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Real Estate Intelligence
Peter Slatin, Forbes/Slatin Real Estate Report 08.13.07, 11:00 AM ET
Led by seismic subprime holdings, the roiling debt markets are casting a pall over the entire real estate sector. And so they should. Before central banks around the globe acted in unison to inject liquidity that lubricates the mortgage machine, published reports put the total number of unsold loans sitting in financial institutions' warehouses waiting to be resold at around $260 billion in the U.S. and another $200 billion in Europe.
And with investment spigots turning off across the U.S., that money is going to sit for a while.
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On a recent conference call with investors, a team of Wachovia Securities research analysts in credit markets and real estate addressed the rapidly changing nature of trading in debt and property. Dan Sullivan, a Wachovia managing director who tracks fixed-income securities for REIT debt, called the current situation "a buyers' strike. There is a complete malaise on corporate credit."
Fixed-income market strategist Richard Gordon noted that what was more surprising than the subprime meltdown itself was "how many [lenders] refused to alter their positions despite a sure bet of an increased default rate on subprime and collateral mortgages originated in 2006."
Last year saw a significant deterioration in underwriting standards, noted Gordon and others on the call. Gordon went so far as to say that some loans were even "fraudulently securitized and sold up into the secondary markets through collateralized debt obligations."
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The ensuing blow-back from all of this, said Gordon, "has morphed into a bigger problem in corporate credit" in general.
Today, two critical questions remain unanswered: First, how deep is the subprime problem, and how deeply will it affect the entire economy or create other credit problems?
One estimate is that at least half of the risky subprime deals have yet to surface, indicating much more bad news is on the way. But the second issue is of perhaps even greater concern: What are the long-term problems that could be created by the unwinding of a "massive pipeline" of existing leveraged buyout and other restructuring deals written in the last few months and predicated on pricing assumptions that no longer hold true? Many of these corporate deals were "priced aggressively or with risky structures, and it is impossible to get these deals done now. There is no acceptance for that type of risk," Gordon said.
"The markets have shut down" as investors wait for risk to be repriced,” he said, noting that the overhang is "billions of dollars in bridge loans" that have not yet been funded. The result? "We have seen this drag down markets that are fundamentally very sound, especially commercial real estate and the financial sector."
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Some serious risk factors have taken on elevated profiles in recent weeks, noted Wachovia's Tony Butler, a director specializing in collateralized debt obligations and commercial mortgage-backed securities research. These include "systemic risks" that a larger percentage of assets in a given debt pool will default, as well as the "growing risk of implied correlation"--the spreading of risk across other asset classes.
"Almost all assets are mispriced to some degree," said Butler.
As a result, the credit markets are heading into what may be a sustained repricing period. The simple fact of the slow late-summer trading season, with many traders on vacation, could actually delay the kind of activity needed to eventually create a "more permanent repricing to risk that was mispriced." Indeed, said Butler, at present there is almost no lending activity, which has more to do with concern in the market than carousing at the beach.
"The clear message is that investors simply will not tolerate the lending standards of 2006," noted Butler.
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The new turbulence in markets last week is certainly exacerbated by the monthly marking to market by hedge fund managers of their investments. Just as American Home Mortgage kicked off the most recent leg of the subprime slide, news of BNP Paribas hedge fund woes and persistent negative rumors involving Goldman Sachs have roiled the markets further.
Panic to some, though, is mother's milk to others. "There are real money accounts interested in buying good collateral at cheap prices," said Butler. "When those accounts start to apply capital, we will see liquidity return."
Much of that money is believed to be overseas capital sitting on the sidelines waiting for the appropriate moment to jump in; clearly, that moment and the bottom it signals have not yet arrived. Even when it does, says Butler, "the downturn in the credit cycle will take some years to play out."
Still, investors, traders and lenders watch to see where the next shoe will drop--or who will have the nerve to call a bottom and dive in and start harvesting. Or who will simply decide it's time to start counting and cutting losses.
Peter Slatin is editor of the Forbes/Slatin Real Estate Report. Click here to learn more about this newsletter and its model real estate portfolios.
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Ohio - Attorney general's office sues six foreclosure rescue companies
Attorney general's office sues six foreclosure rescue companies
Ohio Attorney General Marc Dann took aim Wednesday at foreclosure rescue companies that siphon money from people who are in danger of losing their homes.
Dann's office sued six companies - two of them based in foreclosure-ridden Cuyahoga County - that solicited money from consumers with promises they could save their homes from foreclosure.
Dann said the companies didn't contact lenders or do much else to prevent the homes from being sold, even though they accepted advance payment, ranging from $450 to $10,000.
"This may be the 'last chance' money these people have," Dann said.
The lawsuits, filed in courts across the state, accused the companies of violating the Consumer Sales Practices Act, but also took the new tack of insisting practitioners of foreclosure rescue must comply with the Debt Adjuster Act, which requires them to have insurance, limit consulting fees, undergo annual audits and keep separate trust accounts for clients.
"I believe it's important to take all the arrows in our quiver to attack a business as sleazy as this one," Dann said.
Ohio and Cuyahoga County, in particular, are ripe markets for foreclosure rescue companies. Both have frequently topped lists of the most foreclos- ure-ridden places in the country, and Cuyahoga County's foreclosure rates run triple the national average, giving it the dubious distinction of being, as County Treasurer Jim Rokakis often notes, "first and worst."
On Wednesday, the attorney general sued:
Cary Lavensky, doing business as Home Restoration Services, located in Cleveland.
Richard Pinnix, dba Pinnix Business Services, of Shaker Heights.
United Foreclosure Managers LLC of Youngstown.
American Housing Authority Inc. of Newport Beach, Calif., and a related company, American Housing Financial Inc. of Phoenix.
F.A.S., dba Foreclosure Assistance Solutions and Mortgage Second Chance, of Clearwater, Fla.
Foreclosure Solutions of Cincinnati.
Lavensky said he has been out of the foreclosure rescue business for a year. He said he could recall only one instance in which he had a dispute with a homeowner and, in that case, the family interfered with a planned sale of the home and then demanded a refund.
He said he is certain his company complied with Ohio law.
"I assure you, all our paperwork was drawn up by an attorney," he said. "This is the first I'm hearing of any of this."
Pinnix said that while the attorney general is right in saying he didn't have insurance or separate accounts for clients, "I have saved a lot of people's homes through refinancing and hard-money lending . . . I work 17 hours a day to help my clients. At the end of the day, the truth will come out."
Officials of United Foreclosure did not return a phone message left at the company.
The suits seek restitution for consumers, fines and an order barring the companies from doing further business until they comply with applicable state laws.
To reach this Plain Dealer reporter:
sherylharris@plaind.com,
216-999-4409
Posted at 07:34 PM in Attitude for Success, Bubble Going To Burst?, Commentary by Brian Gibbons - REISkills.com, Current Affairs, Flipping Houses, Foreclosures General, Mistakes of Real Estate Investors, Motivation for REIs, News - Mortgage Fraud, News - Mortgage Lending - Subprime, News for Real Estate Investors | Permalink | Comments (0) | TrackBack (0)