Thursday, February 28, 2008

One More Housing Post...
I just posted against a Government bailout of the mortgage industry. Bush is threatening to veto various proposals, including $4 billion for municipalities to rehab foreclosed homes. Barack Obama has proposed a $10 billion housing fund. Although I don't like the idea of a bailout, these proposals seem modest when compared to the $3.3 trillion spent on the Iraq War.
No Bailout
Here is an article on the Bush Administration's reluctance to bailout the mortgage industry. I agree. This is the banks' problem and they are going to have to fix it. Banks made reckless loans and should not be rewarded with a taxpayer bailout. Here is a post from Greg Mankiw's Blog with a solution posed by Larry Summers. I like the concept - banks cut the loan amount and share in the equity.
What the Housing Market's Up Against
The renter mentality invades home ownership. This article from the New York Times shows what is happening to all those no money down, interest-only mortgages. Homeowners are walking away:
Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.

“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.

For some people, then, foreclosure becomes something akin to eviction — a traumatic event, and a blow to one’s credit record, but not one that involves loss of life savings or of years spent scrimping to buy the home.

There is no incentive for homeowners with no equity or negative equity to stay in their homes when the mortgage becomes unaffordable. It becomes the banks' problem. Banks and mortgage companies that were so eager to make stupid loans are going to have to deal with the fallout. With no equity, there is no incentive for an underwater homeowner try to keep a home when the adjustable rate mortgage resets to a higher monthly payment. Banks thought they were so smart with these tricky, draconian loans. The one factor they obviously did not consider was a decline in home prices. To avoid further declines, banks are going to have to fix their mortgage problems, not the Government. The banks need to step in and rework these loans that should help stabilize home prices.
Ouch! AIG takes an $11 billion write-down. No mention of the pimple-on-the-ass division where I used to work. Who knew AIG had so much mortgage exposure.
Falling Dollar
The dollar is hitting all-time lows against the Euro. Here is an excerpt from a James Fallow article in January / February's Atlantic magazine:

When the dollar is strong, the following (good) things happen: the price of food, fuel, imports, manufactured goods, and just about everything else (vacations in Europe!) goes down. The value of the stock market, real estate, and just about all other American assets goes up. Interest rates go down—for mortgage loans, credit-card debt, and commercial borrowing. Tax rates can be lower, since foreign lenders hold down the cost of financing the national debt. The only problem is that American-made goods become more expensive for foreigners, so the country’s exports are hurt.

When the dollar is weak, the following (bad) things happen: the price of food, fuel, imports, and so on (no more vacations in Europe) goes up. The value of the stock market, real estate, and just about all other American assets goes down. Interest rates are higher. Tax rates can be higher, to cover the increased cost of financing the national debt. The only benefit is that American-made goods become cheaper for foreigners, which helps create new jobs and can raise the value of export-oriented American firms (winemakers in California, producers of medical devices in New England).

You can read the whole article here. It is a sobering read and I need to re-read it. Another benefit implied at the end of the second paragraph is that a weak dollar helps corporate profits and earnings per share of multi-nationals. (Checkout the two-year stock chart on Coca-Cola (KO) to see the benefit of a falling dollar.) A falling dollar is also good if you own unhedged foreign mutual funds.

It has been this blog's opinion that tax cuts, a falling dollar (that makes for good corporate profits) and consumer spending (debt be damned - i.e. house as a bank with exotic mortgages as the finance source) have been the Bush Administration's economic policies. These are tenuous policies at best. All provide short-term benefits but none have a lasting impact on the economy. Some will argue that tax cuts provide long-term benefits, but I think tax cuts are absorbed quickly into the economy and spending and saving habits revert to pre-tax cut levels. The Bush Administration's economic policies are like Chinese food or cotton candy - both sound good before you eat them, but neither are good for you, and when you are finished you realize you're still hungry.

The next president will have to make tough economic choices. The economy will not be strong enough to raise taxes. Curbs on government spending will have to make up for lost tax revenue. The market will take care of consumer spending - by choking it to death. The house as a finance tool is gone for now and won't be back for several years (but it will be back in some version). The easiest course will be a policy to support a strong dollar. It is not in this country's best interest to have the dollar fall much further.

