Posts Tagged ‘mortgage’

Single Family Homes Become an Asset Class

Tuesday, July 31st, 2012

It’s a sign of the times. Single-family homes, as distinct from mortgages, are an emerging asset class. For decades, investors have bought home mortgages in securitizations or as whole loans. Individual investors have built a cottage industry owning small numbers of rental homes. Institutions have been buying commercial real estate in various forms. Public and private REITs allow investment in various real estate asset classes in ways that improve liquidity, remove operational involvement and with more geographic and other risk diversification. What investors lack is a vehicle to own single-family homes that is analogous to single-family mortgages. And they’ve certainly not had the ease of a REIT structure through which to own those homes.

The Single-Family Challenge

Finance attracts a lot of clever people. So why haven’t structures been built to drive institutional ownership of homes? Until recently there have been good reasons (surely you would not think otherwise).

On the demand side, barring one year in the early 1990s, housing prices nationwide rose every year until 2007. Still, single-family homes did not score well as value in the investment sense. If anything at times they were a growth asset. And there were easier ways for investors to buy into growth than owning physical title. Homebuilder stocks, home improvement stocks or some of the late and unlamented mortgage companies were easier to trade and own. Times change and single-family homes are now arguably a value asset, even deeply undervalued depending on their location.

The Growth of the Rentals

Foreclosures and lower credit have made renters out of most former and many prospective homeowners. The renter culture has entered the single-family home market. What the small investor has known for years – that one can own a home and rent it out – has become much more economically viable. We need investor-owners for huge numbers of houses that owner-occupants are unable to buy. Even CoreLogic’s conservative estimates put the number of homes in shadow inventory at close to 2 million homes. Individual investors simply can’t absorb them all while we wait for the owner-occupant to come back. Institutions need to enter. We need to make investing in homes easy and very much in our society’s best interest.

Besides perceived value, institutions have not bought single-family homes because they are difficult to acquire at scale while controlling risk. Buying or selling a home is a byzantine process, reliant on hard copy forms, faxes and even a thumb-print identification to avoid fraud in some jurisdictions.  Buying a handful of houses is easy; buying hundreds, thousands or hundreds of thousands of houses is exceptionally hard because one has to combine the desire for bulk transactions with the reality of closings scheduled one home at a time. But that combo is needed today as homes incrementally transition from distressed ownership to rentals. One can always buy vacant homes in bulk but then the purchase price would reflect the quality of the asset and its rentability. Both seller and buyer would need quite a lot of information to have useful price discovery – that’s unlikely. Experiments out of Washington are helping with supply of homes but we are a long way from doing what’s best for the country and the housing market.

Another impediment to institutional homeownership is the operational complexity of managing residential real estate that is horizontally dispersed rather than vertically stacked (like apartments). Horizontal is harder in some ways than vertical but less risky in others. Besides, a nation that built the Google search algorithm can figure out how to manage homes.

Enter the REITs

As institutions look at single-family home rentals with asset value and cash flows, they want simplicity of ownership. The REIT structure makes a lot of sense. A REIT can own homes just as well as it can own other real estate. A broadening equity-market investor base wants the same: the economics of a rental home minus the operational involvement. The development of the REIT market tells us that REITs are a smart way to structure single-family home investment as those investments grow.

Public or private REITs can also help buyers obtain liquidity. Public REITs alone represent $525 billion in public market capitalization. Homes can be brought into a REIT; markets can be accessed for both equity and debt, with property management contracts attached. Capital can be allocated more efficiently. As a by-product we will see the creation of a new(-ish) industry that professionally manages homes at scale.

RMBS for Rental Homes?

The US financial industry being what it is, the “S” word – Securitization – is not far behind talk of a new asset class. To be fair, not all securitization is bad, the basic structure of mortgage backed securities was a fantastic innovation that institutionalized mortgage investing, reduced geographic and idiosyncratic risk etc. etc. It did not end well but the fundamental insight made mortgages affordable for a generation.

Could something similar happen in the single-family home asset class? Could rental homes be packaged into securities and sold off, maybe as REITs with financial and operational constraints but tax advantages or maybe through some other structure? I believe so. More importantly, to tackle the problem of homes with distressed mortgages, where new owner-occupant buyers are scarce, where investors need to step in to avoid the blight of a foreclosure, it better happen. Because the housing market needs all the help it can get.

Interestingly, such structures don’t need the government to do much, other than continue the tax advantage of REITs.

A number of groups have formed private REITs, rating agencies are talking about the unique issues in forming and rating single-family REITs. Nothing insurmountable, but rating agencies are going to need to evaluate the home acquisition, rental operations and property management processes of REITS seeking ratings.

