion of Treasuries and $200 billion of agency debt in 2009. The purchases are more than half-way completed and are part of efforts to lower borrowing costs.
The battered U.S. housing market, which has suffered the worst downturn since the Great Depression, is both the source and a major casualty of the credit crisis. A setback for the market could prolong a turnaround for the United States, the world's largest economy.
Home prices fall a record 15.6%
Median home prices fell a record 15.6% during the three months ended June 30, compared to the same period in 2008, according to an industry report.
There is good news though: The survey from the National Association of Realtors reported the median home price rose 4% compared to the first quarter of 2009 -- to $174,100 from $167,300.
The increase in median price was not a surprise, representing, as it did, the traditionally strong spring selling season. But the jump did offer the prospect that the worst of the price declines may be behind us.
"With low interest rates, lower home prices and a first-time buyer tax credit, we've been seeing healthy increases in home sales, which are a hopeful sign for the economy," said Lawrence Yun, NAR's chief economist..
In the vast majority of metro areas -- 129 out of 155 -- median prices dropped year-over-year. Some of the decline can be traced to an increase in the percentage of foreclosures and short sales. They accounted for 36% of all transactions during the quarter.
These "distressed properties" are usually sold at discounts of at least 15% compared with traditional sales.
Patrick Newport, a real estate analyst for IHS Global Insight, while admitting the year-over-year results are still awful, said recent evidence indicates that prices are stabilizing.
"The state sales data show sales picking up across the country," he said.
Newport expects prices and sales to trend down again, especially when the impact of the first-time homebuyers tax credit starts to fade. The credit ends December 1. "Afterward, sales will take a hit," he said.
His forecast is for prices to drop another 5% this year, driven down by added inventory as the foreclosure plague continues to worsen.
Cheapest and priciest areas
The Cape Coral metro area in Florida recorded the largest decline: 52.8% to $84,000. Davenport, Iowa, had the biggest gain: 30.6% to $113,200.
The lowest priced market in the nation is now Saginaw, Mich., where the median home sold for $55,700 during the quarter, a 30.6% drop over last year. The most expensive market was Honolulu, with a median price of $569,500 -- although that's still a 10.5% discount from a year ago. San Jose, Calif. led all mainland cities at $500,000 but that was still down a whopping 33.8% from a year ago.
Condo market
Condo prices have taken an even more severe beating. They fell 19.8% year-over-year, but rose 3.6% quarter-over-quarter.
If you're in the market for a condo in Las Vegas, you may never find a better time. Prices dropped 54.1% compared with the second quarter of 2008 and fell 11.7% between the first and second quarters of 2009. The median price now stands at a bargain basement $66,400.
Condo prices rose year-over-year in only four of 61 metro areas surveyed by NAR. The biggest gain was in Virginia Beach, where prices went up 2.8%. Wichita, Kan. (2%), Dallas (0.7%) and Colorado Springs (0.2%) were the only other gainers.
The most expensive condo market was San Francisco, where the median price was $405,700, down 22.5% from a year ago. Las Vegas was the cheapest condo market by far, with Reno a distant second at $103,100.
US 2nd-qtr home prices fall, but rate slows -Zillow
The value of U.S. homes fell by 12.1 percent in the second quarter from a year earlier, but the rate of decline shrank for the first time since prices began to fall in 2007, real estate website Zillow.com said on Tuesday.
Even so, stabilization of the hard-hit housing market, which is seen as key to an economic recovery in the United States, is not yet in view, with mounting foreclosures and a high level of "underwater" mortgages still posing threats, Zillow said.
U.S. home values posted their 10th consecutive quarterly decline, falling to $186,500 on the Zillow Home Value Index, according to the second-quarter Zillow Real Estate Market Reports.
The report encompass 161 metropolitan areas and covers value changes in all homes, not just those that have recently sold.
Home values in the first quarter had fallen by 12.4 percent from the prior-year period.
But distress signals tracked by Zillow remain high, suggesting that for most U.S. metropolitan areas housing prices have not yet hit bottom.
