Housing, Finance and Jobs

Here is a post from Calculated Risk from last week discussing a Fed Study on mortgage originations, and how lack of home equity and tough underwriting standards are limiting refinancings despite record low mortgage rates.  A quote:

Back in 2003, about 35.5% of all homeowners refinanced. In 2010 only 10.7% of homeowners refinanced. On page 62, the study provides a table by FICO score, year of origination, and states with steep house price declines compared to all other states ("Steepest declines" consists of the five states with the steepest declines in house prices from 2006 to 2009: Arizona, California, Florida, Michigan, and Nevada; "other" consists of all remaining states.) Only a few borrowers with low FICO scores refinanced in 2010, and the rates for refinancing were lower in the five states than in the other states.

This is important - although we may see sub 4% conforming 30 year fixed rate mortgages soon, many borrowers will not be able to refinance.

Then yesterday the LA Times had this article on poor home sales, which are now at forty-eight year low:

The August read on new home sales showed properties selling at a seasonally adjusted rate of 295,000, down 2.3% from a revised July rate of 302,000 and just 6.1% above August 2010, according to the Commerce Department.

I am convinced the lack of financing and record low home sales are directly related.  Until the housing market rebounds the economy is going to muddle along, with employment staying near current levels.  Low home sales is not a new trend, and annual new home sales have fallen dramatically since peaking in 2006 at over 1,900 completions.  The table below shows housing completions for the past five years:

2007          1,399

2008          1,002

2009            694

2010            552

2011 (est)    449

The data is from last summer that I obtained on Calculated Risk, and based on July and August figures, it looks like the 2011 estimate of 499,000 new home completions may be optimistic.

Strict lending standards are hindering the rebound in housing and the economy.  The Fed, through Fannie Mae and Freddie Mac, which control over 90% of the mortgage market, can boost the economy by loosening lending standards and generating housing demand.  Relaxing mortgage requirements does not require a return to 2005 standards.  It means letting qualified people buy homes and allowing current homeowners to refinance their homes.  It makes sense to allow a qualified homeowner to lower his or her mortgage payment.  The alternative is not better.

A deliberate Fed strategy of easing home lending requirements will not require new Federal borrowing, or Federal spending, or Congressional debate, or a Presidential speech.  Fannie Mae and Freddie Mac can act on their own to make home lending more accessible, and the economy will benefit, including employment as construction and ancillary housing related jobs increase.  Sometimes you have dance with the one who brought you to the party, and to get out of the current slow economy, we need to focus on housing and finance, the two ugly dates we're stuck with at this gloomy soiree.  It's time to dance.

Valuations

I saw this Investment News article on Tuesday. It is my opinion that the non-traded REIT industry has treated David Lerner and the Apple REITs as a one-off, isolated incident.  This is a misguided, myopic view.  The non-traded REIT industry needs to proactively address their share price valuations, or resign itself to the impact of FINRA and SEC dictates.   The valuation issue impacts the entire industry, and is not isolated to the Apple REITs.  The key passage from the Investment News article is below:

The Finra rule proposal potentially would shorten that time period considerably, said Kevin Hogan, executive director of The Investment Program Association, a trade group for alternative-investment sponsors, including nontraded REITs and the broker-dealers that sell them. Last week, the IPA held a members-only webinar with Finra and Securities and Exchange Commission officials, who discussed the rule proposal.

Finra's proposal will be followed by the customary period of time for broker-dealers and industry sponsors to comment, Mr. Hogan said. But Finra's focus on the length of time nontraded REITs record an estimated valuation is clear, he said.

“Finra will try to have that date to be shorter and more definitive,” Mr. Hogan said.

Nancy Condon, a spokeswoman for Finra, said that she doesn't know when Finra will publish the rule proposal for comment.

It appears that regulators' concern about the valuation of illiquid nontraded REITs stemmed from the valuation of the Apple REITs, which are sold exclusively by David Lerner Associates brokers, Mr. Hogan said.

A large, if not only, part of the non-traded REITs' and broker / dealer community's ostrich valuation strategy is an unwillingness to admit - on client statements - the true impact of the initial load.  All REITs have an immediate valuation that is net of the offering costs (load), giving a REIT that investors paid $10 for a net value of $8.50 to $9.00.  No REIT, whether public or private, traded or non-traded, is buying real estate assets that gives an immediate 18% to 11% appreciation (the amount needed to recover a 15% to 10% initial load).  Even though all the initial fees of non-traded REITs are disclosed, and investors should understand the fees they are paying, registered representatives don't want to deal with investors' questions when sale discussion points become reality on paper, and investors want to know what happened to 10% to 15% of an investment they just purchased. 

