Smart Real Estate News & Commentary by Chris McLaughlin February 1, 2012
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Foreclosures drawing private equity
Private equity firms are jumping into distressed housing as the US government plans to market 200,000 foreclosed homes as rentals to speed up the economic recovery. GTIS Partners will spend $1 billion by 2016 acquiring single-family homes to manage as rentals, Thomas Shapiro, the fund’s founder said. That followed announcements this month that GI Partners, a Menlo Park private equity fund, expects to invest $1 billion, and Los Angeles-based Oaktree Capital Management LP will spend $450 million on similar housing. “It’s a massive market,” Shapiro said in a telephone interview from New York. “We’re starting to see this as a billion dollar opportunity to buy rental housing.” Increasing rentals may reduce lenders’ losses on foreclosed and surrendered properties and curb declines in home prices, according to a Federal Reserve study Chairman Ben S. Bernanke sent to Congress on Jan. 4. Private equity funds began focusing on these investments in September, after the administration asked for proposals to sell the government’s inventory of foreclosed homes — about half of all houses seized from delinquent borrowers.
Private sector gains 170,000 jobs
The private sector created 170,000 jobs in January, boosted again by a surge in service-sector employment, according a report from ADP and Macroeconomic Advisors. With economists looking for signs of life in the jobs market, the ADP number was close to consensus estimates and likely sets the stage for solid though not overwhelming overall growth when the government releases its monthly report Friday. The private payrolls report showed service jobs growing by 152,000 in January, after rising a revised 241,000 in December. Goods-producing jobs rose 18,000 while manufacturing added 10,000 and construction gained 2,000 for the month. The total number of private sector jobs created is a substantial dropoff from December’s report that showed a revised 292,000, revised down from 325,000. The Labor Department on Friday is expected to report nonfarm payrolls growth of 159,000 and an unchanged unemployment rate of 8.5%, according to StreetAccount estimates. Economists sometimes use the ADP numbers to adjust their projected unemployment estimates. ADP’s numbers have been running on average 10,000 more than the government, though that number swelled to 92,000 in December, raising caution that seasonal distortions could be influencing the payroll firm’s figures.
November home prices down 3.7% from previous year
The average price of a single-family home fell again in November, with decreases in 19 of the 20 largest metropolitan areas during the month, according to the Standard & Poor’s/Case-Shiller index. The ratings agency’s 20-city composite index and 10-city index both declined 1.3% from a month earlier. The larger, benchmark index drop 3.7% from November 2010 and the 10-city index for November was 3.6% lower than the year earlier. S&P said both indices are one-third lower than the peak in the summer of 2006 and home prices are now at levels last seen in the middle of 2003. Atlanta home prices for November were nearly 12% lower than the prior year, while Detroit at 3.8% and Washington with a 0.5% gain are the only metropolitan areas to post annual increases. Home prices in Atlanta, Las Vegas, Seattle and Tampa, Fla., all reached new lows in November, according to S&P/Case-Shiller. “Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall,” said David Blitzer, chairman of the S&P index committee. He said Phoenix, one of the hardest-hit areas in recent years, was the only MSA to post an increase in prices from October with a 0.6% gain. “Annual rates were little better as 18 cities and both composites were negative,” Blitzer said. “The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand.” Analysts with Toronto-based Capital Economics agreed and said “there are still no signs that house prices are on the verge of turning around,” as the Case-Shiller indices fell for the seventh month in a row. “But things should be different in six months’ time, when the recent rises in home sales will have helped to put a floor under prices,” the analysts said.
California is broke
California needs to come up with more than $3 billion to avoid burning through its cash by March, according to the state controller, who urged borrowing and delaying some payments. “Assuming no additional revenue loss, erosion of borrowable internal funds, or significant spikes in spending, $3.3 billion of cash solutions are needed to address California’s liquidity needs during this period,” State Controller John Chiang said in a letter to the chairman and vice chairman of the Joint Legislative Budget Committee released on Tuesday. Chiang said California does not need to issue IOUs again as it did during a cash crunch in 2009 or delay tax refunds, noting he has developed a plan with the state treasurer’s office and the state’s finance department that would postpone some payments and borrow from external sources and from state accounts to bolster the state’s cash. “It is not an ideal solution, but it is the best way to manage the challenge without relying on IOUs or delaying tax refunds — actions that can disrupt the delivery of essential public services and slow California’s economic recovery,” Chiang said. Senator Mark Leno, chairman of the Joint Legislative Budget Committee, said he expects the Senate and Assembly by the end the week will approve borrowing from state funds. Leno said he expects the internal borrowing will raise approximately $850 million. Chiang noted California’s dwindling cash reflects revenue coming in below forecast in the state’s budget and spending exceeding expectations.