"While we are encouraged by the increasing sales in many markets and the overall improvement in the rate of decline of the Zillow Home Value Index, I hesitate to be overly optimistic for the near future," Stan Humphries, Zillow's chief economist, said in a statement.
"Foreclosure resales are buoying overall sales numbers, but their low prices are keeping home values down," he said.
Sales of previously foreclosed homes accounted for 22 percent of all home sales nationally in June, and 29.2 percent of homes sold for less than the original purchase price, the report showed.
"Reports of increasing mortgage defaults signal that foreclosures are likely to increase again and peak in mid-2010," Humphries said.
Increasing unemployment and high rates of negative equity should spur even more foreclosures, which will add to the already-high level of for-sale inventory that needs to be cleared before values begin to rise, he said.
In the second quarter, 23 percent of all owners of single-family homes with mortgages were "underwater," meaning the amount owed on their mortgage exceeded the value of the home. That compared to 22 percent in the first quarter, Zillow said.
Negative equity has been one of the biggest banes for many homeowners, making them unable to refinance their loans and preventing some from selling their homes.
Nationally, the number of home sales in June fell 23.7 percent versus a year earlier, but June sales were up 3.8 percent over May. Additionally, in 39 markets home sales increased year-over-year, including Miami-Fort Lauderdale, Los Angeles and Phoenix, the report showed.
FLOOD OF FORECLOSURES LOOM
With the housing market showing strength in some regions, more supply may be in the pipeline.
In Zillow's separate second-quarter Homeowner Confidence Survey, 29 percent of homeowners said they would be at least somewhat likely to put their home on the market if they saw signs of a turnaround.
Foreclosures in your area
In total, 142 U.S. metropolitan areas experienced year-over-year home value declines, eight markets were flat, and 11 markets had year-over-year gains in home values, the reports showed.
While the abundance of affordable foreclosure properties is a boon for many first-time home buyers, there will likely not be a significant housing market recovery until more move-up and move-across buyers reenter the market, Humphries said.
Some markets, however, are giving signs of being near a bottom. Eighteen of the 142 declining metropolitan areas have posted at least three consecutive quarters of smaller year-over-year home value declines, with nine of those markets in California, the reports showed.
Even so, stabilization of the hard-hit housing market, which is seen as key to an economic recovery in the United States, is not yet in view, with mounting foreclosures and a high level of "underwater" mortgages still posing threats, Zillow said.
U.S. home values posted their 10th consecutive quarterly decline, falling to $186,500 on the Zillow Home Value Index, according to the second-quarter Zillow Real Estate Market Reports.
The report encompass 161 metropolitan areas and covers value changes in all homes, not just those that have recently sold.
Home values in the first quarter had fallen by 12.4 percent from the prior-year period.
But distress signals tracked by Zillow remain high, suggesting that for most U.S. metropolitan areas housing prices have not yet hit bottom.
"While we are encouraged by the increasing sales in many markets and the overall improvement in the rate of decline of the Zillow Home Value Index, I hesitate to be overly optimistic for the near future," Stan Humphries, Zillow's chief economist, said in a statement.
"Foreclosure resales are buoying overall sales numbers, but their low prices are keeping home values down," he said.
Sales of previously foreclosed homes accounted for 22 percent of all home sales nationally in June, and 29.2 percent of homes sold for less than the original purchase price, the report showed.
"Reports of increasing mortgage defaults signal that foreclosures are likely to increase again and peak in mid-2010," Humphries said.
Increasing unemployment and high rates of negative equity should spur even more foreclosures, which will add to the already-high level of for-sale inventory that needs to be cleared before values begin to rise, he said.
In the second quarter, 23 percent of all owners of single-family homes with mortgages were "underwater," meaning the amount owed on their mortgage exceeded the value of the home. That compared to 22 percent in the first quarter, Zillow said.
Negative equity has been one of the biggest banes for many homeowners, making them unable to refinance their loans and preventing some from selling their homes.
Nationally, the number of home sales in June fell 23.7 percent versus a year earlier, but June sales were up 3.8 percent over May. Additionally, in 39 markets home sales increased year-over-year, including Miami-Fort Lauderdale, Los Angeles and Phoenix, the report showed.
