Fed Widens Effort to Back Commercial Real Estate Loans
By Neil Irwin
Washington Post Staff Writer
Wednesday, May 20, 2009
The Federal Reserve yesterday broadened a key lending program to support more commercial real estate loans, expanding its rescue of the financial system to deal directly with some of the assets weighing down banks.
The move is the Fed's first attempt to use its unlimited lending capacity to try to support markets for "legacy securities," or those that were created months or years ago. Previously, the Fed program supported only new commercial real estate lending.
Many legacy loans are clogging balance sheets of banks and other lenders. There are few buyers or sellers for these assets, even those that are generally regarded as safe investments. Government officials have been seeking ways to buy up these and other assets, thus removing them from bank balance sheets. But the programs, announced in March, have been slow to get rolling.
Starting in July, the Fed will allow investors participating in its Term Asset-Backed Securities Loan Facility to purchase existing securities backed by loans for apartment complexes, office buildings, retail shopping centers and other commercial property. In effect, the Fed will provide investors with large loans to buy highly rated securities.
The TALF program, which originally supported mainly consumer lending, uses Fed and Treasury money, and could reach $1 trillion.
If the Fed's efforts to start up commercial real estate lending works, it could begin to help an industry that many analysts believe is on the verge of massive losses. Between this year and 2011, $814 billion in commercial real estate loans are expected to mature, research firm Foresight Analytics estimates.
With banks reluctant to lend, the market for so-called commercial mortgage-backed securities is virtually moribund. And with operating earnings from many commercial properties plummeting, there could be a wave of foreclosures on office, retail and other commercial properties absent new sources of lending.
Fed officials are also hoping that their new steps will create a more active market for commercial mortgage securities, giving banks and others more leeway to sell them or hold them on their books at a price that reflects their long-term value, instead of what they would currently sell at in a distressed market.
Moreover, they argue that by helping restart the market for existing CMBS, lending will be more widely available for new commercial real estate loans, allowing owners to refinance as their loans come due.
"I think the Fed's actions will have an impact, but in and of itself they're not enough to move the market enough to fix the problems," said Matthew Anderson, a partner at Foresight Analytics. One reason the Fed programs are no panacea for the industry: They provide backing only for securities rated AAA by major rating agencies, which excludes many hardest-to-value assets.
Study finds more than 20% of U.S. homeowners - about 20 million residences - owe more than their homes are worth.
CNNMoney.com staff writer
Last Updated: May 6, 2009: 9:51 AM ET
NEW YORK (CNNMoney.com) -- More than 20% of American homeowners owe more on their mortgage debt than they can sell their homes for, according to an industry report released Wednesday.
The real estate Web site Zillow.com reported that 21.8% of all U.S. homes, representing more than 20 million residences, were in a "negative equity" or "underwater" position after prices dropped more than 14% nationally in the year ended March 31.
"A combination of falling prices and low down payments has left many borrowers underwater," said Stan Humphries, Zillow's vice president in charge of data and analytics. "In some markets, more than half of all homes are in negative equity."
Those markets include Las Vegas, where a whopping 67.2% of homeowners would have to bring cash to the table if they sold their homes. Other markets are Stockton, Calif., where 51.1% of homes are underwater, and Modesto, Calif., where 50.8% of homes are in that position.
"That's really important, because homeowners in negative equity have fewer options if they take financial shocks such as divorce, job loss or medical bills, making foreclosure more likely," said Humphries.
Zillow.com based its estimate of negative equity using its own home price estimates. It obtains these by collecting sales records and applying the price trends it finds to other homes in the community. It then compares its home price estimates to the initial loan balances to determine if borrowers have fallen underwater.
The analysis is based on the mortgage balance at the time of purchase and the price changes that have occurred since. It does not take into account that some homeowners may have paid down principal along the way.
Humphries believes it's a conservative approach because the trend has been for people to strip value from their homes in the form of home equity loans and lines of credit, than to add value by paying down their mortgages.
"I think our number is either right on or negative equity may be even a little worse," he said.