MBA – mortgage applications down
Mortgage applications decreased 2.9% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 27, 2012. The Market Composite Index, a measure of mortgage loan application volume, decreased 2.9% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 9.0% compared with the previous week. The Refinance Index decreased 3.6% from the previous week. The seasonally adjusted Purchase Index decreased 1.7% from one week earlier. The unadjusted Purchase Index increased 17.1% compared with the previous week and was 4.3% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 4.11%. The four week moving average is up 2.48% for the seasonally adjusted Purchase Index, while this average is up 4.22% for the Refinance Index.
The refinance share of mortgage activity decreased to 80.0% of total applications from 81.3% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 5.6% from 5.3% of total applications from the previous week. “The Federal Reserve surprised the market last week by indicating that short-term rates were likely to stay at their current low-levels until the end of 2014. Longer-term treasury rates dropped in response, and mortgage rates for the week were down slightly as a result,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. Fratantoni continued, “Although total application volume dropped on an adjusted basis relative to last week, refinance volume remains high, with survey participants reporting that the expanded Home Affordable Refinance Program (HARP) contributed to roughly 10% of their refinance activity.” In December 2011, Connecticut had the largest increase in refinance applications, increasing by 80.1% from November. Maine saw a 30.8% increase in applications for home purchase, which was the largest state-increase in applications for home purchase. Only 12 states had a decrease in home purchase activity in December, while every state in the US saw an increase in refinance volume.
Europe on life support
The European Central Bank (ECB) has saved the euro zone from a heart attack, but its members face a long convalescence, made worse by the insistence that fiscal starvation is the right remedy for feeble patients. Last week’s downgrading of its forecasts by the International Monetary Fund (IMF) shows the dangers. The IMF now forecasts a recession in the euro zone this year, with a decline of 0.5 per cent in overall gross domestic product (GDP). GDP is forecast to fall sharply in Italy and Spain, and stagnate in France and Germany. This is a terrible environment for countries seeking to cut fiscal deficits. Forecasts are far from satisfactory for other high-income countries. But the euro zone is the most dangerous part of the world economy: only there do we see important governments — Italy and Spain — menaced by a loss of creditworthiness.
Elsewhere, governments of high-income countries can continue to support their economies, largely because they possess a central bank and an adjustable exchange rate. This combination has given them the ability to run large fiscal deficits. In post-crisis conditions, such deficits are both the natural counterpart and the principal facilitator of necessary private sector deleveraging. The euro zone has no such internal mechanisms. When private external financing dried up, as happened to a number of countries, affected members needed both financing — in the short run — and a mechanism for adjusting their external accounts — in the longer run — other than via deep slumps. The euro zone lacks both capacities. It has turned out, as a result, to have limited ability to cope with the global financial disease. As Donald Tsang, chief executive of Hong Kong, remarked in Davos: “I have never been as scared as I am now.” Astute observers have a sense that little stands between them and a wave of sovereign and banking defaults inside the euro zone, with ghastly global repercussions.
Olick – refinancing to go through FHA
“After announcing during his State of the Union address a new government refinance program for, ‘responsible’ but ‘underwater’ borrowers with privately held mortgages, President Obama is expected to detail the plan today. It will go through the government mortgage insurer, the Federal Housing Administration (FHA) and could cost between 5 and 10 billion dollars, according to senior administration officials. The cost of the program, officials say, would be covered by a tax on major lenders, which is likely to make it a no-go in Congress. It would cover closing fees for borrowers and additional risk to the FHA, which doesn’t insure new loans where the borrower owes more than the home is worth. Critics will also argue that the FHA, which now has an inordinately, historically large share of the mortgage market, is in no position to take on any more risk. The FHA could be considered ‘underwater’ itself, guaranteeing about $1 trillion in mortgages but sitting on just a $1.2 billion dollar cushion to cover losses. To that end, officials say they could create a separate fund for these loans, not the regular mutual mortgage insurance fund (MMI). This would be a special risk fund, designed to handle high losses. ‘In this program we’re talking about extraordinary circumstances,’ says Brian Chappelle of Potomac Partners. ‘People have played by the rules, they made payments in addition to the fact that their house is underwater, they’re paying excessively high rates. It’s a unique homeowner, not somebody looking for a handout.’
