Real Estate Journal Online

With lots of news coming out regarding the housing market, especially on the mortgage and mortgage-backed securities, it is easy to get lost in all the hype. And it is also easy to mix the fact from fiction. But many will be surprised that some of the news circulated in major news outlets is grossly exaggerated.

One of those will be the concerns encircling the huge numbers of mortgage loans. Much of what is being speculated assumes that the post-2004 deterioration of underwriting standards has affected the creation of securitization trusts and transferring assets. Many who have believed in the headlines have also ignored the long history of securitized mortgage market spanning 30 years and the language on transfers of notes to securitization trusts used by the Uniform Commercial Code (UCC).

If there is something people should believe, it may well be law firm SNR Denton’s analysis. It says, “The recent allegations of possible wholesale failures to convey ownership of mortgage loans to private-label RMBS trusts are baseless and unfounded. All parties to these transactions…clearly intended that the transactions convey ownership of the loans to the trusts, and appropriate steps were taken to effect such conveyances in accordance with well-settled legal principals governing transfers of mortgage loans.”

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The federal home buyer’s credit may have been canceled last April, shattering the dreams of many who wish to own a home for the first time. The Federal Housing Administration, though, comes to the rescue and gives them hope. With FHA loans, which are originally meant for purchasing or refinancing owner-occupied residential properties, manufactured homes, and condominiums, can also be utilized to purchase your first home.

The Federal Housing Administration’s guidelines are not that strict that anyone, as long as they qualify under the agency’s requirements, can avail of the loans. FHA loans, which are not actually funded by the FHA, act as guarantee that loans will be repaid even when borrower defaults.

Whereas traditional loans dwindled during the economic crisis, FHA loans continued to thrive making them extremely popular with first-time home buyers. What makes FHA loan more attractive to first-time home buyers is that fact that, amidst the failing economy and the breaking down of the mortgage market, it is still easier to secure compared to regular conventional loans.

Being one of the more lenient loans, an FHA loan can approve anyone as long as borrower has no other mortgage and meets the requirements. FHA is very understanding of certain financial situations that it even approves a loan even just two years after bankruptcy is declared. The only time one cannot be eligible for an FHA loan is when he has federal liens or defaults on student loans.

Perhaps one of the biggest attractions of an FHA loan is its credit score of 620 when putting down minimum 3.5%. This is way below the conventional loan requirement of a 720 or higher credit score.

Even the amount needed at closing is seen as a big advantage of an FHA loan. At least 20% is needed at closing for conventional loans and most first-time home buyers just don’t have the funds to meet this. For FHA loans, only 3.5% is required at closing.

But FHA loans are not just attractive to first-time home buyers but also to those needing refinancing. FHA allows refinancing of up to 95% of the appraised value and does not even require reappraisal of the property. If there is an existing FHA loan on the property, the refinancing homeowner can opt to avail of the FHA Streamline loan.

The economy may be on shaky grounds but there are options – like the FHA loans – that can still uplift people’s spirits.

The economy may still be in recovery stages but recent reports show that momentum may regained really, really soon. Take for example the report on this week’s U.S. mortgage rates. With mortgage rates being at its lowest in the last 40 years, real-estate watchers are crossing their fingers that the market will pick up soon and banks will start helping more people with house purchases.

In a seven-day period that ended Thursday, numbers show that the 30-year mortgage rate is at its lowest ever since Freddie Mac tracked the said figures in 1971. The average 30-year mortgage rate tumbled from 4.36% to 4.32% last week. The number is also lower by 5.08% from 2009.

Good things in the housing market are already stemming from the depreciating rates. The low mortgage rates may have resulted to the unexpected growth in July pending sales – although the extension of tax credit for homebuyers may as easily have caused this as well.

The number of U.S. homes that entered escrow in July also went up by 5.2% vis-à-vis June’s numbers – the number though, is 19% short of last year’s statistics. The numbers are based on a report released by the National Association of Realtors (NAR).

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As of June 2010, the Federal Deposit Insurance Corporation (FDIC) has reported that commercial banks and savings institutions under its protective wings have collected an aggregate profit of $21.6 billion, leading to an overall profit of $26 billion following the $4.4 billion net loss registered in the prior corresponding year.

