Posts Tagged ‘credit’

Contract Cancellations Sour Home Sales

Wednesday, August 24th, 2011

A new phenomenon has emerged that is depressing the sales of existing homes. Contract cancellations are surging, dashing hopes that the distressed housing market is showing signs of improvement.  According to the National Association of Realtors (NAR), sales fell 0.8 percent in June compared with May to an annual rate of just 4.77 million units, the lowest since November, and falling for the third consecutive month.  Economists had expected sales to climb to a 4.90 million-unit yearly pace.  “Buyers and sellers are increasingly running up against conservative appraisals, which often cause deals to fall through or be delayed,” said Mark Vitner, senior economist at Wells Fargo Securities.  In fact, the market is unlikely to improve in the near term, said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

“A variety of issues are weighing on the market including an unusual spike in contract cancellations in the past month,” NAR chief economist Lawrence Yun said.  Fully 16 percent of NAR members reported a sales contract was cancelled in June, up from four percent in May.  “The underlying reason for elevated cancellations is unclear,” Yun said, suggesting possible problems like tight credit for buyers and low home appraisals.

Writing for the Wall Street Pit, Dirk van Dijk says that “Regionally sales were down on the month in two of the four Census regions.  All four regions were down year over year.  The Northeast fared the worst, with sales down 5.2 percent for the month and down 17.0 percent from a year ago.  The West had a month to month decrease, with sales falling 1.7 percent, down 2.6 percent from a year ago.  In the Midwest, sales rose one percent for the month but are down 14.0 percent year over year.  The South, the largest of the four regions, saw a 0.5percent rise on the month, but a 5.6 percent year-over-year decline.  After all, it is better to simply sell the house and get something for it, rather than let the bank take it and get nothing for it.  The more people under water, and the deeper they are, the higher foreclosures and strategic defaults are going to be.  A strategic default is when someone has the cash flow available to continue to make his mortgage payment, but simply decides not to, since paying is a just plain stupid thing to do from a financial perspective.  If you have a house that could only sell for $150,000 in the current environment, and you owe $200,000 on the mortgage, in effect you have the option of ‘selling’ the house to the bank for $200,000 simply by not writing the checks.  Of course that will be a hit to your credit rating, but $50,000 is probably worth a bit of a tarnish on your Fico score.  If the difference is only $5000, then the hit to your credit score makes less sense, and there are lots of non economic factors (a house is after all a home, not just an investment) that come into play.”

Despite the disappointing existing house data, homebuilders appear to have more confidence than buyers, because May housing starts climbed to a five-month high, according to the Department of Commerce.  The month was the first time in five years that more homes were started than completed.  A majority of the buyers were investors, with 29 percent of the transactions being all cash.

Writing for The Hill, Vicki Needham says that “Distressed homes — foreclosures and short sales generally sold at deep discounts — accounted for 30 percent of sales in June, compared with 31 percent in May and 32 percent in June 2010.  Foreclosures have flooded the market, providing good deals for some potential homebuyers but hindering new construction.  Mortgage rates for a 30-year, conventional, fixed-rate mortgage were 4.51 percent in June, down from 4.64 percent in May.  The rate was 4.74 percent in June 2010, according to Freddie Mac.”

“With record high housing affordability conditions thus far in 2011, we’d normally expect to see stronger home sales,” said NAR President Ron Phipps.  “Even with job creation below expectations, excessively tight loan standards are keeping many buyers from completing deals.  Although proposals being considered in Washington could effectively put more restrictions on lending, some banking executives have hinted that credit may return to more normal, safe standards in the not-too-distant future, but the tardiness of this process is holding back the recovery.

Phipps noted that lower mortgage loan limits, which are scheduled to go into effect October 1, already are having an effect.  “Some lenders are placing lower loan limits on current contracts in anticipation they may not close before the end of September,” he said.  “As a result, some contracts may be getting canceled because certain buyers are unwilling or unable to obtain a more costly jumbo mortgage.”

Fed: Banks Easing Up on Credit to Hedge Funds

Wednesday, January 26th, 2011

The Federal Reserve has obserFed:  Banks Easing Up on Credit to Hedge Fundsved that Wall Street’s big banks eased credit terms for hedge funds and private equity firms in the 4th quarter of 2010.   More banks believe that credit terms have “eased somewhat” than those that think it has “tightened somewhat” in the last three months of 2010, according to the Fed’s year-end financing survey.  Hedge funds and other investors worked harder to negotiate favorable terms for transactions; 55 percent of dealers responded that clients “increased somewhat” or “increased considerably” their requests for concessions.