Wednesday, February 27, 2008

Housing Overload
There have been multiple articles on the housing market over the past few days. They are presenting mixed signals on the direction of housing. Here is an article on Fannie Mae's quarterly loss. The article has good information on the state of delinquencies. Not surprising but not encouraging. Here is an interesting take-away from the article:

Fannie Mae, which buys mortgages and repackages them into bonds it guarantees, said in its earnings report that it doesn't see any relief coming. Serious delinquencies will continue to mount this year, the company said, as housing markets continue to deteriorate, particularly in states like Florida and California.

"We expect the housing market to continue to deteriorate and home prices to continue to decline in these states and on a national basis," Fannie said in its annual report. "Accordingly, we expect our single-family serious delinquency rate to continue to increase in 2008.
And here is what's happening to all the home buyers who were late to the game:
Fannie said delinquency rates were highest for borrowers with low credit scores or high loan balances relative to the value of their homes, with fast rises in delinquencies among loans with less than full documentation, adjustable rates, and interest-only or variable payment features, many of them made in 2006 and early 2007. Loans used to buy condominiums and second mortgages also saw delinquencies rise rapidly, and Florida was a particular trouble spot, with serious delinquencies there nearly quadrupling.
Here is another article on new home sales. Sales have not been this low since 1995. This is a dramatic headline but I'm not sure what it means in the whole scheme of the housing mess, unless you view 1995 as when the housing market turned up after falling in the early 1990s.

Monday, February 25, 2008

Housing Market Signs
The housing market continued its decline in January. But the data was encouraging in that it did not drop as much as expected. Here are some economists' opinions on the data. The overall opinion is that a bottom is not that far off.

Friday, February 22, 2008

CMB(S)X Index
Here is a fascinating article on the CMBX index that tracks commercial mortgages and is used by conduit lenders to price and insure commercial mortgage backed securities. The index has spiked since the start of the year (but has pulled back this week). Below is the index:

The article states that short sellers may have caused the spike. This quote looks past the credit market hysteria and gets to the bottom line:
Actual delinquencies on commercial-mortgage bonds hit a record low of 0.27% in January, according to Fitch Ratings. Among 40,000 loans in these bonds, only 293 were delinquent last month. The most bearish market prognosticators predict defaults on commercial mortgages will reach 2% over the next year or so, in line with the historical range. By comparison, the performance of the CMBX implies the default rate could be four times that level, according to analysts. "The level we're seeing in the CMBX right now just doesn't make sense," says Lisa Pendergast, managing director for RBS Greenwich Capital in Greenwich, Conn.
Defaults just hit an all-time low, bears predict defaults will revert to their norm but the CMBX index is pricing a default level of 8%. This does not make sense. This index is only two-years old and obviously has not been through many market cycles, and its unfortunate that loans are tied to its pricing. Especially when the article states "(t)he index itself has become one of the most popular ways to make bets on the outlook for real estate, and also to hedge against a downturn." It appears that the index will cause another round of write downs by banks holding commercial mortgage backed securities. There is sizable BS in the CMBX index. All TIC sponsors and other real estate borrowers need to be calling portfolio lenders.

Tuesday, February 19, 2008

Return of the Portfolio Lender
Tenant In Common sponsors are adjusting to new credit market realities. The old way of financing acquisitions - high LTV loans with extended interest-only periods that were packaged and sold as part of Commercial Mortgage Backed Securities - is no longer available. The large money-center banks that used to make these loans have stopped this type of lending. Another name for these loans was conduit loans. Into this breach, the smart TIC sponsors have approached community banks and insurance companies who make loans and keep the loans on their books. These are known as portfolio lenders. In the heady days of TICs most, if not all, TIC deals were financed with conduit financing. The portfolio lenders were always an option, but TIC sponsors did not want to pay the extra 15 bps to 25 bps that the portfolio lenders charged.

When I started in the business in the late 1980s portfolio lenders were the norm because conduit loans did not exist. I am glad to see the return of the portfolio lender. I think many sponsors will be glad to have a entity behind their loans rather than the faceless world of conduit financing. The TIC sponsors who have found portfolio lenders who understand and are making mortgages to TIC properties are guarding these relationships. Conduit financing will return, albeit not on the terms available before mid-2007. The option of using both is good for the industry.