FLOOD OF FORECLOSURES LOOM
With the housing market showing strength in some regions, more supply may be in the pipeline.
In Zillow's separate second-quarter Homeowner Confidence Survey, 29 percent of homeowners said they would be at least somewhat likely to put their home on the market if they saw signs of a turnaround.
Foreclosures in your area
In total, 142 U.S. metropolitan areas experienced year-over-year home value declines, eight markets were flat, and 11 markets had year-over-year gains in home values, the reports showed.
While the abundance of affordable foreclosure properties is a boon for many first-time home buyers, there will likely not be a significant housing market recovery until more move-up and move-across buyers reenter the market, Humphries said.
Some markets, however, are giving signs of being near a bottom. Eighteen of the 142 declining metropolitan areas have posted at least three consecutive quarters of smaller year-over-year home value declines, with nine of those markets in California, the reports showed.
Mortgage servicers act for investors-US regulators
U.S. regulators said on Thursday that residential mortgage servicers dealing with first and subordinated liens on the same property must focus on getting the best overall deal for the loan's owners.
"Servicers have an obligation to act in the best interests of the owners/investors of serviced residential mortgage loans ... Any decisions that are not anticipated to produce a greater recovery to investors given the alternatives may constitute a breach of that duty," the Federal Financial Institutions Examination Council (FFIEC) said in a statement.
The FFIEC consists of the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Office of Thrift Supervision and the State Liaison Committee, which represents financial supervisors at the state level.
Millions of U.S. homes are in foreclosure or heading in that direction after the housing market collapsed, sparking the worst recession since the 1930s Great Depression.
Mortgage lenders are working with loan servicers to make changes to monthly payments and, in some cases accept a cut in the principle of the loan amount. The effort is aimed at making the mortgages more affordable and to keep as many home owners as possible from slipping into foreclosure.
This task is complicated when the home buyer has more than one loan secured on the property.
The regulators said that the loan servicer must not trade off interests between the first and second lien, but rather do whatever gets the best overall return for investors, regardless of how it impacts the different tranches of debt.
"Regardless of any potential effect on the subordinate lien obligations, servicers should modify the first lien mortgage when doing so would produce a greater anticipated recovery to the first lien owners/investors than not modifying the loan," they said.
"Similarly, regardless of any potential effect on the first lien mortgage, servicers should modify the subordinate lien loan when doing so would produce a greater anticipated recovery to the subordinate lien owners/investors than not modifying the loan," the regulators added.
"Servicers have an obligation to act in the best interests of the owners/investors of serviced residential mortgage loans ... Any decisions that are not anticipated to produce a greater recovery to investors given the alternatives may constitute a breach of that duty," the Federal Financial Institutions Examination Council (FFIEC) said in a statement.
The FFIEC consists of the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Office of Thrift Supervision and the State Liaison Committee, which represents financial supervisors at the state level.
Millions of U.S. homes are in foreclosure or heading in that direction after the housing market collapsed, sparking the worst recession since the 1930s Great Depression.
Mortgage lenders are working with loan servicers to make changes to monthly payments and, in some cases accept a cut in the principle of the loan amount. The effort is aimed at making the mortgages more affordable and to keep as many home owners as possible from slipping into foreclosure.
This task is complicated when the home buyer has more than one loan secured on the property.
The regulators said that the loan servicer must not trade off interests between the first and second lien, but rather do whatever gets the best overall return for investors, regardless of how it impacts the different tranches of debt.
"Regardless of any potential effect on the subordinate lien obligations, servicers should modify the first lien mortgage when doing so would produce a greater anticipated recovery to the first lien owners/investors than not modifying the loan," they said.
"Similarly, regardless of any potential effect on the first lien mortgage, servicers should modify the subordinate lien loan when doing so would produce a greater anticipated recovery to the subordinate lien owners/investors than not modifying the loan," the regulators added.
US mortgage demand boosted by refis as rates drop
Demand for U.S. home loans rose last week as a decline in 30-year fixed mortgage rates to a three-week low boosted applications for refinancing, the Mortgage Bankers Association said on Wednesday.
