Headlines – Week of January 24, 2010
February 1, 2010
Record Number of Foreclosures in 2009 (from The Associated Press)
Total foreclosures in 2009 reached 2.8 million, a 21 percent increase over 2008 and a 120 percent rise compared to 2007, according to RealtyTrac Inc. Between 3 and 3.5 million homes are expected to enter some phase of foreclosure this year.
RealtyTrac also reported that fourth quarter foreclosures decreased 7 percent from the third quarter, although they were up 18 percent compared to 2008. December 2009 foreclosures were up 14 percent over December 2008.
The 10 states with the highest foreclosure rates in 2009 were: Nevada, Arizona, Florida, California, Utah, Idaho, Georgia, Michigan, Illinois, and Colorado.
California, Florida, Arizona, Illinois account for 50 percent of the foreclosures. The other 10 states with the largest numbers of foreclosures are Michigan, Nevada, Georgia, Ohio, Texas, and New Jersey.
Long Recovery Ahead for Commercial
In its February 2010 issue, Bloomberg Markets reports the current commercial real estate downturn will overshadow all of the others.
The report quotes Kenneth Laub of New York based, Kenneth D. Laub & Co. The key difference today is the explosion in debt financing and related derivatives that fueled a run-up in commercial real estate prices in the 2000s. Laub believes that it is not a supply-demand issue but an overleveraged condition which has left property owners struggling to make mortgage payments. The overhang of debt will delay any recovery, he says.
He expects a wave of restructurings by troubled commercial borrowers as hundreds of billions of dollars of loans come due annually during the next few years. Laub believes commercial real estate may still be recovering a decade from now.
U.S. commercial property prices have plunged more than 40 percent from their October 2007 peak, while the default rate on commercial mortgages more than doubled in the third quarter of 2009 to 3.4 percent from a year earlier, according to data compiled by Moody’s Investors Service and Real Estate Econometrics.
Continued Problems in CMBS Loans
According to Moody’s Investors Service CMBS loan delinquencies rose to 4.47% at the end of 2009. The Moody’s report said that the balance of delinquent CMBS loans stood at $6.7 billion in December 2008 and has risen by over $23 billion in the past 12 months. The delinquency rate on loans backed by hotel properties increased the most with multifamily properties second.
Working similarly to the mortgage-backed securities (MBS) market that contributed to the housing bubble and financial meltdown, CMBS loans were originated by financial firms and then packaged with other loans for sale to investors as securities. Investors could buy different tranches of CMBS loans – putting them in position to take the first, the middle or the last hit on their investment if the loan loses value. These loans typically matured in four or five years. CMBS loans signed during the height of the boom at peak values have started coming due and should continue maturing through 2013.
As the number of seriously delinquent loans continues to increase, there is growing capital pressure on the special servicers. Nearly 9% of all CMBS loans have been referred to the special servicer, which includes delinquent and defaulted loans as well as loans seeking extensions or other loan modifications.
This capital pressure comes at an unfortunate time since many special servicers are struggling to remain solvent as the value of their portfolios of subordinate CMBS securities have cratered (special servicers were also active buyers of CMBS paper; that’s generally how they secured the special servicer designation in the first place).
According to C&WSG Capital Markets Update, LNR, with a special servicing portfolio of $17B, is reportedly readying itself for a bankruptcy filing. This follows on the heels of Capmark’s filing in October and closely mirrors the situations at Centerline and Anthracite. The end result may be a greater willingness to push assets out the door rather than extending loans or holding them.
C&WSG reports that as of January 2010, 13 of the 15 largest delinquent CMBS loans were secured either by New York City multi-family or lodging assets.