Thursday, February 22, 2007

Mortgage Lenders
HBSC's bombshell (if you call a drunk getting a DUI a bombshell) from two weeks ago is still being felt across mortgage lenders. Fieldstone (FICC) (who is a tenant in a TIC deal I reviewed a year and a half ago) agreed to be bought this week by a company called Credit-Based Asset Servicing and Securitization, LLC, and its price doubled in a day. The stock went from $2.50 to $5.00, but is off its 52-week high of $12.64. Another mortgage lender, Novastar Financial (NFI), lost half its vaue from Tuesday ($18) to Wednesday ($9) when it said it expects no taxable income for five years. The mortgage REITs are known for their high dividends, with yields of 10% or more not unusual. The yields are increasing as prices fall, but beware because I would not count on the dividends staying at current levels.

Friday, February 16, 2007
I love this website. It's been up for about a year and just keeps getting better. The Wall Street Journal had an article on it this week and cited wild fluctuations in its valuations. In my neighborhood it's accurate within the 5% margin of error, from what I have seen.

Thursday, February 15, 2007

This is Classic
The big banks that bought packaged subprime loans are now putting them back to the mortgage companies that originated the loans. As a condition to buying the loans, banks had the option to sell back ("put") the loans to the originator if the loans defaulted. This puts the risk on the seller not the buyer.

The mortgage companies must not have read that paragraph in sales contract. They would have been prudent not frivolous in making the "no income verification" loans to people with low credit scores if they expected to ever see the loans again. One company, ResMae Mortgage Company, had to declare bankruptcy this week when it had to buy back $308 million of crap mortgages it sold.

Not to get political (this is being a realist) but the finance companies were big promoters of the bankruptcy law that was passed two years ago. I hope the bankruptcy court is tough on these companies because ResMae is not going to be the only one going under. These companies had retarded lending practices and their stupidity was confirmed by their acceptance of the put option on the garbage loans they originated and sold. The court should have no mercy.

Tuesday, February 13, 2007

Heartless - Part II
I may not care about Anna Nicole Smith, but that crazy astronaut must be thrilled. No more diapers, now its all about the drugs.
One lender stops making piggyback loans. All the others will now stop. The real estate market bubble is over. I am not a banker, but I would think a piggyback loan in today's market is less risky than one made when home prices hitting new highs every month. This was so predictable. The real estate bubble was finance driven and the crash, recession, pullback, slowdown or whatever adjective you choose will be finance driven.
Simon Says Xanadu
Simon Properties and its hedge fund partner win the bidding for mega-mall developer Mills. Let's see if Simon can make the Xanadu mall outside of New York City into something more than the purgatory it was for Mills.

Monday, February 12, 2007

Second Time
I have been reviewing tenant in common deals since 2003. I just reviewed the second program where the Syndicated Acquisition Price (the price of the property plus all the costs of the tenant in common offering and property acquisition) was less than the appraised value. This sounds like simple, but few deals have an appraised value greater than the all-in cost of the property. An appraised value is not tangible, but its positive for that deal.
Never Would of Thunk It
A highly leveraged condo developer with too much exposure in Florida is in trouble. That's a surprise. This gaffe jumped out at me:

By some measures, analysts said, WCI has underperformed other builders in recent years. Its troubles have been exacerbated by its heavy exposure to Florida, where an oversupplied condo market has pushed down prices and sales. WCI expects to report a loss in the fourth quarter partly because of higher-than-expected defaults in some of its condo towers. Defaults and cancellations exceeded the total number of orders WCI received for homes in the fourth quarter. (emphasis added) Moreover, the company is more heavily leveraged than many other builders.

Without looking at a balance sheet or income statement, I'm curious what options WCI has.

Sunday, February 11, 2007

Grumpy Bastard
Two frustrations this weekend. The family went to Islands for lunch on Saturday. I like the food but the place drives me nuts. What happened to plates? All its burgers are served in baskets. WTF? And it never has enough napkins on the table. Would it be that unprofitable to have a napkin dispenser on table. Throughout the whole meal we bug the waitress for plates and napkins. I am too old to eat a meal out of a basket. It is so annoying. If I want to fight through a meal I'll go to Souplantation.

The second frustration was at JC Penny's, where we went for a few items. Penny's gave up the traditional registers in each department several years ago for centralized Customer Service checkout counters. What a mess, it takes forever. We were at the front of a line and waited ten minutes. The Customer Service counter had FOUR registers working. It took that long for the people in front of us to make their purchases. This has happened before at several Penny's locations. Penny's needs to be more like Costco where people get checked out fast.