To be eligible, borrowers would have to be current on their mortgages, not having missed a payment in at least six months. They need a credit score (FICO) above 580, must be employed, and must have a conforming loan (between $271,050 and $729,750 depending on their location). No appraisal would be necessary, according to officials. Estimates are that the plan could help 3.5 million borrowers in addition to the 11 million expected to qualify for the existing refinance program for those with Fannie Mae and Freddie Mac loans (HARP). The one sticking point could be the mortgage insurance premiums charged by the FHA. If rolled into the loan, they would put a borrower further underwater. ‘To use taxpayer dollars to bail out the few who are current and don’t need payment assistance but are underwater is ludicrous and worsens their equity position,’ says JT Smith of Aristar Funding. The plan would also require lenders to write down the value of the loan if it exceeded 140% of the value of the home. Administration officials say the trade-off for lenders is they get rid of a risky loan.
On the flip side, the government would then be backing that same risky loan, but officials argue they would offset some of that risk because in order to get closing fees paid, the borrower has to agree to use the lower interest rate savings on the refinance to pay off principal balance. The plan faces many headwinds, first and foremost being Congressional approval; borrowers and lenders would also have to agree to all the requirements, as this is not an automatic plan but a voluntary, borrower-initiated deal. It would also rile Wall Street, as hundreds of thousands of loans could ‘pre-pay,’ which means the bondholders lose. ‘Some say it undermines the value of existing [mortgage] securities, so they would build a premium in,’ notes Chappelle. That could make future loans for other Americans more expensive.”
US to charge European traders
US authorities are preparing to charge four former Credit Suisse employees with criminal and civil fraud related to write-downs on subprime mortgage derivatives at the height of the financial crisis, sources familiar with the matter said. Credit Suisse will not be charged in the matter, which is being investigated by federal prosecutors and the US Securities and Exchange Commission (SEC), the sources said. The four people to be charged were former Credit Suisse traders who were fired, another source said, but it was unclear when and for what reason. The suspected illegal conduct took place roughly four years ago, the source said, adding that the bank had been cooperating with officials. The investigation stems from $2.85 billion in write-downs that Credit Suisse took on collateralized debt obligations in 2008, said the sources, who spoke on the condition of anonymity. Credit Suisse revealed those CDO losses in early 2008, and blamed them on a group of rogue traders – who the bank said had deliberately mispriced securities – and on a failure of internal controls. Credit Suisse, the Federal Bureau of Investigation, the SEC and Manhattan US attorney Preet Bharara declined to comment on the matter.
WSJ – housing’s firmer foundation
The Case-Shiller index is closely watched for a reason. It was quicker than a US government price index to show just how bad things were as housing came off the rails in 2007. But right now, the connection between what the S&P/Case-Shiller index says and what is actually going on with housing may be lukewarm at best. The difference: The Federal Housing Finance Agency index includes only homes with mortgages guaranteed by Fannie Mae and Freddie Mac, while the Case-Shiller index includes those backed by jumbo and subprime mortgages. Many homes that were backed by subprime mortgages are now being sold in foreclosure. They aren’t in nearly as good condition as when they were last bought, and are selling for less than if they had been properly maintained. Because the Case-Shiller index is based on repeat sales, such homes may be biasing it downward. Moreover, the Case-Shiller index is based on a three-month average of sales, so its November level includes transactions that were completed in October and September. Consider that it takes about two months between a sale and a closing (often longer with mortgage hassles these days), and you are talking about deals agreed on in the summer, when recession fears filled the air. Things now look better. Home prices probably do, too.
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 150 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
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thousands of investors make money in the
biggest market opportunity ever!
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