Housing is a basic consumption good. It can be owned or rented. Home ownership is embedded deep within our national psyche. But the need for shelter is even deeper. People going through a foreclosure eviction need to live somewhere. Living with family or friends is not a long-term solution. These folks will need to rent as buying may be out of reach for financial or credit reasons, or may be (temporarily) unappealing.

REITs and simple securitizations can make homes much more attractive to institutional and individual investors. These homes would otherwise enter foreclosure, burden neighborhoods and signal the dysfunction at the heart of the current housing market. Securitization run amok hid the risks in our housing market. Within the cause of housing’s meltdown are the possible seeds of its rebirth. Securitization may yet save us.

Jafer Hasnain is co-Founder of Lifeline Assets, one of the first private equity firms in the country to invest exclusively in single-family homes. Information at www.lifelineassets.com.

Under Water Homeowners Slow Consumer Spending

Wednesday, November 17th, 2010

Consumer spending is down as under water homeowners struggle to pay their mortgages.  Although millions of Americans are paying their under water mortgages on time – sometimes with difficulty — it still could prove to be a source of trouble.  Because home prices are stagnant, many owners are using their hard-earned dollars to pay the mortgage and less on consumer spending.  In the long term, that is not encouraging news for economic growth.  With an estimated 15 million American homeowners under water, approximately 7.8 million owe at least 25 percent more than their homes were worth in the 1st quarter of 2010, according to Moody’s Analytics.

“At the root it’s ‘the’ problem,” said Mark Zandi, Moody’s chief economist. “If you’re going to put your finger on the one thing that’s gotten us into this fiasco, it’s the fact that millions of homeowners are under water on their homes.”  Consumer spending is slumping as homeowners find they can no longer take equity out of their homes to fund big-ticket purchases. In a sluggish economy, it’s not difficult to push an under water mortgage into default.  “When you’re under water and you have some kind of hit to your income or some kind of unintended expense, that’s when you default.  And so now we’ve got this noxious mix of millions of people under water and unemployment,” Zandi said.

Because under water homeowners owe so much, they can’t refinance or get home equity loans that could be used to finance major remodeling projects.  A case in point is Heather Hines and her husband, Santa Rosa, CA, residents who owe $415,000 on the house they purchased for $430,000 in 2004.  The county recently appraised the house at $246,000, a lower figure than just one year ago.  Although the Hines’ house needs a new roof, they have put off replacing it because their mortgage payments eat up too much of their income.  “It’s hard to think of making that investment when you’re hundreds of thousands under water,” she said.  “It just feels hopeless.  What are we supposed to do?  It feels like we’re never going to see any equity in our home.”

Covered Bonds Could Be a Viable Alternative to CMBS

Monday, November 15th, 2010

A financing vehicle invested in Prussia in 1769 could be the solution to failed #CMBS.A financing vehicle that has been used in Europe since it was invented in Prussia in 1769 is finding its way to American shores as a replacement for commercial mortgage-backed securities (CMBS).  The vehicle is known as covered bonds, which is a securitized debt instrument backed by a pool of top-quality assets, primarily mortgages. What is different about covered bonds is that the assets – known as a cover pool – are maintained on the issuer’s balance sheet.  This acts as a safety measure because the issuer is less likely to underwrite loans that carry significant risk.

Currently, the United States has no established market for covered bonds, although they are a $3 trillion business in Europe.  In July, the House Financial Services Committee approved a bill that would establish a regulatory framework for covered bonds.  Although the bill just missed being included in the Dodd-Frank financial reform overhaul, the consensus is that the legislation could win House and Senate approval in 2011.

“We have seen the difficulties wrought by the complexity of securitizations,” said Bert Ely, a financial and monetary policy consultant.  “Covered bonds, on the other hand, are a very clean and simple tool.  A bank makes a loan, keeps the loan on its books, and issues a covered bond.  There is no sale and resale of mortgages.”  With a covered bond, several elements protect the bondholder.  All assets in the covered pool are subject to monthly monitoring by an independent third party.  If one of the loans becomes non-performing, the issuer must remove it and replace it with a loan that is performing.  Thanks to the safety features, the majority of covered bonds enjoy a triple-A rating.

Despite the fact that many in the investment community support covered bonds, the Federal Deposit Insurance Company (FDIC) has some concerns about them.  Primary is the fact that the pools are over-collateralized – sometimes by as much as three times the bonds’ face value.  The FDIC wants access to these assets when a bankruptcy occurs.  The FDIC argues that if the cover pools protect the bulk of the banks’ assets from being claimed, the depositors are being asked to take on too much risk.  “We support covered bond legislation, but not at the expense of our obligation to protect the deposit insurance fund,” said the FDIC’s Michael H. Krimminger.

