Smart Real Estate News & Commentary by Chris McLaughlin, March 10, 2010

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Commercial and multifamily mortgage delinquency among the lowest

According to a survey conducted by the Mortgage Bankers Association’s (MBA), delinquency of commercial and multifamily mortgages, of over 30 days, was lower than the average of all loans held by banks end 2009. Commercial mortgages had a delinquency rate of 5.06% while multifamily mortgage delinquency stood at 5.64%, the overall average delinquent rate was 7.3%. Single-family mortgages had 12.49% delinquency rate. The rate of charge offs – provision made in balance sheets when loans are written off – was 0.8% of the balance of commercial mortgages and 1.1% of multifamily mortgages. These rates compare with 1.7% of residential mortgages, 2.4% of home equity loans, 3% of non-credit-card consumer loans, 5.4% of construction loans and 9.1% of credit card loans. “Commercial and multifamily mortgages provide security to their lenders in that a) even when under stress the commercial property continues to provide some level of income to help pay its debt service, except in the most extreme situations, and b) for every loan there is a real, tangible asset pledged as collateral should the loan become delinquent,” said the MBA. “For these reasons, commercial and multifamily mortgages have historically not experienced the same rate of losses as most other types of loans.”

Apollo to buy Citi’s real estate unit

Citigroup, which has received substantial bailout money from the government, is under pressure to sell its non-core assets to strengthen its balance sheet. As part of asset restructuring, Citi has sold off many proprietary trading businesses, including the Philbro energy trading unit, and plans to focus on trading services for clients. Last week Citigroup Chief Executive Vikram Pandit informed a congressional panel that Citi was focused on “back-to-basics” banking. Citigroup is in talks with Apollo Management to hive off its real estate investment unit. The deal includes 65 investments in 26 countries. “Apollo is getting a lot of good assets with a lot of good sponsors because I think Citi was good at it,” said Gary Mozer, principal at George Smith Partners, a real estate investment banking firm. “They were just a victim of the times.” Citi’s real estate unit has more than 90 professionals and manages about $12.5 billion in gross real estate assets. Apollo’s real estate assets will more than triple once the deal is consummated. Apollo has signed a letter of intent and plans to retain Citi’s staff. The deal is likely to take 3 months to close.

A $6 billion program for energy efficiency in homes

President Obama is hopeful that the so-called Homestar program – which will offer rebates to homeowners of energy efficient homes – will create energy savings for U.S. consumers and offer environmental benefits. Under the program, rebates would be offered on energy efficient home HVAC equipment and water heaters, as well as insulation and windows and doors. “I’m convinced that the country that leads in clean energy is also going to be the country that leads in the global economy,” Obama said recently. The National Association of Home Builders (NAHB) believes that every $1 billion in remodeling and home improvement activity generates 11,000 jobs, $527 million in wages and salaries, and $300 million in business income. “This has the potential to be a real shot in the arm for the home building industry,” said NAHB Chairman Bob Jones. “It will help put America back to work and it will help families save on monthly energy bills.” Homeowners can choose to get the Silver Star rating which will consist of rebates of 50% of the cost for upgrades for a total of up to $1,000 or $1,500 or Gold star rating which will get them a $3,000 rebate plus additional amounts for any energy savings above 20%. “The majority of money is targeted to silver-star rebates,” said Steve Cowell, CEO of Conservation Services Group.

Job openings rise 7.6%

The Labor Department has said the number of job openings in January rose 7.6%, to 2.7 million, compared to December; this is the highest total since February 2009. Analysts say as many as 300,000 jobs may be added in March, a four-year high, giving rise to a hope of sustained employment gains and economic recovery. Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities, says a 450,000 payroll gain in March “can’t be ruled out,” and job gains are “going to convince people of the sustainability and durability of the recovery.” Some economists have cautioned that the job gains may not happen at a rapid pace. “It’s getting better, though not as quickly as you’d like,” said Dan Greenhaus, chief economic strategist at Miller Tabak. Indeed.com, which tracks job openings in 12 industries, said last week that 10 of the 12 industries posted more job openings in February than they did a year ago. “We have seen a sharp turnaround in the job market in the last few months,” said Paul Forster, CEO of Indeed.com. Among the 12 industries, hospitality and retail industries – which are critical to economic recovery – saw the biggest gains in job openings last month. When the recession began 1.7 people were competing for each opening. There are now 5.5 unemployed people, on average, competing for each job opening, against just over 6 people per opening in December 2009.