Average 30-year mortgage rates fell 0.19 percentage point to 5.17 percent in the week ended July 31, the lowest since 5.05 percent in the July 10 week.
The drop in borrowing costs pushed refinance applications up 7.2 percent to 1,996.7 last week, lifting total loan requests by 4.4 percent to 517.3, based on the industry group's seasonally adjusted indexes.
Although the refi gauge has jumped 35 percent from its June low, it remains well below the 6,000 level that it had topped for five weeks around the time 30-year mortgage rates sank to a record low of 4.61 percent in March.
Purchase loan requests, which have been stuck in a narrow range for months, rose just 0.9 percent last week to 264.4.
Despite a handful of surprisingly upbeat sales and price reports indicating a bottom, a swift rebound in the worst housing market since the Great Depression is not on the horizon, industry analysts agree.
"Most folks are hopeful, based on all the numbers we've been seeing, that we've got a floor here and we're going to start seeing a long, slow recovery," said Jonathan Corr, chief strategy officer at Pleasanton, California-based mortgage software provider Ellie Mae.
"We can't march around in victory yet, but we're starting to see the light at the end of the tunnel," he added.
A break from persistently gloomy housing news, including record foreclosures and a toppling in average home prices by more than 32 percent in three years, has emerged in the past few weeks from government and industry measures.
Pending home sales rose more than expected in June, for the first five-month string of increases in six years, the National Association of Realtors said on Tuesday.
Sales of both new and existing homes gained in June for the third straight month, fired up by relatively low mortgage rates and prices, as well as first-time-buyer tax credits.
House prices increased in May for the first time in three years, and the annual pace of decline slowed for the fourth straight month, Standard & Poor's/Case-Shiller indexes showed.
Just as souring sentiment helped crush the market, so will improved confidence help to rebuild housing, economists said.
"You've got to continue to see some healing in the economy," Corr said. I don't think anyone will tell you that we're going to see a lot of appreciation over the next couple of years" in housing.
Still to be seen is how high the U.S. unemployment rate will rise, a big factor in determining how much further the record pool of foreclosure properties grows.
Unemployment that is at a nearly 26-year high and headed toward 10 percent is keeping many prospective buyers out of the market.
Average 30-year mortgage rates fell 0.19 percentage point to 5.17 percent in the week ended July 31, the lowest since 5.05 percent in the July 10 week.
The drop in borrowing costs pushed refinance applications up 7.2 percent to 1,996.7 last week, lifting total loan requests by 4.4 percent to 517.3, based on the industry group's seasonally adjusted indexes.
Although the refi gauge has jumped 35 percent from its June low, it remains well below the 6,000 level that it had topped for five weeks around the time 30-year mortgage rates sank to a record low of 4.61 percent in March.
Purchase loan requests, which have been stuck in a narrow range for months, rose just 0.9 percent last week to 264.4.
Despite a handful of surprisingly upbeat sales and price reports indicating a bottom, a swift rebound in the worst housing market since the Great Depression is not on the horizon, industry analysts agree.
"Most folks are hopeful, based on all the numbers we've been seeing, that we've got a floor here and we're going to start seeing a long, slow recovery," said Jonathan Corr, chief strategy officer at Pleasanton, California-based mortgage software provider Ellie Mae.
"We can't march around in victory yet, but we're starting to see the light at the end of the tunnel," he added.
A break from persistently gloomy housing news, including record foreclosures and a toppling in average home prices by more than 32 percent in three years, has emerged in the past few weeks from government and industry measures.
Pending home sales rose more than expected in June, for the first five-month string of increases in six years, the National Association of Realtors said on Tuesday.
Sales of both new and existing homes gained in June for the third straight month, fired up by relatively low mortgage rates and prices, as well as first-time-buyer tax credits.
House prices increased in May for the first time in three years, and the annual pace of decline slowed for the fourth straight month, Standard & Poor's/Case-Shiller indexes showed.
Just as souring sentiment helped crush the market, so will improved confidence help to rebuild housing, economists said.
