The Current Real Estate Finance Climate

Transcription

1 The Current Real Estate Finance Climate Elizabeth J. Zook, Esq. Carruthers & Roth, P.A. (336) December 10, 2008

2 Residenti tial Housing Market

3 Subprime Mortgage Crisis i Ongoing financial crisis triggered by a dramati tic rise in mortg age deli nquencies and foreclosures in the United States. Subprime, meaning that little or no down payment was made, and that they were issued to households with low incomes and assets, and with troubled credit histories.

4 Subprime Mortgage Crisis i When house prices in the US began to decline in , mortgage delinquencies soared, and securities backed with subprime mortgages lost most of their value. The result has been a large decline in the capital of many banks and USA government sponsored enterprises, tightening credit around the world. - Wikipedia

5 According to the national index prepared by S&P Case-Shiller Home Price home prices declined 16.6% in the third quarter of 2008 compared with the same period a year ago.

6 For 10 major cities, home prices fell a record 18.6% 10 Major Cities: San Francisco, Las Vegas, Miami, Los Angeles, San Diego, Washington, Chicago, New York, Boston, and Denver

7 Why are housing prices falling? Record number of foreclosures, Rising i interest rates 80% LTV Expedited foreclosure process Opportunities? Recession, and Job losses housing prices circa early 2004

8 Foreclosures According to CNN and Trulia.com, in Las Vegas and Cleveland about half of all homes for sale are bank-owned properties,

9 In the best performing markets, Dallas, TX and dch Charlott tte, NC, homes prices dropped d 2.7% and 3.5% respectively. But what about Wachovia?

10 Wachovia It is estimated that Wachovia has about 20, employees based in Charlott tte According to the Charlotte Business Journal, experts estimate that up to 3,000 local jobs may eventually be lost in cost-cutting measures.

11 According to a study by Charlotte's Chamber of Commerce for every 1,000 direct banking jobs lost, Charlotte will also lose: 100 other banking-related jobs (e.g. mortgage brokers), 76 professional and technical jobs, such as jobs in information technology and computer support services, 56 management jobs, 31 transportation jobs, 28 hotel and restaurant jobs and 10 construction jobs.

12 Issues in the Residential Lending Market

13 Fannie Mae and Freddie Mac Housing market D/n make home loans directly to consumers *Encouraged by the Clinton Administration to loosen credit standards and facilitate loans to low and moderate income borrowers *Buy loans, repackage them as mortgagebacked securities, and sell them to investors in the secondary mortgage market

14 Fannie Mae and Freddie Mac *Mortgage investments funded primarily by issuing mortgage-backed securities Private companies set up at the direction of the government to promote home ownership *Guaranty payment of P&I to investors but securities carry no government guarantee of being repaid Facilitates liquidity in the primary mortgage market

15 Ginnie Mae Does not buy or sell loans or issue mortgage- backed secur ities. guarantor of government-issued mortgages Guaranty to investors the timely payment of principal and interest on mortgage-backed securities (backed by federally insured or guaranteed loans)

16 What is the Secondary Market? A market for the sale of securities or bonds collateralized by the value of mortgage loans. The loans are grouped together and investors can invest in the pool of loans, reducing the risk of the individual loans. Mortgage delinquencies, e defaults, and decreased real estate values can make these loan pools difficult to value.

17 Residential Lendi ding Issues Record number of foreclosures means less liquidity idit in the market because: Fannie, Freddie and Gennie have to make good on their guaranties, raising i investor concerns Concerned investors are not investing in residential (or commercial) mortgage backed securities

18 New Federal Programs $800 billion plan by the Federal Reserve and Treasury Department t to shore up the struggling U.S. economy by encouraging lending by banks to consumers and small businesses.

19 $200 billion for holders of securities backed by consumer debt, such as credit cards, car loans and student loans. $500 billion to purchase mortgage backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae, and $100 billion in direct debt--trying to jump start the market in mortgage backed securities

20 Commercial Real Estate Market Problems in the housing market Foreclosures on developers = slow down in the construction industry Record number of materialmen s lien filings Tighter underwriting Lack of liquidity in the loan market General nervousness

21 Long Term Commercial Lending Most local banks do not want to make large long-term loans For example - Construction Lending: Construction loan followed by permanent financing, or Construction loan followed by mini-perm loan followed by permanent financing

22 Mini-Perm Requires the borrower to make a monthly payment small enough to pay off the loan over a 20 to 30 year period, but contains a balloon payment (a total payoff) after a lesser time frame (e.g. 5 years) When the loan balloons, the borrower owe usually wants to refinance the loan or sell the property

23 The Good Old Days - Conduit Loans Usually a long-term fixed rate loan (10 25 year term); Secured by an income-producing parcel of real property; Strict loan requirements

24 Conduit Loans The lender/investor needs a long-term investment a t a fi xed rate of return. Accordingly, no prepayment of the loan. In exchange, borrower gets a long-term fixed interest rate and limitations on personal liability for the loan.

25 Conduit Loans Often non-recourse loans: borrower will not have personal liability for repayment of the loan, exceptf for bad boy carve-outs lender s recourse is to foreclose the property.

26 Commercial Mortgage Backed Securities Conduit loans are grouped together and investors can invest in the pool of loans Conduit loans are pooled in an attempt to standardize them so that the pool can be assigned a credit rating for investment purposes A credit rating is a numerical system which attempts to quantify the relative likelihood that a loan will be repaid.

27 CMBS Often the lender makes little or no money on the loan itself lf, and on ly make money by the selling and trading of bonds But once the loans in the pool begin to go bad, it becomes difficult to assign a credit rating = investors c/n assess the risk

28 Commercial Lendi ding Issues Because investors have stopped buying commercial mortgage backed securities, most conduit loans are no longer available at good dinterest ra tes

29 Long-Term Financing i in 2009 Strict underwriting requirements Higher debt service coverage rati tios (the (th ratio of cash available to the required loan payments) Higher LTV (a mathematical calculation which expresses the amount of a mortgage as a percentage of the total appraised value of the collateral) Personal Guaranties Financially able borrower (not just the property)

30 Maturing Loans and Beyond Additional equity guarantors Additional collateral New guaranty agreements Return of conduit loans? Will require investor confidence ce

31 Elizabeth J. Zook Carruthers & Roth, P.A. 235 N. Edgeworth Street Greensboro, NC Tel. (336) Fax (336)