The FDIC said that while the numbers reflected the biggest surge in quarterly earnings since September 2007, the improved performance still fall short of its historical norms yet only 20 percent of banks have reported of net loss by the June quarter, coming from the 29 percent posted in the same period last year while the quarter’s average return on assets (ROA) jumped to 0.65 percent from 0.13 percent from a year ago.

Following the Great Depression, the US Congress had legislated the birth of FDIC in 1933 to restore public confidence on the banking system and as of the current year, some 7,830 financial and savings institutions’ deposits were being insured by the federal corporation.

FDIC chairman Sheila Bair is upbeat on the industry’s latest results, stressing that the June numbers represented the best quarterly profit in three years with about 70 percent of banks reporting improvements on their year-on-year earnings.

Bair conceded that the industry is still encountering rough roads though in general terms, the banking sector is slowly regaining its traction as shown by the earnings growth posted by many institutions and so long as “economic conditions remain supportive most institutions should maintain profitability and increase their capacity to lend.”

The FDIC said that this year’s gains were anchored on reduced provisions for loan losses, posting an improvement of $27.1 billion or 40.2 percent lower from last year while net income soared by 8.6 percent to $8.5 billion and non-interest expenses were slashed by up to 1.5 percent to $1.5 billion.

The federal corporation added that improvements were seen in asset-quality trends as loans and leases that were 90 days due dipped fort he first time since 2006 while net charge-offs by insured banks and thrifts retreated by 0.4 percent to $214, reporting only of $49 billion in uncollectible loans in the June quarter.

The FDIC said that overall loans and leases in the same quarter fell by 1.4 percent to $107.5 billion though at the same time, the industry’s total assets shrunk by 1.0 percent to $136.2 billion.

Also, loan-loss reserves saw marked improvements since the last quarter of 2006 as the industry’s total reserves dipped by 4.5 percent to $11.8 billion while its ratio of reserves to total loans and leases slid to 3.40 percent in June, prompting Bair to caution that “all banks should continue to exercise caution and maintain strong reserves,” considering the economic uncertainties.

The FDIC said that the industry’s coverage ratio of reserves to noncurrent loans went up in two consecutive quarters, notching 65.1 percent from 64.9 percent but the list of its problem institutions ballooned from 775 to 829, with assets decline of $403 billion.

The federal corporation reported too that 45 insured institutions succumbed to financial pressures in the June quarter but the Deposit Insurance Fund (DIF) balance improved from negative $20.7 billion to negative $15.2 billion, with the reserve slipping from $40.7 billion to $27.5 billion during the same period.

On the other hand, the FDIC said that the industry’s liquid resources remained stable as cash and marketable securities stood at $44 billion by the end of June, declining a bit from the $63 billion posted in the first quarter mainly due to three Puerto Rican bank failures on April 30.

Bair expressed confidence that FDIC’s current resources would be able to meet the expected demand spikes for cash this year and to resolve any bank failures that would occur as she noted that by the end of the June quarter, the industry’s total insured deposits have been reduced by 0.7 percent or up to $39 billion.

First-time home buyers are considered very important to the real estate industry – some go as far as to say that they keep the market healthy. And with the July statistics showing that the number of people buying a home for the first is going down, analysts are starting to look at reasons why this is happening. The expiration of the tax credit is being seen as the number one culprit.

Campbell/Inside Mortgage Finance recently released its monthly Survey of Real Estate Market Conditions. It says that first-time home purchases accounted for just 39% of the total purchases in July. This is lower than the 48% share that was seen for the month of March.

July’s number on first-time home buyers is the lowest in at least a period of one year. And Campbell Surveys director Thomas Popik blames it on the termination of the tax credit. He further says that activity by first-time home buyers is likely to fall further in the next months.

“The end of the tax credit has clearly had an effect. First-time home-buyer participation is continuing to drop. We expect a further decline in first-time home-buyer activity, perhaps reaching as low as 30% to 35% of the market by the fall months,” Popik says.

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Mortgage Bankers Association released their mid-year rankings. It lists the top servicers for commercial and multifamily loans and also ranks by secondary market activity.