Wednesday, February 13, 2008

Bad Housing News
This article makes a compelling point that housing prices, especially in California, Florida and Nevada will keep dropping. Maybe my estimate that the housing market is near a bottom is premature. I always thought that the "affordability" factor was a key to the unsustainability of the housing bubble, and by this measure home prices are still overvalued.
Congress and Sports
I don't know why it is Congress' jurisdiction to investigate steroids in baseball or the New England Patriots' videotaping in football. These are trivialities compared to other issues facing Congress. Baseball and football have the means and structure to deal with these issues internally.

Monday, February 11, 2008

Boo - Hoo - Not Crying for AIG Stock
AIG's stock is getting crushed today. No tears here. I used to work for a company that was acquired by AIG and soon realized what a messed-up corporation it was. The company I worked for was part of a group of companies that even when combined didn't amount to a rounding error on AIG's financial statement. Part of AIG's dysfunction was Hank Greenberg and the organizational fear of him. Executives at all levels were terrified of him and of the possibility of receiving his wrath. The other part was that executives from New York just were not that smart.

I remember a meeting where a group of AIG life insurance executives came out to pitch AIG's life insurance. Their brilliant plan was to give cheap pens to reps that sold an unachievable amount of AIG insurance. The scheme was laughable as well as insulting and it took six guys to present it. I sold my AIG stock after that meeting at over $90 a share - a price AIG has not seen since. (If a company sent six guys to pitch an uncompetitive product with an unappealing incentive it was a bad harbinger for the whole organization and was not a stock I wanted to own.) At another meeting an AIG sales executive invited reps golfing and then tried to get the reps to pay their own green fees! AIG's inability to value its investments comes as no surprise.

Thursday, February 07, 2008

I heard from a reliable source that nothing untoward led to Tony Thompson's departure from Grubb & Ellis. It was compared to Eli Broad's departure from SunAmerica after AIG's acquisition. This is a poor comparison because AIG bought SunAmerica. Eli Broad did not have a choice about staying. Triple Net engineered the acquisition of Grubb & Ellis, a public company, to avoid its pending public offering. If Thompson wanted to stay, he could have stayed. Thompson was chairman of the new Grubb & Ellis, plus he is leaving still owning 16% of GBE (7.4 million shares at approx $5 per share is approx. $37 million, which is 16% of GBE's $226 million market cap). Broad got billions but never owned 16% of AIG.

I don't know what percent of Thompson's net worth is in GBE, but unless he is going to liquidate soon (and lose the 60% since the deal was announced last May) it still does not make sense to me why he is leaving. Why would he, or anyone, leave $37 million in someone else's hands , especially since it has already lost 60% in less than a year. I will take the boring explanation for now but will keep my ears open for alternative views.

Wednesday, February 06, 2008

This Sucks
Delta is talking to Northwest. My frequent flier miles won't be helped by this deal. A Delta / United merger is much more attractive to my flying patterns. I don't have too many calls for long hauls to Asia.

Tuesday, February 05, 2008

Wells Timberland REIT
I thought I had blogged on this REIT last fall, but I guess not. I recommend reading Timberland's October 15, 2007 8-k. Closely. Especially the passages describing the $160 million bridge loan utilized to acquire the REIT's sole property. There is a $40 million principal payment due at the end of February and an additional $24 million of principal is due no later than April 30, 2008. The section on the REIT issuing preferred stock to Wells Real Estate should also be read.
No Rumors
I know of no rumors on Thompson's departure from Grubb & Ellis. I just find it odd that he would orchestrate the merger and then quit two months later. He owns 13% of the company and GBE's stock has dropped approximately 65% since the merger was announced last May. Thompson has a reputation as a hard-nosed boss who likes control. I'll say it again, it just seems odd that he would depart now.

Monday, February 04, 2008

Clear As Mud
Here is an article on Tony Thompson's departure from Grubb & Ellis. It reads more like a press release than a news article. There just has to be more to this story. So, Thompson is going to stay in the real estate industry. He has to have a non-compete that would prevent him from taking employees from Grubb & Ellis (i.e. former NNN employees) and in starting a competing business. To me, this means no syndicated TIC deals or non-traded REITs. Right, like that will happen. Plus, he still owns 13% of GBE.