Monday, October 25, 2010

More From The ULI Fall MeetingIn Washington, D.C.

This is Part 2 of notes I took at the latest annual fall meeting of ULI - the Urban Land Institute. The meeting was held in Washington, D.C. from October 11 to the 15th.



From Distressed Loans/Deals:
·        5,200 CRE loans are in special servicers’ hands representing $94 billion in distressed debt
·        Lenders are holding 1,100 REO properties having a value of $10.7 billion
·        73% of all outstanding CRE loans will mature over the next 6 years
·        There are 4.8 workers for every job in the USA, up from 1.8 workers per job
·        The he run-up was caused by investor demand that was fueled by Wall Street quant jocks who didn’t understand the cyclicalities in the economy
·        There is a correlation between high unemployment rates and the rate of defaults on indebtedness
·        Troubled loan goes from the master servicer to a special servicer at even the threat of imminent default, such as when someone has had a receiver appointed
·        Workout techniques:
o   Subordinate some portion of the debt to fresh equity – this creates the A note, B note situation
o   Restructure if you can get a higher NPV by doing so as opposed to the NPV on foreclosure and the issues of REO
§  The hurdle rate for the NPV is the interest rate on the note
o   Because of REMIC requirements, a special servicer who sells the asset has to do so on an all-cash basis. BUT if they get a court appointed receiver to sell it, the receiver can sell it as a structured deal
§  Also, the receiver insulates the lender from liability and becomes the manager of the asset once it goes into foreclosure
·        CMBS trusts can’t hold REO more than 5 years
From Larry Sabado: What the Elections Mean for the Economy:
·        It will take a decade to recover from the recession in the USA
·        Republicans will win control of the House with at least 226 seats and probably more
o   30 to 40 of these will be Tea Partiers, who will not compromise
·        Republicans will get 7 to 9 new seats in the Senate but will not get enough to prevent filibuster
·        Thus, gridlock will reign on Capitol Hill



Connect with us: visit facebooktwitterLinkedInYouTubethe Falbey Institute for the Development of Real Estate. There currently is a special on the real estate development videos available on the Institute's web site.
©2010 by The Falbey Institute for the Development of Real Estate

Friday, October 22, 2010

I attended and participated in the ULI Fall Meeting in Washington, D.C. last week. It was the usual track meet environment - too many activities going on from dawn to late into the evening for 4 or 5 days with a great deal of concurrency and overlapping.  Much of my time was spent in my Product Council activities, District Council activities, and presenting or moderating sessions, but I did get to attend some of the most interesting sessions. Here, in bullet point fashion, are the take-home comments that resonated with me.

From Certainty in Uncertain Times
What is certain?
·        Demographics
·        Trends (urban infill)
·        Green
·        Differentiation and disparity - not everyone wants the same thing
·        Economy – will improve, but slowly
Demographics
·        Housing starts currently are at ¼ what’s needed for expected population growth
·        Gen Y is 30% unemployed, in debt, ambivalent about owning versus renting (will rent for years to come), urban oriented, will move a lot
·        Immigration is 50% what it has been, but immigrants and their descendants will drive 82% of the population growth
·        Homeownership will settle at 62-64%; the rest will rent
·        Much housing will be urban infill which will put upward pressure on prices
·        Going forward, emphasis will be on smaller, affordable, compact housing
Green
·        870,000 sf are being LEED certified everyday despite the recession
·        Gen Y is environmentally sensitive and aware
From Council Day: Taxation:
·        NPV with a discount rate of 10% indicates you should accelerate planned 2011 sales into 2010
·        Sell securities in 2010 and buy them back in 2011
·        When buying distressed debt, get the lender to write it down before you buy it or you may recognize ordinary gain
From Global Capital Markets:
·        Never forget: real estate is a yield instrument (not sticks and bricks)
·        Emerging countries are riding high on $86 oil, but Western nations are floundering under unsustainable debt
·        China has $700 billion to invest in stabilized real estate assets;
o   Looking for long-term value, not quick profits
o   But very risk-sensitive and carefully analytical
·        If the USA pushes China to revalue the Yuan, they may stop buying our treasuries, which would push up interest rates
·        Consensus is interest rates could go anywhere – who knows in this environment?
o   So, if rates go up, today’s 4.5% (on quality core assets) is an argument against delevering
o   The market currently expects quantitative easing (QE), but fears the consequences because QE is treating the symptoms and not the disease
o   What is needed is not QE; it’s:
§  real jobs (not road-paving)
§  spending cuts and the reduction in the spread of government centralized power
·        Corporate bonds are safer and have a better return than treasuries
·        Today’s low interest rates are propping up property prices
·        Today, a fair return on core assets with 50% equity is about 8%
·        Global gateway cities are where the current action is:
o   The market is very narrow and very deep
o   Foreigners are bullish on the long-term USA economic growth prospects
§  They are used to low yields (i.e., a 5 cap)
o   The Euro is stronger than the dollar because the EU doesn’t print money to solve financial crises
·        Difficult to find equity for construction because return is 3 years away (when stabilization is reached)
·        Lower unemployment rates would encourage investment because of the expected effect n the economy
·        Hedge funds have a better model than Wall Street because they don’t pay preferred returns (“prefs”), so they collect 20% from the first dollar of return
·        Higher risk mezzanine debt returns are being compressed
·        Real estate taxes are going up, so expenses will increase and NOI will go down, negatively affecting cap rates and values
·        Banks are lending today only on core assets with strong cash flow
·        Moratoriums on foreclosures because of bad documents could result in all mortgages being decertified for foreclosure action, not just the ones with bad documentation. This would be a disaster because it means no one has to pay mortgage payments and lenders cannot do anything about it.