According to the Fed, increased competition and general improvement in the market are the primary reasons that explain why the terms eased.  Fully 90 percent of survey respondents cited each factor as “very important” or “somewhat important” in easing their terms.  The Fed, which started the survey in response to the financial crisis, found that the results “highlighted that a significant volume of credit intermediation has moved outside of the traditional banking sector.”

More-aggressive competition from other institutions and an improvement in the current or expected financial strength of counterparties were frequently cited reasons for the easing of terms,” the Fed report said.   In addition, the banks surveyed said borrowers have increased efforts to negotiate better terms.  “Dealers also noted that demand for funding of all categories of securities covered in the survey had increased over the past three months, including demand for funding of equities,” the report said.

“Home Sweet Home” Is Back in Style

Monday, September 14th, 2009

Despite positive news about rising home sales, the number of Americans with under water mortgages might be as worrying as anything else happening in the economy. When people owe more on their mortgages than their home is worth, it limits their ability to pursue new opportunities because they cannot afford to sell.  In Chicago, First American CoreLogic reports that more than 550,000 homes were under water at the end of June.  That translates to $134 billion in negative equity.

54755_1215745994960_bStatistics from the United States Census Bureau indicate that household mobility is at a 20-year low.  According to Sam Khater, a senior economist with the consulting firm of American CoreLogic, under water mortgages are the primary reason why people are less mobile.

Lenders are wary about extending credit in housing markets where values are sinking, which feeds the negative cycle of inactivity in the housing market and pushes prices down even more.  This damages the economy because under water homeowners have a tendency to accept the inevitability of foreclosure.  Homeowners with negative equity are seven times more liable to go into foreclosure than people whose mortgage and home equity loans total between 95 and 100 percent of their home’s value.

Homes are no longer considered to be sources of future wealth.  Consumers aren’t spending because they can’t rely on getting a low-interest home equity loan to buy their way out of a personal credit crunch.  Khater notes that “Borrowers are beginning to treat a home more like a home and less like a financing vehicle.”

Economic growth is further impacted because these same homeowners (who, in most cases, have stayed current on their mortgage obligations) are delaying or eliminating home improvements due to fears that any additional investment in the home will not be economically realized in value or returned in the event of a sale.  This inactivity is being felt by many home remodeling contractors, as well as retailers.

Distressed CRE Hits $108 Billion

Monday, August 3rd, 2009

More than $108 billion of commercial properties in the United States are now in default, foreclosure or bankruptcy.   That preliminary statistic is nearly double the amount reported at the start of 2009, according to New York-based Real Capital Analytics, Inc.19and20

At the end of June, 5,315 buildings were reported to be in financial distress.  Hotels and retail properties are the most “problematic” assets after bankruptcy filings by mall owner General Growth Properties, Inc., and Extended Stay America, Inc.  The lack of credit is spurring property defaults throughout the country and among every type of investor.

“Perhaps more alarming than the rapid growth in the distress totals is the very modest rate at which troubled situations are being resolved,” according to Real Capital Analytics.  The good news is that approximately $4.1 billion of commercial properties have emerged from distress.  “In far more situations, modifications and short-term extensions are being granted, but these can hardly be considered resolved, only delayed,” the report notes.

Economic Development: Packaging A Loan in Today’s Market

Wednesday, July 15th, 2009

Economic development organizations are stepping in to help plug the credit hole.  We all know what the economy is like today, and it is unlikely that the industrial and commercial real estate markets will soon turn around. As anbroken_piggy_bank_0 economic developer, I see another side of the economy where both communities and businesses are seeking opportunities and looking at alternatives ways to secure capital.

Aside from the federal stimulus incentives, municipal, state governments and educational institutions offer a variety of incentives to encourage businesses to remain in their jurisdictions. Here’s an example:

I am currently working with a printer, a cutting-edge small business with Fortune 500 customers, to preserve more than 100 good-paying jobs in a small municipality. The company’s primary obstacle: borrowing money for new equipment and other capital improvements. The deal requires $1.5 million, all of it collateralized.  Because the company was in financial straits, an angel investor recently purchased the company and is investing heavily.  Even with this influx of new capital, lenders consider the company a high risk. To make the deal happen, we are using state, county and municipal revolving loan funds to underwrite $750,000 of the project to add to the $750,000 conventional bank loan. The lender has virtually no exposure and has first position on all assets, including building and land that are free and clear of debt.