Some dispute: Not all industry insiders back these findings.
"Zillow's negative equity estimates strike me as a little high," said Richard DeKaser, a real sate analyst and founder of Woodley Park Research in Washington D.C. He pointed out that other estimates of negative equity from Moody's Economy.com, for example, and First American (FAF, Fortune 500) CoreLogic, have not been that elevated.
The last CoreLogic report was for data through the end of 2008 and it estimated that 8.3 million homes were underwater.
Moody's Economy.com chief economist Mark Zandi estimated that 14.8 million were underwater at the end of March.
Foreclosure risk: Underwater homeowners are much more likely to lose their homes to foreclosure than borrowers with value remaining. That negative equity contributes to foreclosures is supported by Zillow's statistics on foreclosure sales.
In Los Angeles, 20.3% of owners are underwater and foreclosures accounted for 34% of all sales. In the New York
metropolitan area, by contrast, only 7.8% of homeowners are underwater and a mere 4.5% of all home sales during the past 12 months were foreclosures.
Negative equity makes it harder for housing markets to revive.
"It puts increased downward pressure on housing prices as defaults increase and add supply to markets," said DeKaser.
It also makes homes more difficult to sell. Underwater owners either have to bring cash to the table in order to pay off the balances of their debts not covered by the sale prices of their homes, or they have to get their lenders to agree to "short sales," for less than what they owe, and have their lenders forgive the unpaid debts.
The problem may be easing a bit. Zillow did report that price drops seem to be moderating in some hard-hit cites, indicating that they might be approaching a bottom, according to Humphries.
"Places like Modesto, Calif. have recorded a couple of quarters of flat or diminishing year-over-year declines," he said. "That's what constitutes the good news in this report."
First Published: May 6, 2009: 6:10 AM ET
Pending home sales jump 3.2%
Buyers defy expectations with an increase in sales contracts signed during March.
NEW YORK (CNNMoney.com) -- Is the housing meltdown ending?
Pending home sales rose in March for the second consecutive month and are up year over year. The Pending Home Sales Index from the National Association of Realtors showed a 3.2% gain to 84.6 from February, when it was 82. The index stands 1.6% higher than a year ago.
The consensus forecast of industry experts polled by Briefing.com had predicted no increase in the index.
0:00 /2:45No help for homeowners
It may still take a while before the market gains enough momentum to firmly state that the downturn has been reversed, according to Lawrence Yun, NAR's chief economist. And, the upturn may have been boosted by the first-time homebuyers tax credit, a temporary measure that will lapse in December.
"We need several months of sustained growth to demonstrate a recovery in housing, which is necessary for the overall economy to turn around," said Yun. "This increase could be the leading edge of first-time buyers responding to very favorable affordability conditions and an $8,000 tax credit, which increases buying power even more in areas where special programs allow buyers to use it as a down payment."
The index is understood to be a forward indicator of home sales trends since it measures contracts signed, not completed sales. The up-tick may indicate that home prices have fallen low enough for buyers to get off the fence.
Feeling for the bottom
Yun is not calling a bottom yet, however, because the index is still at a relatively low level. Instead, he's looking toward the summer selling season to determine what direction the market will take. Plus, he would like the number of homes on the market to drop to a more normal level of six to seven months of supply.
"If inventory goes down - it's at just under 10 months now - to below eight months, that would mean we're on the way to a sustainable recovery," Yun said.
Anecdotal evidence indicates that trend may be happening. Realtors and other industry insiders are seeing rising open house attendance and multiple bids on some particularly desirable properties. Plus, pricing has become sharper, according to Sherry Chris, the CEO of Better Homes and Gardens Real Estate.
"Overpricing seems to be ending," she said. "Properties are coming onto the market and selling quickly."
And buyers are feeling a little more urgency, she added. In many markets, buyers have not felt any pressure to make an offer. "They said to themselves, 'I don't have to act immediately. It will still be on the market two weeks from now,'" she said.
Today, buyers are more likely to bid because they perceive the market as at or near its bottom. An April Gallup Poll reported that 71% of Americans thought it was a good time to buy a house.