Wells Fargo came on top in commercial and multifamily loans, servicing 40,292 loans totaling to $462.8 billion. PNC Real Estate/Midland Loan Services, Inc., with $307.9 billion serviced loans, placed second. Berkadia Commercial Mortgage LLC and Bank of America Merrill Lynch are on the 3^rd and 4^th place, with serviced loans equal to $202.6 billion and $133.4 billion, respectively.

Commercial- and asset- backed securities were also ranked; so as collaterized debt obligation activity. The four who came on top of the MBA listing had securities portfolio of $381.6 billion, $130 billion, $120.4 billion, and $95.3 billion.

The number one commercial banking and savings institution is PNC, followed by TriMont Real Estate Advisors, Inc. and Deutsche Bank.

GEMSA Loan Services, L.P. gained top spot for credit company/pension funds/REITs/investment funds. PNC gets another spot in this subcategory, coming in second place. Teachers Insurance and Annuity Association, College Retirement Equities Fund (TIAA-CREF) came in third.

Servicing loans for Fannie Mae and Freddie Mac were also ranked, with PNC again gaining top spot with $56.8 billion. Wells Fargo (with Wachovia) gains another ranking, placing second with $44.8 billion. Deutsche Bank, with $26.5 billion serviced loan, is on third place.

PNC also tops the servicers ranking for FHA and Ginnie Mae securities; Berkadia, Prudential Asset Resources, Wells Fargo and Red Mortgage Capital, LLC follow suit.

Commercial and multifamily loans with collateral outside the U.S. were also ranked. With $33.6 billion serviced loans, Hatfield Phillips International (an LNR company) ranked first overall. It is followed by Deutsche Bank ($21.5 billion) and PNC ($11.7 billion).

All ranking are based on primary (loan payment collection and property performance) and master (cash and data collection) servicing.

As the American economy again enters a period of uncertainty, industry analysts are raising valid concerns that the commercial real estate market could slide into a turmoil once the trillion dollars of loans that the sector carries begin maturing within the next few years.

Experts explained that majority of commercial loans in the United States were contracted during the real estate bubble but most borrowers were now enmeshed with mortgages that are worth much higher than the properties they owned.

Rep Elizabeth Warren, chair of the Congressional Oversight Panel, warned that troubled commercial properties that are set to renew their skyrocketing loans could eventually end up defaulting on debt servicing, effectively creating “a wave of commercial mortgage defaults and triggering economic damage that would touch the lives of every American.”

The scenario is not actually far-fetched as commercial loans were normally refinanced in a cycle of three to ten years and such procedure eventually eats up the actual value of a mortgage property, from a decline of 40 percent to actually canceling out the property’s total value as interest further pile up.

Warren said that defaults introduce the specter of empty offices and empty stores which inevitably lead to job losses while on the other hand, banks absorbing too many loan defaults would become reluctant to release more loans and the end situation is scarcity of jobs and funds, which could bring the economy down to its knees.

New Jersey’s The Goldstein Group president Chuck Lanyard said that more than eight percent of the group’s retail space on its numerous stores and shopping malls went unoccupied during these hard times and prior to the recession, the average was a manageable two to three percent.

Lanyard blamed the decline to a decade of accelerated expansion activities which created a breaking point in commercial retail space and ended up pitting similar businesses competing against each other.

He said that the crowded retail sector in New Jersey discouraged fresh initiatives from new retailers as they would not want to go in direct competition with existing and established businesses, with grave concerns that “there’s not enough dollars to go around for those retailers to survive.”

However, Lanyard remains optimistic that the bankruptcies that have paralyzed many giant commercial centers such as Circuit City and Linens ‘n Things would simply pass over Paramus, as he cited that the area’s vacancy rates were still relatively low compared to other regions in the country.

Tax assessor James Anzevino could only follow Lanyard’s upbeat attitude as he stressed that despite the current economic difficulties, people still frequent the shopping malls not only to venture around and kill time but to actually spend some of their cash.

One example, Anzevino pointed to is the $170 million Bergen Town Center expansion, which in spite of three years delay is now approaching completion, a testament, according to him, to Paramus’ strength and resiliency.

Economists are in agreement that New Jersey and New York may not be paralyzed by the looming commercial mortgages meltdown but they remained cautious on the area’s high incidence of vacancy rates, while its loan delinquency rates were running much higher than the national levels.