Friday, February 09, 2007

Blackstone Divestiture
Blackstone was splitting up EOP before it finished the acquisition. Blackstone is selling big chunks of EOP, presumably under the theory that the parts are greater than the whole. Buyers will likely resell some of these properties as they attempt to build optimal, manageable portfolios. I hope that some of the smaller, solid properties find their way to the TIC sponsors.
I don't give a damn about Anna Nicole Smith.

Thursday, February 08, 2007

Mortgage Realization
What I have been saying about exotic mortgages is happening. People with exotic mortgages are having problems making the payments. It is so far limited to the subprime market, but with $1.5 trillion in adjustable rate mortgages due to reset this year the problems could spread beyond subprime borrowers. HBSC announced yesterday that its portfolio of subprime mortgages is in trouble due to high rates of default. (I guess that's what happens with mortgages that don't require income verification. )

Articles here and here highlight the debacle. This should not be a surprise. And don't be surprised when the default rate increases on the non-subprime portfolios. The bankers caused this mess and are going to have to figure it out.

This article presents the big issue for banks. An important take-away:

These new challenges come at a time when many borrowers who took out adjustable-rate mortgages are facing higher payments. There are about $1.1 trillion to $1.5 trillion in ARMs that will face rate increases this year, according to the Mortgage Bankers Association. The MBA expects borrowers to refinance as much as $700 billion of those mortgages.

"The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp. U.S. Bank is seeing more loans fall through, particularly in markets such as Arizona, California, Colorado and Ohio, where home values have softened. It could be "the tip of the iceberg," Mr. Shanks says.

This article is talking about all mortgages, not just the subprime loans. The industry expects 50% to 70% of adjustable rate loans coming due this year to be refinanced. That is astounding. If appraised values are down, will these people be able to refinance? Will they have to have additional cash to support a loan to value ratio? These are huge questions for the housing market. If people start walking away from their mortgages the housing market's mild downturn could get severe.

Wednesday, February 07, 2007

It's Over Johnny
Vornado pulls out and Blackstone gets EOP. Let the property sales begin. I hope some of EOP's quality properties end up in TIC deals (that buy them at reasonable prices).

Monday, February 05, 2007

Blackstone Ups Bid For EOP
Blackstone tops Vornado's bid for for EOP with a $55.50 per share offer. I am getting dizzy. I hope some of the better properties end up in TIC deals as whatever company gets EOP will have to sell some properties to pay down debt.
Triple Whammy
Today's Wall Street Journal has three interesting articles. Vornado has offered to accelerate its cash payment schedule in its bid for Equity Office Properties (EOP). EOP rejected Vornado's bid last week for the lower, but more secure, Blackstone bid. Simon Property and a hedge fund have upped the ante for Mills Corp. The hedge fund, Farallon Capital Management, is Mills' largest shareholder and wants a higher price for Mills than Brookfield offered several weeks ago. These two articles show the strength of the commercial market.

The third article in the Journal presents data that the perceived rebound in residential real estate may be premature. Homes for sale that are vacant hit the highest level in forty years. The vacancy figures include existing homes that are for sale and are vacant, and new homes that have not been occupied. Speculators have played a large part, according to the article, as "flippers" got caught in a slow and falling market. From the article:

Meantime, J.P. Morgan economist Haseeb Ahmed said the overhang of vacant housing stock could erode existing home values as sellers slash prices to move their vacant properties. Economists fear that many vacant homes are owned by speculators who are stuck with investment properties that they can't sell and may be under increasing pressure to drop their prices. "We are concerned that there could be downward pressure on prices for awhile," Mr. Ahmed says.

Such worries could cloud hopes for a swift housing rebound. Those hopes have been bolstered recently by signs that the market may be stabilizing. Sales, which fell sharply through much of last year, have leveled off in many metropolitan areas and mortgage applications have been rising.

One amazing point is that 11% of the condos for sale are vacant. Save cash because bargins are coming.

Thursday, February 01, 2007

If You Did Not Catch It...
This article is from last Saturday's Wall Street Journal. It is about the increased rate of mortgage defaults in sub-prime mortgages and their effect on the bond market. There is an actual index that tracks the defaults and it's deteriorating monthly. The sub-prime market is a sign of trouble for the whole mortgage market. If the defaults spread to better credit borrowers as the exotic mortgages start to reach their reset periods, the trouble could spread. In the sub-prime market, housing values are worth less than the mortgages causing borrowers to walk away. I would not be surprised to see the same scenario with other mortgages.