There is more to follow in a subsequent posting.

Connect with us: visit facebooktwitterLinkedInYouTubethe Falbey Institute for the Development of Real Estate. There currently is a special on the real estate development videos available on the Institute's web site.
©2010 by The Falbey Institute for the Development of Real Estate Connect

Monday, October 18, 2010

Ramifications of the Foreclosure Moratorium


Within the past week, major lending institutions have suspended their foreclosure proceedings because of the possible existence of irregularities in the documents involved in the proceedings. Sounds like a bank problem, but it has dire ramifications for the economy, including:
·        The market clearing process that restores equilibrium to the housing market is suspended indefinitely;
·        The suspension of this process further delays the absorption of the large inventory of homes which, in turn, delays the recovery of the homebuilding market and the massive reemployment that would occasion;
·        Investors in the mortgage-backed securities secured by these loans are that much farther from recovery of those invested funds, which otherwise could be reinvested in other areas, thus stimulating the economy;
·        Those who purchased a home through a foreclosure sale herein the documents or proceedings were improper may not legally own the home. If they did not purchase title insurance, they may suffer financial loss.
But the news may be worse,…much worse. The purported cause for the suspension of foreclosure proceedings is irregularities in the legal processes mandated for those proceedings and in the documents themselves. First, a word about how mortgages actually work:
·        A home buyer gets a loan from a lender to assist in paying the purchase price of the home;
·        The loan is evidenced by a promissory note, or legal IOU, which is an enforceable pledge to repay the loan at the stated interest rate over the stated time period;
·        The note is secured by collateral – the house – through the recording of a mortgage that acts as a lien on the title to the house until the note is fully repaid;
·        If the home buyer/debtor doesn’t make the payment on the note, the note holder forecloses the mortgage and forces the sale of the security (the house) in order to generate the funds necessary to satisfy the debt evidenced by the note;
Here’s a snapshot of what appears to have happened:
·        Mortgages were given to individuals and entities that otherwise were not financially qualified to make the payments due on those loans. A lot of finger pointing and blame can be spread around the lending spectrum, including Congress, Fannie and Freddie, lending institution underwriting practices, appraisers, and more;
·        These mortgages, sometimes thousands at a time, were packaged into investment pools. The pools were sliced into tranches that were assigned risk factors and returns – lowest risk meant lowest rate of return and vice versa;
o   These pooled mortgages operate in what is known as a REMIC or real estate mortgage investment conduit, which must meet specific IRS requirements;
o   The mortgages in these various pools are serviced for the REMICs by MERS or mortgage electronic registration systems;
·        These securities, in the form of bonds, were purchased by investors according to their respective tradeoffs of risk tolerance versus desired rate of return;
The problem that now is emerging is that there are millions of mortgages that are in default and spread throughout the various tranches. The simple answer is to foreclose against those that are in default. Ordinarily, that would mean that the holder of the promissory note secured by the mortgage brings a foreclosure action. It’s not that simple, however.
The notes have gotten separated from the investors who bought the bonds issued by the REMICs. On September 28, 2010, a Federal judge in Oregon determined that MERS, the purported servicer of the mortgage loans, lacks the authority to transfer the notes and is merely a nominee or custodian of the notes.
This raises the critical issue of who owns the notes and has the right to enforce payment of the debts evidenced by them. Ordinarily, foreclosure actions cannot proceed until that determination has been made.
In addition, title insurance companies, which stand to lose billions if the validity and enforceability of the mortgages they’ve insured is denied, are digging their heels in where new mortgages are concerned. Lenders cannot grant mortgages unless the validity and enforceability of the mortgage lien is insured.
There is concern that those who are in default on their mortgages may be getting their house gifted to them because they don’t have to move out and don’t have to pay on the mortgage. Ultimately, that’s not how things work in America. Mortgages are governed by a body of legal principles known as Equity. Equity requires that fair outcomes be achieved. Various proceedings exist, such as interpleader, where monies can be placed into the registry of the court. In this instance, when the irregularities in the documents and or proceedings are resolved, it may be possible in some jurisdictions for foreclosures to proceed with the funds being placed into the court registry pending resolution of ownership of those funds.