"You've got to continue to see some healing in the economy," Corr said. I don't think anyone will tell you that we're going to see a lot of appreciation over the next couple of years" in housing.
Still to be seen is how high the U.S. unemployment rate will rise, a big factor in determining how much further the record pool of foreclosure properties grows.
Unemployment that is at a nearly 26-year high and headed toward 10 percent is keeping many prospective buyers out of the market.
US Treasury names, prods banks on home rescue plan
Some mortgage companies are helping a great number of troubled homeowners take advantage of a government-backed rescue plan but other firms are falling flat and must do more, the U.S. Treasury Department said on Tuesday.
The most effective mortgage service companies are helping one in five eligible borrowers find aid while 11 of the largest 25 servicers are helping less than 5 percent of those eligible.
"It's safe to say we're disappointed in the performance of some of the servicers," said Michael Barr, Treasury assistant secretary for financial institutions. "We expect them to do more."
JPMorgan Chase and Co is helping one in five troubled homeowners eligible for a government-sponsored housing rescue, while Wells Fargo & Co is reaching 6 percent of eligible borrowers, and Bank of America Corp is aiding 4 percent, the U.S. Treasury Department said on Tuesday.
Officials are going to give more scrutiny to the mortgage services "that have been slow out of the block" in terms of embracing the housing rescue plan, Barr told reporters on a conference call after the mortgage report was released.
A link to the Treasury report can be found here: http://www.treas.gov/press/releases/docs/MHA_public_report.pdf
HOUSING RESCUE PLAN TAKES SHAPE
In February, U.S. President Barack Obama unveiled a housing rescue plan intended to lower monthly mortgage costs for struggling borrowers.
The program doles out incentives to the mortgage service companies that collect monthly checks from borrowers and act as caretaker for the Wall Street investor or bank behind a loan.
Last week, the Treasury Department and Department of Housing and Urban Development (HUD) asked 25 mortgage servicers to expand their help. Officials have promised to name and shame the service companies that do not meet their expectations.
Bank of America, which has taken $45 billion in taxpayer aid, is ranked 11th among servicers helping troubled borrowers. Citigroup Inc, which has also received a $45 billion bailout, has helped 15 percent of eligible borrowers and is ranked seventh among its peers.
National City Corp, which was acquired by PNC Financial Services Group Inc, has over 37,000 troubled loans eligible for modification but has only helped four borrowers.
Saxon Mortgage Servicers Inc., a subsidiary of Morgan Stanley, had the highest participation rate at 25 percent.
Wells Fargo said that it modifies many home loans outside the parameters of the Obama administration's Home Affordable Modifications program and has success keeping borrowers current.
"Wells Fargo continues to have the lowest delinquency rate of the top four lenders in the nation," the lender said in a statement.
Officials hope to see 500,000 home loans modified under the terms of the Obama rescue by November, Barr said, and noted that over 200,000 troubled borrowers have seen their monthly mortgage payments lowered under the plan.
The most effective mortgage service companies are helping one in five eligible borrowers find aid while 11 of the largest 25 servicers are helping less than 5 percent of those eligible.
"It's safe to say we're disappointed in the performance of some of the servicers," said Michael Barr, Treasury assistant secretary for financial institutions. "We expect them to do more."
JPMorgan Chase and Co is helping one in five troubled homeowners eligible for a government-sponsored housing rescue, while Wells Fargo & Co is reaching 6 percent of eligible borrowers, and Bank of America Corp is aiding 4 percent, the U.S. Treasury Department said on Tuesday.
Officials are going to give more scrutiny to the mortgage services "that have been slow out of the block" in terms of embracing the housing rescue plan, Barr told reporters on a conference call after the mortgage report was released.
A link to the Treasury report can be found here: http://www.treas.gov/press/releases/docs/MHA_public_report.pdf
HOUSING RESCUE PLAN TAKES SHAPE
In February, U.S. President Barack Obama unveiled a housing rescue plan intended to lower monthly mortgage costs for struggling borrowers.
The program doles out incentives to the mortgage service companies that collect monthly checks from borrowers and act as caretaker for the Wall Street investor or bank behind a loan.