They don't, however, believe there will be price increases soon; three of four buyers think prices will stabilize or even decline in their areas over the next 12 months, according to Gallup.
Pat Newport, a real estate analyst for IHS Global Insight, is putting less emphasis on pending home sales than he once did for his housing market analyses. There has been a disconnect lately, he said, between the number of properties going into contract (pending home sales) and the number that actually close (existing home sales).
He speculates that this is because buyers are making offers and signing contracts but, because of financing problems, many deals are falling through.
Regional differences
The South saw the largest gain of any region, with pending home sales jumping 8.5%. Pending sales are 7.7% higher there compared with a year ago.
The Midwest gained 3.9% from February and 1.7% year-over-year. Northeast sales fell 5.7% and are off 24.1% compared with March 2008. The West dropped 1% for the month but are up 8.2% year-over-year.
Low home prices continued to help to drive sales, although NAR's affordability index actually fell 2.3% from February, when it hit a historic high. This index is based on family income, home prices and mortgage rates.
"Compared to a year ago, the typical family can pay much less in mortgage costs for the same home, or buy a better home without necessarily increasing their monthly payment," said NAR President Charles McMillan, in a prepared statement. "For buyers who've been on the sidelines and have good jobs, the market has never looked more favorable.
First Published: May 4, 2009: 10:00 AM ET
Retirement Communities May Benefit From Economic Downturn
Thursday, April 16, 2009 -
PARSIPPANY, NJ – According to a recent national survey of Coldwell Banker® real estate professionals, over half of those who work in popular retirement areas are seeing younger retirees (ages 60 and under) looking to purchase homes in their markets.
Furthermore, 43 percent of all the sales associates and brokers surveyed believe market and economic conditions may cause an increase in demand for retiree homes in their areas throughout the next year.
“Over the past couple of years, home prices have declined significantly in the majority of markets with traditional appeal to retirees,” said Jim Gillespie, president and chief executive officer of Coldwell Banker Real Estate LLC. “Younger retirees are taking advantage of these desirable prices and turning the economic downturn into an opportunity.”
While the survey indicates that this is emerging trend across the country, driving factors seem to vary regionally. For example, anecdotal feedback from Coldwell Banker real estate professionals in South Florida finds pre-retirees taking real estate-related steps now to support longer-term goals. “Many individuals not yet ready to retire are purchasing these homes and leasing them until they are prepared to move permanently,” said Elaine Harari of Coldwell Banker Residential Real Estate in Bay Harbor Islands, Fla.
In desirable areas with low property taxes, such as northeast Arkansas, it’s more common for younger retirees to move from more expensive cities; some even taking jobs for which they can telecommute to save money. Additionally, Coldwell Banker professionals in Michigan note that some retirement communities are experiencing an influx of former automobile company employees who have received early retirement packages.
Andrew Brearley, president of Coldwell Banker First Affiliate in Sedona, Ariz. reports a recent increase in sales volume. “Lifestyle is certainly the reason why so many choose to move to Sedona. We have 360 days of sunshine. With the 30 percent price corrections we have experienced, many individuals who are at or near retirement are realizing this is a great opportunity for them. Some buyers who have lost their jobs, taken retirement packages or sold their businesses are moving up their plans for retirement and taking advantage of the low mortgage rates and home prices. Others, who are already here, are moving up.”
The Coldwell Banker real estate professionals surveyed offered their perspectives on the top reasons retirees are buying or selling homes, and 33 percent said the No. 1 reason retirees are moving right now is to live closer to their families. Interestingly, 12 percent cited improvements in housing conditions, such as buyer-friendly home prices and interest rates, as the key drivers.
Other results from the overall survey include:
53 percent of Coldwell Banker real estate professionals have observed an increase in retirees who plan to downsize from their primary residences into smaller properties.
37 percent are seeing an increased number of retirees who own more than one property sell their primary residences to move to their secondary homes.
23 percent are seeing more people buy different homes for retirement, or move into their previously purchased retirement properties earlier than expected.
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