If all REITs were required to publish their net valuations, it should have the impact of driving down front-end fees, as brokers are going to want to avoid fee impact conversations.  It will also shorten hold periods as smaller loads are easier to overcome.  Earlier and more frequent valuations will benefit investors, sponsors and brokers.

Hines in the Wall Street Journal

There is an interview with Jeff Hines in today's Wall Street Journal.  No mention of Hines' non-traded REITs in the entire article, except maybe this passage:

WSJ: Regarding the fund business, I was told it's not yet half of the overall business of Hines, but it is approaching that. What is the balance then?
Mr. Hines: Up through the '80s, we were basically a development firm. We would put a site together, and then go find an investor who would decide whether to come into the deal or not. The investor was making the ultimate decision of whether to invest in that specific project.  In the early '90s, we changed dramatically in three ways. One, we went international. Two, we started to get into the acquisition business as well as the development business. We found that our skill sets worked just as – all of the things that help you make and manage a good acquisition are all of the things we were doing on the development side. The third big change was, when we went international, we went to Europe and emerging markets. To get back to your original question, we now have a big group of various funds that we've raised where we are playing that fiduciary role. (Emphasis added.)

Or, maybe not with the follow-up question and answer:

WSJ: It's still the case that the investment management business is approaching being half the company?
Mr. Hines: In incremental (new) business that we do, it's certainly more than that. Recently, we're talking to a lot more very large investors and doing programmatic deals with maybe one or two investors rather than 10 or 12. But, again, it's one where we have discretion in most cases over making the decision of where to invest.

America's Got Talent

I do not like the show America's Got Talent, and hate is not too strong a word. But it's a staple on TV in my house over the summer.  I choose to do other things than subject myself to this popular show.  I did, however, catch the credits after last night's finale, and in a blink saw that the winner gets paid the $1 million prize in a form of a forty-year annuity.  I don't know the terms of the annuity, but at today's interest rates it's probably not much more than the straight-line $25,000 per year.  I saw on another blog that contestants can choose to take a discounted lump sum payment, which would probably be closer to $400,000.  Good money, but nowhere near the advertised $1 million.  What crappy terms.  Come on NBC, pay the winners the full $1 million up front, you can afford it.  I wonder if all reality shows deceive screw their winners in this manner.  

Auspicious Anniversary

Today is the third anniversary of Lehman Brothers' collapse, which took the credit crisis out of Wall Street and to the entire global economy.  If you haven't already seen it, I would recommend HBO's riveting Too Big to Fail, based on Andrew Ross Sorkin's book of the same name.

ARC IPO

American Realty Capital Properties, Inc. had its IPO late yesterday at $12.50 per share, and is now listed on NASDAQ with the symbol ARCP. ARCP raised $69.75 million and has a market capitalization of $116 million.  As part of its IPO, it declared an annual dividend of $.875 per share, for a yield of 7% based on the IPO price of $12.50.  I need to watch this REIT's filings to see how it dealt with all its debt. 

KBS REIT I

Here is a link to a Bloomberg article on Gramercy Capital's settlement with KBS REIT I and other creditors on $549 million of mortgage debt, on which Gramercy defaulted in May 2011  As part of the settlement, KBS REIT I will receive:

About 317 commercial properties in the REIT’s Gramercy Realty division were given up today to lender KBS Debt Holdings LLC in an initial transfer, Gramercy Capital said in a statement. The agreement obligates KBS to acquire all remaining Gramercy Realty entities and properties by Dec. 15 and releases the REIT from outstanding loan balances and contractual and default interest.

Here is another paragraph from the article:

KBS, along with Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C), held senior and junior mezzanine loans on the Gramercy properties and threatened to foreclose on about 900 properties in May after Gramercy Capital failed to pay off debt.

The article did not give specifics as they relate to KBS REIT I.  At June 30, 2011, KBS REIT I carried the mezzanine loan on its book with a $459 million book value, subject to a $187 million repurchase agreement.  I'm waiting for KBS REIT I to file an 8-K explaining the transaction and its ramifications.