Last week, the Treasury Department and Department of Housing and Urban Development (HUD) asked 25 mortgage servicers to expand their help. Officials have promised to name and shame the service companies that do not meet their expectations.
Bank of America, which has taken $45 billion in taxpayer aid, is ranked 11th among servicers helping troubled borrowers. Citigroup Inc, which has also received a $45 billion bailout, has helped 15 percent of eligible borrowers and is ranked seventh among its peers.
National City Corp, which was acquired by PNC Financial Services Group Inc, has over 37,000 troubled loans eligible for modification but has only helped four borrowers.
Saxon Mortgage Servicers Inc., a subsidiary of Morgan Stanley, had the highest participation rate at 25 percent.
Wells Fargo said that it modifies many home loans outside the parameters of the Obama administration's Home Affordable Modifications program and has success keeping borrowers current.
"Wells Fargo continues to have the lowest delinquency rate of the top four lenders in the nation," the lender said in a statement.
Officials hope to see 500,000 home loans modified under the terms of the Obama rescue by November, Barr said, and noted that over 200,000 troubled borrowers have seen their monthly mortgage payments lowered under the plan.
South Florida condo conversions collapse
Much of the attention heaped on South Florida's struggling condominium market has been focused on the sexy, luxury towers that shot up along the coastal waterways. Before the curious eyes of the world, a historic construction boom restyled the skyline in just a few short years. But beyond the waterfront properties and the focus of the national media, in South Florida's less come-hither heartland -- communities such as Kendall, Hialeah and Lauderhill -- an even larger wave of condo creation was taking place and bringing rapid change to the housing landscape.
Hundreds of rental buildings, representing tens of thousands of units, were being bought by developers, emptied of renters and turned into condominiums for quick resale, mostly to investors and speculators, as so-called condo conversions. And now that slice of the market is in real trouble.
Since 2003, when housing prices took off, more than 74,000 rental apartments were converted into condominiums in Miami-Dade and Broward counties, twice as many as the previous 50 years combined, according to state records of condo conversion applications. The number compares to roughly 53,000 new units constructed in both counties since 2003, according to research of state records by Condo Vultures, a Bal Harbour-based brokerage and real estate consultancy. As the fallout from the housing collapse continues, the conversion market -- largely a collection of aging garden-style complexes and dowdy mid-rise buildings -- is shaping up as one of the biggest losers of the downturn.
Most real estate analysts predict it will be the last submarket to recover since it is competing for scarce buyers with the swanky supply of new condos being marketed at cut-rate prices.
``It's ugly out there. The conversion market is extremely dysfunctional,'' said Constantine Scurtis, the Miami-based vice president of The Lynd Co., a large, national apartment management company headquartered in San Antonio. ``There were a lot of inexperienced developers that converted product that never should have been converted.''
EXTREME EXAMPLE
While almost all condos have faced plunging values, abysmal sales, high foreclosure rates and cash-strapped condo associations since the market took a dive two years ago, condo conversions have all those problems in the extreme, analysts said.
Adding to their woes are aging buildings, developer disputes, high rates of absentee landlords and foreclosures of entire projects.
Median prices for conversions are down by an estimated 60 to 75 percent since peaking. Overall, median home prices have fallen by just over 50 percent in Miami-Dade County and 60 percent in Broward, according to statistics from the Florida Association of Realtors.
Grant Stern, a mortgage consultant in Bay Harbor Islands, who joined partners in converting an apartment building during the boom, estimates that between 10,000 and 20,000 units are severely underwater and at risk of being reverted to rentals.
Vince Yambrovich, for example, paid about $174,000 for a condo at the Mirassou conversion in Northwest Miami-Dade when the market was at its peak. Now similar units are being listed for about $50,000, he said.
``People camped out to buy these places -- my family didn't do that -- but several people that are still living here did and they talk with. . . regret about that experience to be first in line to buy one of these places. Nobody saw this coming,'' Yambrovich said.
Investors have begun picking through the distressed projects, looking for high quality complexes whose developers have sold only a few units.