Investments in “high-yield” municipal bonds rise

According to Standard & Poor, a rating agency, high-yield municipal bonds which are some 10 levels below investment grade debt – those that assure timely interest payment and principal repayment – have yielded 31% in the last 12 months compared to 11% from investment-grade municipal securities. Lured by the high yields, investors poured over $7.8 billion into high-yield municipal bonds in 2009. Analysts say yields are high because of high risk premium (read, high likelihood of default) associated with such securities and investors should be wary of the bubble that is building up. “People are starving for yield because rates are at zero,” said Paul Tramontano, co-chief executive officer of Constellation Wealth Advisors. “They’re taking more risk than they think.” High-yield municipal funds had $49.3 billion in assets as of January, the most since November 2007, according to Morningstar. While states and local governments – borrowers that issue municipal bonds — can raise taxes and cut services to meet interest obligations, investors should do their own research before buying a high-yield bond, said Lynette Hotchkiss of the Municipal Securities Rulemaking Board. “Make sure you understand the credit of the issuer, the source of repayment for the bond and the priority of repayment,” Hotchkiss said. “Where I get worried is when Mom and Pop get interested in chasing yield,” Hotchkiss said. “It’s very intoxicating.”

Now on to our real estate investing educational section…

Who Walks? A Look at Strategic Default by Loan Type

Most people immediately think of sub-prime loans when the issue of strategic default is brought up but as every short sale investor knows, high risk borrowers are not the only people walking away from under-water mortgages. In fact, financial experts are noticing never before seen trends among even the wealthiest borrowers. Find out the facts about who walks by comparing strategic defaults by loan types:

Fixed Rate vs Option ARM’s

According to J.P. Morgan, 27 percent of borrowers owe more on their mortgage than the property is worth but only about 20 percent of them will do so over the next five years if inflation stays at or above 3 percent per year. If inflation is able to hold steady, the number of underwater borrowers will shrink from 27 percent to only 10 percent in that same five year period of time. For those that remain underwater, the difference or “incentive” is roughly $40,500 for fixed interest rate borrowers and $105,500 for Option ARM borrowers.

It will come as no surprise that Option ARM borrowers walk at nearly twice the rate of fixed interest rate borrowers….the banks know this and so should short sale investors. All things equal, a seller with an option ARM is a much higher default risk and typically owes significantly more on the property than a homeowner with a fixed rate mortgage. Which do you think the lender will be more likely to want off their portfolio as soon as possible?

Second LIens & Non Agency Loans

In an unusual turn of events, BofA recently decided to share some telling data on securitized non-agency loan performance including these startling statistics:

• Nearly 60% of prime borrowers have a second lien
• Over 50% of Alt-A borrowers have a second lien
• Over 46% of Option ARM borrowers have a second lien
• Nearly 25% of subprime borrowers have a second lien

When the primary mortgage plus any secondary loans were compared to the current value of the property, it was found that only 45% of prime borrowers retained any equity in their homes, just under 39% of Alt-A borrowers and only 19% of Option ARM borrowers. Surprisingly, almost 42% of subprime borrowers still had equity apparently due to their inability to obtain large amounts of credit to begin with. Savvy short sale investors should recognize the strategic default potential of high income, favorable credit homeowners in addition to the typical high risk or subprime market.

See you at the top!

Chris McLaughlin
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About the author:

Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.

    * As the top Florida foreclosure and pre-
      foreclosure expert, he oversees more than
      100 short sale & REO closings each month
   * Long-time authority on real estate investing
      and rapid reselling of distressed homes.  Owns
      portfolio of nearly 100 high-value, high-profit
     properties
    * Owner of one of Florida’s largest Real Estate firms,
     running 4 different offices, supporting over
     400 agents, uniquely positioning him to help
     thousands of investors make money in the
     biggest market opportunity ever!
    * Highly sought-after speaker, consultant, and
      seminar leader for current trends and hot topics
      in Real Estate Investing, Entrepreneurship, and
      Wealth Building
    * Follow me on Twitter: http://twitter.com/mclaughlinchris
    * Join my Facebook Fan Page: http://www.mclaughlinchris.com
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