Connect with us: visit facebooktwitterLinkedInYouTubethe Falbey Institute for the Development of Real Estate. There currently is a special on the real estate development videos available on the Institute's web site.
©2010 by The Falbey Institute for the Development of Real Estate



Friday, October 8, 2010

The Good, The Bad,…And…The Ugly

Here's a rundown on the latest developments - good and bad - in the real estate development industry. And, yes, there continues to be an ugly side to things, but if you stay focused on the long-term, there will be a recovery.

MULTIFAMILY
The Good: According to data from Reis, Inc. reported in the Wall Street Journal, the multifamily (apartment sector) has enjoyed rent increases for the third consecutive quarter. Not surprisingly, the national vacancy rate for the third quarter of this year is down .7% year-over-year.
The Bad: The recently passed summer months represent the prime rental season for the year as families relocate and students enter school. In addition, the continued health of the sector depends essentially on the creation of jobs; otherwise, these recent gains in occupancy and rent increases may be lost. Unfortunately, the latest jobs data, just out at 8:30EDT this morning, shows continued job losses and a continued unemployment rate of 9.6%. Finally, these data points are national in scope and don’t bring much solace to those parts of the country where there have been continuing declines in occupancy and/or rental rates.

COMMERCIAL
The Good: The commercial property price index maintained by Green Street Advisors, which is comprised of $300 billion in commercial properties and assets owned by 53 Real Estate Investment Trusts (REITs), reports that commercial property values have risen almost 30% since the bottom reached in the recession.
The Bad: National averages combine data from around the country and, obviously, average the highs with the lows. If things are rosy in Manhattan, they aren’t necessarily the same in Buffalo, Detroit, Phoenix, or Jacksonville, or anywhere where there continues to be fallout from overbuilding, short sales, and foreclosures. The properties that have been selling recently to a low cap rate (indicating that the sales prices were very healthy) have been well located core assets with very high occupancy by über creditworthy tenants on long-term leases.

RESIDENTIAL
The Good: The latest S&P/Case-Schiller Home Price Indices report that home prices appeared to be stabilizing. Further study indicates that home prices in half of the 20 Metropolitan Statistical Areas (MSAs) actually experienced a negative annual growth rate.

The Bad: ZipRealty’s latest review of properties listed with Multiple Liting Services (MLS) in 26 markets reflects both an increase in housing inventories and reductions in list prices. 

The Ugly: As has always been the case, most data, if not all, can be misinterpreted, or worse yet, manipulated to appear to support almost any point. What we in the real estate development industry are most interested in professionally is the health of our industry. Grasping at positive changes in data on a month-over-month basis is wishful thinking. Trends, real trends, are long-term.
While few of us in the industry believe that a return to the halcyon days of 2005-2007 is beneficial, we do look for the recovery from the current disastrous state of affairs. The litany of the elements contributing to that disastrous state is a lengthy one. But the situation is not hopeless. There is one area that can spark the turnaround.
In past recessionary economies, the shelter industry – housing – was a major contributor to recovery. Not so, this time. The reason: uncertainty about the future caused by lack of confidence in the policies and direction in Washington. Loathe Mr. Obama or love him, the fact remains that his administration seems more intent on recreating the American culture and political structure than restoring economic viability.
Until the distinct majority of Americans are confident that jobs are being created on a scale sufficient to significantly reduce unemployment, that opportunities are being developed by the entrepreneurial class, and that businesses are expanding, consumer demand will remain dormant, business leaders will not take financial risks by expanding and hiring, and investment capital will continue to seek “fire sales”.



Connect with us: visit facebooktwitterLinkedInYouTubethe Falbey Institute for the Development of Real Estate. There currently is a special on the real estate development videos available on the Institute's web site.
©2010 by The Falbey Institute for the Development of Real Estate