Headlines – Week of May 16, 2010

May 27, 2010

Survey: 4 in 10 homeowners would consider walking away from ‘underwater’ mortgage (from the Sun Sentinel)

A study conducted this month by Harris Interactive for real estate firms Trulia and RealtyTrac touched on a topic that affects many South Floridians … foreclosure.

According to a national online survey, more than 40% of homeowners with a mortgage say they would consider abandoning an “underwater” property.

More than 371,000 homes in Palm Beach, Broward and Miami-Dade counties were worth less than the mortgage amount at the end of the first quarter according to Zillow.com.  An executive at Trulia “absolutely expects” more homeowners to walk away in the coming years as the stigma of foreclosure fades.

Because South Florida home prices have fallen by more than 40% since the peak of the housing boom in 2005, underwater borrowers here may have to stay put for a decade or more until they can break even in a sale.  Some of these homeowners say they’re unwilling or unable to wait that long.

Adding to the frustration, many borrowers are disgusted with their lenders, feeling as though the banks are “stonewalling” their attempts to seek mortgage modifications and stay in the homes.

The Mortgage Bankers Association issued a recent report that sent mixed signals about delinquencies and foreclosures. Some figures indicating a drop in the rate of distressed loans weren’t seasonally adjusted, but other numbers that were adjusted showed minor increases in late payments. The chief economist for the group said that Florida is getting worse when it comes to delinquencies and foreclosures.

 Full Article

Banks Continue to Embrace ‘Extend and Pretend’

According to report in Bloomberg, a growing number of hotel investors are finding that their lenders are increasingly willing to redo loans often backed by struggling properties rather than risk taking an immediate loss.

In the article, an executive from the consulting firm of Deloitte Real Estate Services stated that banks are less likely now to take back an asset as we begin to see some positives in the economy such as a decrease in the unemployment rate and increased consumer spending. 

The trend called “extend and pretend” continues as lenders postpone inevitable losses on owners swamped by debt taken on during the commercial real estate boom of 2002 to 2007.

Lenders and owners restructured $10.5 billion of troubled debt during the first quarter, up from $2.2 billion a year earlier, according Real Capital Analytics Inc. Such deals accounted for 49% of newly troubled and foreclosed commercial properties in the first quarter, compared with 13% in the first quarter of 2009.

Real Capital Analytics defines restructurings as those in which loan terms have been modified, the lender remains in that role and the owners retain a majority stake in the property.

Although hotels have been a main beneficiary of lenders’ willingness to redo loan terms, a 40% decline in commercial real estate values since the 2007 peak is also squeezing owners of office buildings, malls and apartments.  

An estimated $1.4 trillion in commercial mortgages will mature through 2014, according to Deloitte. It is estimated that 65% of those would have difficulty to be refinanced, which could mean extensions for many since lenders continue to be concerned about the risk and cost of foreclosing. Banks also don’t want to hassle with trying to unload properties they take over.

A recovery of the U.S. hotel industry isn’t likely until 2011 because room rates are down and commercial real-estate values have plunged. Net occupancy will decline 0.2% this year as the addition of rooms will outpace demand, according to estimates by Smith Travel Research Inc.

According to the article, regulations enacted in the fourth quarter are enticing banks to restructure. A regulatory directiveby the U.S. Federal Reserve in October allowed lenders with current loans worth more than the underlying property to split up the debt and increase backup funds for only a portion of the loan. In addition, the Internal Revenue Service changed the Real Estate Mortgage Investment Conduit rules, which are the guidelines that govern CMBS trusts, allowing certain commercial- mortgage borrowers to modify and restructure their securitized loans without triggering tax penalties. The new rules make it possible for loans to be transferred to special servicers prior to default.

Preceding the rule change, the special servicers, who hold the power to modify, extend or liquidate CMBS loans, weren’t able to initiate the workout process until the loan was already in default.