The only consolation that analysts could see now is banks have identified the problem early and are presently working hard to rectify the situation by adjusting commercial loans in order to veer away from the debilitating foreclosures that were seen in housing market lately.

If businessmen believe the government should take a backseat in most things business, they have a different take when it comes to the mortgage market. In fact, they feel that when it comes to mortgages, the government should have more involvement.

Last Tuesday, the Obama administration invited banking executives and asked them for advice regarding changing the government’s role in the mortgage market. Though they were in disagreement as to the level of support the government must extend, they were all in agreement that a large role must be maintained. After all, the mortgage market is worth $11 trillion.

The executives pointed out that if government decides to pull out of the mortgage market, banks will no longer take risks in granting Americans home loans. Doing so also heightens the risk of spiking mortgage rates. Less and less people will be encouraged to buy homes then banks and lenders will lose money.

Many of those present during the meeting agrees that it’s high time the government lets go of lenders Fannie Mae and Freddie Mac. Though not the sole cause of the financial crisis, both companies have contributed to worsening it. The government already shelled out $150 billion to rescue them.

A popular view amongst the businessman is to have the government do away with both Fannie Mae and Freddie Mac and instead formulate a plan that will surely get thumbs up from mortgage investors: sure payment even when a large number of borrowers default.

Fannie Mae and Freddie Mac have actually been a huge challenge to Obama and the party. Both companies have been criticized for burdening the taxpayers during the housing crisis, even as they made tremendous profits when the economy was faring well. Even with the market collapsing, both mortgage lenders were still able to provide home loans because they package mortgages into securities.

There are also suggestions about merging Fannie Mae and Freddie Mac with the government. -Treasury Secretary Timothy Geithner suggested that a change in structure should be made. He has not put forward a specific suggestion, but he reiterates that whatever is decided on should not be vulnerable to the same errors that worsened the housing crisis.

Others are also pushing for more dramatic actions. Automatic refinancing has been suggested. Obama officials, though, assure that this is not part of the plan as opposed to the buzz in Wall Street the past weeks.

Freddie Mac continues to lose profit in the second quarter of the year. With a net loss of $4.7 billion, Freddie Mac asks the U.S. Treasury for a $1.8 billion infusion.

The mortgage-finance company, which is on its 11^th quarter loss, has now increased the government’s rescue tab to $63.1 billion. Though the credit losses are at $5 billion, it is slightly lower than the previous months – thanks to slower delinquent mortgages and improving home prices. Low interest rates, though, plus backlog accounting of delinquent loans led to $3.8 billion loss and $900 million charge.

Compared to last year’s statistics, Freddie Mac saw a 36% increase in non-performing loans. With a total of $118 billion, the number is up by 2% for the quarter. Its affiliate company, Frannie Mac, may have seen a 22% appreciation from last year’s non-performing loans with $217 billion, the figure is still 3% down for the second quarter.

The larger Frannie Mae may be faring better than its cousin but it also was affected by interminable loans granted even during the crash of the housing industry. As more and more loans turn delinquent, both Frannie Mae and Freddie Mac found it necessary to set aside money for future losses.

Though the worst seems to be over, because the number of delinquent loans is falling and home prices are stabilizing, analysts are still wary to point as to when losses are going to stop.

With Freddie Mac reserving 32 cents for every one dollar in non-performing assets, and Frannie Mae 27 cents, analysts like FBR Capital Markets’ Paul Miller says they are “massively under-reserved”. Not to mention the fact that more declines in home prices are looming in the horizon – this only means more delinquent borrowers are just around the corner.

The two companies own 191,000 homes – an increase from last year’s 97,000. This presents another problem for the company, as these homes need to be sold without further pressure on home values.

Freddie Mac and Frannie Mae have been getting assistance from the U.S. government since they have been acquired through conservatorship. This means that the government will extend unlimited financial assistance in the next three years. This does not come without a price.

Every injection by the government mean 10% dividend will be shared. This means the companies will be indebted for at least 18 years.

Though the Obama administration says a detailed plan to salvage both mortgage-finance companies will be detailed early next year, analysts agree that a resolution will take years to take effect.