Scurtis says his company has access to a $500 million fund and is actively seeking to acquire bank notes and distressed South Florida conversions that can easily be turned into rentals.
The biggest challenge to so-called conversion reversions is getting lenders to stomach the huge losses, he said. ``Some of them cannot take the losses because it will put them out of business,'' Scurtis said. ``They've been frozen like deer in headlights.'' Stern said he was arranging financing for a developer looking to buy back 35 units from condo owners for a conversion reversion. Down the road, the idea would be to resell the entire apartment complex when the market recovers.
Renting out the remaining units in one of these ``fractured'' projects can pose difficulties for developers, especially when high foreclosure rates have left condo associations on the ropes.
Not only is the money coming in from the associations insufficient to keep buildings up, but the tolerance levels of owners and renters also are different. ``You are dealing with a lot of homeowners, so you can't take the place over with your maintenance crews and leasing offices,'' Scurtis said.
Relatively forgotten by developers until the early 2000s, conversions were rediscovered as an inexpensive way to provide affordable housing and home ownership to low-paid workers in South Florida's service and tourism industries.
CASHING IN
When both prices and demand began to heat up in 2002, though, the virtues of conversions as quick, easy and profitable investments became clear to astute converters looking to cash in on rising property values and potential buyers' belief that prices would continue to go up, up and up.
``To convert an apartment into a condo building required a legal declaration, a coat of paint, some new sod and blacktop for the garage, and you had a condo conversion,'' said Peter Zalewski, Condo Vultures president. New construction could take two to three years or more to bring to market. Conversions, by comparison, could be turned around in nine to 12 months. The relatively simple process drew a crowd of new condo converters to the field, from doctors and plumbers, to attorneys and mortgage brokers. They pooled their money and dove in. Project financing was ample and ubiquitous.
``The root cause of the condo conversion boom was that residential apartment values were skyrocketing in comparison to the commercial income value of the apartments,'' Stern said.
In much the same way that investors were making unsolicited offers to homeowners to purchase their properties, condo conversion companies were making handsome offers to buy apartment complexes from multifamily operators.
``Developers were trying to get as many deals as they could,'' said Robert White, a managing director of KW Property Management & Consulting, a Coral Gables-based firm that helped arrange financing for several converters during the boom. It now handles several failed conversion projects for lenders.
RENTAL DEPLETION
The result, according to analyst Jack McCabe of McCabe Research & Consulting, was ``an incredible depletion in the rental apartment pool -- in Florida, but especially in Miami.''
The sweep pushed rents up by 14 percent in 2006, McCabe said. ``We lost over a third of the apartments to condo converters.''
At the beginning of the craze, developers were buying new apartment buildings for roughly $80,000 to $85,000 a unit, said Adam Cappel, president of Miami-based CondoReports .com, a condo consultancy. As the boom progressed, unit prices skyrocketed to $165,000.
As the best properties were snapped up, developers eventually began turning to older complexes. ``Generally, converters were looking for 15 percent [or higher return] on their total development budget. So if the complex cost $40 million to buy and they needed to put in another $10 million in costs, then they would want to project a $7.5 million to $10 million profit beyond those costs,'' Cappel said.
Some deals returned more. Others, obviously, ended in bankruptcy and foreclosure when the market turned, Cappel said.
Meanwhile, easy credit made homeowners and investors out of people who had little ability to afford a new condo in the soaring market. Thousands of renters, who may not even have been looking to own, were offered a chance to buy their units.
White, of KW Management, said developers offered renters first dibs on properties slated for conversion. Lenders often set up shop on the premises to peddle payment-option adjustable rate loans and mortgages requiring no proof of income or assets. Enticements included no closing costs and no money down. ``Those deals [to renters] were best for developers,'' White said. ``Often their units wouldn't need any upgrades. A lot of people wanted their units ` as is.' ''
Around 25 percent of the renters would end up buying in typical projects, White said.
EASY INVESTMENT
Other investors and speculators flocked to conversions not only because they were less expensive than new construction but also because developers of the ready-made product required no preconstruction deposits as builders of new condos did.