A key player in putting the deal together is the Illinois Department of Commerce and Economic Opportunity’s Participation Loan Program, one of the few available state incentives until Illinois adopts a capital budget. For more information about the program, contact Stanley Luboff, Capital Programs Manager at

Chris Manheim is our guest blogger.  He is the President of Manheim Solutions, Inc., a consulting firm specializing in community, workforce and small business economic development programs.

Some Alt-A Home Loans Go the Way of Subprime

Thursday, May 7th, 2009

It seems that we just can’t escape the bad financial news.  Now, mortgage loans made to supposedly better-off Americans are also heading south at an alarming rate.  This time around, the loans in question are Alternative-A (Alt-A) mortgages,which are used by borrowers such as the self-employed who have reasonable credit standings but unpredictable incomes.image3272351g

Right now, the number of Alt-A loans with payments 60 days in arrears has quadrupled to 13 percent, compared with last year.  Because of the same slapdash underwriting standards that gave us the subprime mess, losses on Alt-A loans could eventually total $1 trillion.  According to the Bank for International Settlements, 40 percent of mortgages originated during the first quarter of 2007 were interest-only or negative-amortization Alt-A loans.

Some of these loans were granted, rather imprudently, based on minimal documentation of income and assets – sort of like the dreaded NINA loans. Alt-A borrowers pay higher interest rates than prime borrowers.  Many have option adjustable-rate mortgages (ARM) where they can chose one of four types of payments to make each month.  The amount can range from the actual principal and interest due or it could be a minimum payment, often significantly less than the interest owed.  When the ARM resets the interest rate, an $800 per month payment could easily soar to $1,500.  And that’s the point at which the trouble typically begins.

Investment Banking in an Economic Meltdown

Friday, May 1st, 2009

Investment banks are hunkering down to preserve capital, primarily because there are grave concerns about current property valuations, says Charles Krawitz, Senior Loan Sales Asset Manager, Fifth Third Bank, in an interview for The Alter Group podcasts on real estate.  Banks are reluctant to lend $10 million to a property that might be worth only $8 million, and with good reason. Multifamily housing currently is the least distressed asset class, thanks to Fannie Mae, Freddie Mac and FHA financing that is creating a market for loans on these properties.

Distressed assets fall into three tranches – buildings, loans and securities. According to Charles, if a property is struggling and the cash flow is impaired, there is a commercial lending problem. In a CMBS structure, the loan has been sliced and diced so many times that it’s likely to be toxic and beyond restructuring. Fully 1.8 percent of commercial loans cannot be restructured, and $400 billion in loans are rolling over this year alone. The challenge is to pin down values in a distressed market when there are no comparable sales statistics.

One smart thing that the government has done is expand loans to small businesses through the Small Business Association (SBA). With interest rates so low, this is very beneficial to small businesses, Charles notes. Capital is once again flowing – though not in a tsunami – but that’s very good news. The government will be an equity partner, and it’s likely that certain approved vendors will be part of this program. A lot of questions remain, but it’s a very strong effort on the government’s part.

Use the player below to listen to Charles Krawitz’s entire interview on the state of investment banking:

icon for podpress  Charles Krawitz on the Credit Crisis: Play Now | Play in Popup | Download

Suburban Office Vacancies Rise

Tuesday, July 15th, 2008

According to a recent Crain’s Chicago Business article, suburban office vacancy rates shot up to 13.1 percent during the second quarter of 2008.  That is the highest level in more than two years. According to the commercial real estate services firm, Transwestern Commercial Real Estate, the vacancy rate is at its highest level since the first quarter of 2006, when it rose to 13.7 percent.  There’s no doubt that demand for suburban office space is in lockstep with job growth or loss; we’re not seeing any job growth in the suburbs right now.

Class A landlords are more likely to accept lower rent deals right now than was true in the last year, but this can be risky.  This has the effect of also reducing the building’s value, because this is a function of the in-place income stream.  Sometimes, it is better to pass on a low rent deal and simply “assume” accepting a higher rent to protect the building’s value.

The sales market has been robust over the past several years, so protecting value has been a priority.  With credit now being largely unavailable, building owners are no longer in the sale market because buyers are unwilling or unable to pay top dollar.  Because we don’t know when the office market will stabilize and since selling isn’t viable at present, landlords may take that lower rent to boost occupancy.

A respectable number of transactions will be completed this year, but only because there is so much low-cost sublease space available.  Additionally, some industries are likely to make positive contributions to the suburban office scene.  Companies providing goods or services to hospitals, physician practices and the senior-housing market are experiencing growth, as are data-center operations and some engineering firms, especially those working with energy production or conservation.