Half of Americans Worry About Making Mortgage Payments

Tuesday, November 9th, 2010

Approximately 53 percent of all Americans are concerned that they will not be able to pay their mortgage or rent.  A recent Washington Post poll found that 53 percent of all Americans are concerned that they will not be able to pay their mortgage or rent, despite the fact that they believe the economy has shown some improvement since the dark days of 2008.  The worry is driven by slow job creation, said Karen Dynan, who served as a Federal Reserve economist and on George W. Bush’s Council of Economic Advisors.  According to Dynan, “The unemployment rate is still very high, so if you think of it as being about the odds of someone losing their job and not being able to find another there’s good reason to be concerned about being able to make mortgage payments,” according to Dynan, who is now co-director of economic studies at the Brookings Institution.

More than half of Americans want the Obama administration to impose a moratorium on foreclosures on homeowners who are unable to make payments.  The president and his economic advisors oppose the idea, saying it is dangerous to a housing market that is still on shaky ground.  The push for a moratorium is driven primarily by people’s worries about personal finances and the economy as a whole.  Not surprisingly, the people most worried about making their payments are strong supporters of the moratorium.  Compounding the situation is the fact that several lenders – notably Bank of America, JPMorgan Chase and Ally Financial – were found to have significant errors in some of their foreclosure documents.  Of those polled, 52 percent support the moratorium, while 34 percent oppose it.

So who do Americans think is responsible for the foreclosure mess?  The mortgage lenders are to blame, according to 45 percent of poll respondents; 26 percent thought that homebuyers who purchased beyond their means are the guilty party; another 20 percent blames both sides.  Cara Habegger of Akron, OH, summed up the last point of view.  “Certainly they are both at fault.  Most people tend to blame the big institutions and that’s valid but if you’re making poor financial decisions and buying houses you can’t afford, that’s also not excusable,” she said.

Fannie, Freddie Bailouts Could Cost the Taxpayers $154 Billion

Monday, November 8th, 2010

Taxpayer bill for Fannie, Freddie bailout could reach $154 billion. The ultimate cost of bailing out Fannie Mae and Freddie Mac could cost as much as $154 billion unless the economy improves, according to a government report.  The mortgage giants rescue – which has kept the housing market on life supports – already has cost $135 billion to cover losses on home loans in default.  The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, says the most likely scenario is that house prices will have to fall slightly during a slow economic recovery, then rise a bit.  If that occurs, the Fannie and Freddie bailout will cost taxpayers an additional $19 billion.  A more upbeat prediction sees the housing market recovering sooner, which would require just $6 billion more for a total bill of $141 billion.

Washington, D.C., research firm Federal Financial Analytics believes the FHFA projection provides a sound indication of what the bailout will cost, but “nowhere near a definitive picture of it.”  Fannie and Freddie issued a joint statement that said “It’s simply impossible to forecast reliably now how much foreclosuregate will cost.”  Fannie and Freddie’s plight stands in sharp contrast to the success of the Trouble Asset Relief Program (TARP), which is now expected to cost just 10 percent of the $700 billion originally forecast.

Federal regulators seized Fannie and Freddie in September of 2008 in the wake of the financial crisis.  Since then, the government has kept the agencies solvent, with President Obama pledging unlimited support.  “From the beginning, the Obama administration has made it clear that the current structure of the government’s role in housing finance, while necessary in the short-term to provide critical support to a still-fragile housing market, is simply not acceptable for the long term,” said Jeffrey Goldstein, Treasury Department undersecretary for domestic finance.

The House That Started a Foreclosure Frenzy

Thursday, October 28th, 2010

Meet the hard-luck Maine homeowner whose faulty papers ignited a foreclosure crisis.     A small, weathered, blue-gray house in Denmark, ME, set off a national uproar about the foreclosure crisis when its owner, Nicolle Bradbury, lost her job and stopped paying her mortgage two years ago.  The family, which includes Bradbury’s disabled husband and two children, lives on food stamps and welfare. When the bank started to foreclose on the house, Bradbury contacted Pine Tree Legal Assistance, a non-profit group and was lucky enough to have her file read by retired attorney Thomas A. Cox, who decided to help her as much as possible.

Cox’s act set off a national foreclosure uproar, with the attorneys general of all 50 states opening investigations into the bad paperwork and questionable methods behind many of them.  The Senate plans to hold a hearing and the federal government is taking a closer look.  The housing market – currently fueled by foreclosure sales – is chaotic.  All this occurred because Cox thought something about Bradbury’s foreclosure file didn’t look right.