``For speculators with no financial wherewithal to enter the market, conversions were the way,'' Cappel said. Teaser-rate loans allowed them to buy several units, rent them out or flip them as values rose. As conversions opened with grandiose sales events, some developers sold out their units in a matter of hours to buyers who sometimes camped out overnight so they could be among the first purchasers.
By the end of 2005, it was becoming clear to consultants like McCabe that the rate of conversion projects coupled with new condo construction was leading to a serious oversupply. ``And, we knew that well over 50 percent of the sales were going to speculators,'' McCabe said.
Analysts say the crash of the conversion market came in early 2006. White said instead of one or two deals a week, rather abruptly his company went to handling no deals at all. Units continued to sell for another six months but eventually that, too, slowed to a trickle.
With the pool of buyers evaporating, KW Management, whose job on some projects had been to kick out renters because prices had risen beyond their reach, began a mad scramble to bring renters back in.
PULLING BACK
Overall, some 16,000 conversions have been pulled back into the rental pool since the market cooled, according to McCabe. The number grows daily.
As the market turned to cinders, buyer incentives such as free granite upgrades and no maintenance fees for two years worked for only a short while. The efforts, became, as White put it, ``like putting a Band-Aid on a leg that had been cut off.''
When 2008 rolled around, the chips had fallen. Those developers who failed to close their units were trapped in a financial vise.
The market freeze caught many in the midst of project renovation with construction dust still in the air. ``They had torn up the units to renovate them. They couldn't sell them, but they couldn't rent them. Then, they were in a world of trouble,'' White said. Conversion foreclosures have been widespread. White's company, for example, currently manages 20 foreclosed projects in receivership.
Timing turned out to be crucial. Analysts said most developers who delivered conversions to the market in 2006 are stuck with significant unsold inventory.
Some of those who sold at least half of their units, however, are able to stay afloat by renting out what's left.
But other developers have simply run out of money. Flameouts range from small, individual converters to Juan Puig of Puig, Inc., one of the first major conversion companies to file for bankruptcy.
Unable to shoulder their share of maintenance fees, these developers typically have projects that are in very bad shape. ``Vendors are not being paid; electricity and water are turned off. The garbage is not being picked up. It's bad. Some are complete disasters,'' White said.
While no one is tracking how many condo conversion buildings are in foreclosure or bank-owned, analysts believe it is easily in the hundreds.
Meanwhile, conversion owners like Yambrovich are stuck in quickly deteriorating properties. The Mirassou condo association is receiving demand letters from creditors because high fee delinquencies and foreclosures have made it impossible to pay all the bills.
``I see our situation as being kind of like a renter,'' Yambrovich said. ``We'll never sell the place and be able to pay off the mortgage, but we need a place to live right now. So, we're living -- existing here.''
Latest HAMP Incentive Targets Home Price Declines
The administration is taking on a new enemy to homeowners: home price declines that plunge borrowers underwater on their mortgages.
The US Treasury Department as part of its Home Affordable Modification Program (HAMP) designed a new Home Price Decline Protection (HPDP) program to add to its alphabet soup of lender and servicer incentive initiatives.
The new program aims to encourage lender and servicer participation in areas with recent home price declines by helping to offset incremental collateral loss on modifications that don’t succeed. HPDP servicer incentives are linked to the degree of home price decline in the area as well as the mortgage’s unpaid principal balance and mark-to-market loan-to-value ratio.
Treasury said the program ensures borrowers in areas with recent home price declines are able to stay in their homes, which should minimize foreclosures in the area and keep home values from becoming depressed.
“This is an important next step in our multi-faceted efforts to bring relief to struggling homeowners and stabilize the housing market,” said assistant secretary for financial institutions Michael Barr in a Treasury statement. “Home price decline protection can help homeowners who may not have been reached otherwise.”
Treasury allocated $10bn for the program, but the actual amount used depends on price trends. The program applies to all modifications made through HAMP after Sept. 1, 2009, but not to loans owned or guaranteed by Fannie Mae or Freddie Mac.
http://www.housingwire.com/2009/08/03/latest-hamp-incentive-targets-home-price-declines/
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