 Full Article


Florida Bank Failures Cost FDIC $1.3 Billion in Losses in 2010

Florida, which already leads the nation in bank seizures this year along with Illinois, is on pace to experience 27 financial institution failures in 2010, according to a new report from CondoVultures.com.

Regulators seized their 10th Florida-based bank of the year on May 21st, closing the Bank of Bonifay with $243 million in assets. The closure produced an estimated loss of nearly $79 million for the FDIC.

So far this year, the FDIC has absorbed losses of nearly $1.3 billion related to Florida bank failures. This is in addition to the $7.3 billion the FDIC lost in 2008 and 2009 related to 16 other Florida bank failures, according to the report.

The FDIC established a 500-person bank seizure and asset sales satellite office in Jacksonville, Fla., in September 2009. Given the FDIC office and the challenges of the real estate market, it is possible that the regulators will close more than two dozen Florida banks this year.

A typical foreclosure now takes about 18 months to complete at a cost of at least $100,000.

Regulators have already closed 68 U.S. banks this year after closing 140 banks in 2009 and 25 in 2008. The FDIC insurance recovery fund has had to absorb losses of $16.1 billion and counting in 2010, $36.5 billion in 2009, and $10.4 billion in 2008, according to FDIC data.

Florida’s bank failures rank it atop the list for the states with the most seizures this year. Georgia ranks second with seven failures, and Washington State is third with five failures. Rounding out the top five rankings are California and Minnesota with four each, according to the report.

NAR urges Congress to combat commercial real estate crisis (from the National Association of Realtors)

With the commercial real estate markets experiencing its worst liquidity challenge in almost 20 years the NAR, asked Congress to take action to prevent a deepening crisis in testimony to the U.S. House of Representatives Subcommittee on Oversight and Investigations.

According to the NAR’s testimony, the crisis is driven by a confluence of high unemployment, a slow economy, weakening commercial property fundamentals, and an increase in commercial loan delinquencies. Commercial real estate is the basis for much of the growth in the American industry and economy, and having a stable and well-functioning commercial market is crucial to our nation’s economic recovery and the market is now in the midst of a financial meltdown and many property owners are underwater.

The group stated that, “we cannot regain our footing until action is taken on such issues as an enhancement of liquidity and extensions of terms for performing properties.”

The NAR outlined a number of proposals he urged the congressional panel to consider.

First, changes that will boost lending to the commercial real estate and small business markets.  Currently, due to the slumping economy and falling commercial real estate values, many commercial banks have tightened their credit standards and reduced their loan volumes. Credit unions have often filled this need in the past, but they are hampered by a business lending cap of 12.25% of total assets. NAR strongly supports H.R. 3380, “Promoting Lending to America’s Small Businesses Act,” which would increase the cap on credit union lending to 25% of total assets.

Second, lenders should be encouraged to extend the term of current loans but they have been wary of offering extensions because of oversight and regulatory concerns. Incentives and improved cash flow for investors of commercial property would help fend off some of the challenges the market faces and soften some of the commercial liquidity crisis.

Third, the most effective means of improving the cash flow on real property is to provide more generous depreciation allowances. NAR believes that some combination of accelerated depreciation (or shorter recovery periods) and passive loss relief would be significant investor incentives.

Fourth, NAR supports developing a mortgage insurance program for commercial debt and an extension of the Term Asset-Backed Securities Loan Facility (TALF) program. A proposed mortgage insurance program would provide insurance on the difference between the current value of a commercial property and the debt service. NAR believes an extension of TALF will help stimulate the commercial mortgage-backed securities market and that the program requirements should be less burdensome for investors.

During the testimony, a NAR spokesperson stated, “The commercial real estate sector supports more than 9 million jobs and generates billions of dollars in federal, state and local tax revenue. NAR believes the commercial market is vital to American life and urges Congress to act quickly on these crucial issues.”

Posted by Scott R. Lodde


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