In reading Bradbury’s filing, Cox noticed that the documents from GMAC Mortgage were approved by an employee whose title was “limited signing officer”, which indicated that the person who approved the foreclosure likely knew little about the case.  When Cox won the right to get a deposition from the employee in question, he learned that the individual had signed off on as many as 400 foreclosures a day, and that no one at GMAC Mortgage had actually reviewed the documents.

“A lot of people say we just want a free ride,” according to Bradbury.  “That’s not it.  I’ve worked since I was 14.  I’m not lazy.  I’m just trying to keep us together.  If we lost the house, my family would have to break up.”  Unfortunately, Bradbury is almost certain to lose her house, despite the errors made in the foreclosure process.  “Had GMAC followed the legal requirements, she would have lost her home a long time ago,” said Geoffrey S. Lewis, another attorney on the case.

To listen to The Alter Group podcast on solving the foreclosure crisis, click here.

Waiting for Defaults

Tuesday, October 5th, 2010

Commercial real estate may be in better shape than thought. Real estate professionals who had been expecting a worst-case scenario – an onrush of distressed commercial properties coming onto the market – are still waiting for that to come to fruition.  Ben Johnson, writing in the National Real Estate Investor, notes that “Keep on waiting/lurking seems to be the prevailing view.  According to New York-based researcher Real Capital Analytics, the default rate for commercial real estate mortgages held by the nation’s FDIC-insured depository institutions did increase by nine basis points to 4.28 percent in the 2nd quarter, up from 4.19 percent in the 1st quarter. For those of you keeping score on a historical scorecard, at its cyclical low in the 1st half of 2008, the commercial mortgage default rate was 0.58 percent.  A mere pittance.  Year-over-year, the tale is more striking, with the commercial default rate up by 139 basis points.”

Instead of accelerating, Johnson says that the negative drift seems to be slowing.  “Year-over-year increases had been accelerating for 13 consecutive quarters through the end of 2009, but have moderated more recently,” he said.  The dollar volume of commercial mortgages in default recorded the smallest increase since the 2nd quarter of 2007.  Approximately $46.2 billion of bank-held commercial mortgages currently are in default, an increase of $547 million from the 1st quarter of 2010.

“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.

Downtown Chicago Rental Apartments Thriving

Monday, August 31st, 2009

Downtown Chicago apartment buildings – especially Class A properties – are seeing a resurgence in occupancy and rental rates as residents apprehensive about the condominium market choose to rent rather than buy.  The average effective rent of downtown apartment buildings climbed to $2.17 PSF in the second quarter, a 2.4 percent increase over the first quarter, according to a report by Appraisal Research Counselors, a real estate consulting firm.  During the same time frame, average Class A occupancy rose to 93.4 percent, as compared with 90.9 percent in the first quarter and 91.6 percent a year ago.chicagoskyline1

The statistics would be even better if there weren’t so many new downtown apartment buildings.  More than 2,098 new units have been built downtown since 2008.  Add to that the shadow rental market – condominium owners who rent their units when they cannot sell.  Many potential buyers are renting for the time being because they are concerned about falling property values and the possibility that they will be unable to obtain a mortgage in a tight credit market.

These numbers show the inherent strength of Chicago’s CBD rental apartment market — proof that downtowns continue to thrive because of the number of highly educated knowledge workers who want to live in the city.  As a result, places like River North and the Loop remain highly sought after locations for businesses looking to recruit talent.

Las Vegas Underwater

Monday, June 1st, 2009

Las Vegas may be in the middle of a desert, but right now it’s underwater.  Fully two-thirds of the once fast-growing city’s housing stock is underwater,  meaning that the owners owe more on their mortgages vegasthan the home is worth.

According to www.zillow.com, borrowers who are underwater totaled 20.4 million at the end of the first quarter of this year, compared with 16.3 million at the end of last year.  This represents 21.9 percent of all homeowners.

The irony in these numbers is that falling prices are making homes more affordable for first-time buyers who previously were shut out of the housing market.  At the same time, the decline in home prices compounds problems for owners who get into financial trouble by making it harder for them to refinance and take advantage of the current low interest rates.

“What’s going on here is that you don’t have any markets that have turned around and you have new markets, like Dallas, that have joined the ranks of communities where home prices have fallen,” noted Stan Humphries, a Zillow.com vice president.

Zillow.com reports that the nation’s top 10 underwater cities are:

  • Las Vegas, NV                    67.2 percent
  • Stockton, CA                       51.1 percent
  • Modesto, CA                       50.8 percent
  • Reno, NV                             48.5 percent
  • Vallejo Fairfield, CA       46.5 percent
  • Merced, CA                         44.4 percent
  • Port St. Lucie, FL              43.5 percent
  • Riverside, CA                     42.8 percent
  • Phoenix, AZ                        41.7 percent
  • Orlando, FL                         41.7 percent