At its Tuesday meeting, the Federal Reserve reaffirmed its pledge to keep interest rates low and opted to not take any new measures to bolster the economy, saying the economy has already been showing signs of “expanding moderately.” The economy has shown some improvement in employment and consumer spending in recent weeks. However, the Fed cautioned at Tuesday’s meeting that the "housing sector remains depressed."
In reaffirming a pledge it first issued in August, the Fed said the federal funds rate -- which serves as a benchmark rate for many types of loans, including mortgages -- will remain near zero until mid-2013. The Fed said it will continue with plans to move $400 billion of its bond portfolio into longer-term securities, which ultimately could send long-term interest rates even lower.
Overall, the Fed said the economy has steadily been showing signs of improvement and is on track to post its strongest gains of the year in the final months of 2011. But the Fed said that the European debt crisis will continue to pose a major threat to recovery with “strains in global financial markets continue to pose significant downside risks."
Source: “U.S. Fed Leaves Rate Unchanged, Says Economy Expanding Moderately,” Bloomberg News (Dec. 13, 2011)
Wednesday, December 14, 2011
Fed Chair Takes Advantage of Low Rates Too
Fed Chair Ben Bernanke knows a good interest rate when he sees it. The Fed chair has refinanced the mortgage on his three-bedroom, attached town home in Washington, D.C. twice since 2009.
Most recently Bernanke refinanced on his home in September shortly after the Fed announced “Operation Twist,” which was a rare move by the Fed to publicly vow to keep long-term interest rates low for the next two years.
Bernanke lives in a town house near the Capitol in Washington, D.C., which he paid $839,000 for it in 2004, according to an article in The Wall Street Journal. The home’s appraised value is about $850,000. Bernanke owes $672,000 on his 30-year mortgage, according to the article.
Meanwhile, mortgage rates continue to hover around record lows. The 30-year fixed-rate mortgage fell under 4 percent once again this past week--30-year rates below 4 percent were unheard of until this year. The 30-year fixed-rate mortgage averaged 3.99 percent for the week ending Dec. 8, according to Freddie Mac’s national mortgage market survey. Low rates, mixed with low home prices, are pushing housing affordability to record highs this year, Freddie Mac reports.
Source: “Bernanke Joins Bargain Hunters Who Refinance,” The Wall Street Journal (Dec. 12, 2011)
Most recently Bernanke refinanced on his home in September shortly after the Fed announced “Operation Twist,” which was a rare move by the Fed to publicly vow to keep long-term interest rates low for the next two years.
Bernanke lives in a town house near the Capitol in Washington, D.C., which he paid $839,000 for it in 2004, according to an article in The Wall Street Journal. The home’s appraised value is about $850,000. Bernanke owes $672,000 on his 30-year mortgage, according to the article.
Meanwhile, mortgage rates continue to hover around record lows. The 30-year fixed-rate mortgage fell under 4 percent once again this past week--30-year rates below 4 percent were unheard of until this year. The 30-year fixed-rate mortgage averaged 3.99 percent for the week ending Dec. 8, according to Freddie Mac’s national mortgage market survey. Low rates, mixed with low home prices, are pushing housing affordability to record highs this year, Freddie Mac reports.
Source: “Bernanke Joins Bargain Hunters Who Refinance,” The Wall Street Journal (Dec. 12, 2011)
Principal Reductions Outpace Short Sales?
Some lenders may be more willing to reduce the mortgage principal than grant a short sale for borrowers under the Home Affordable Modification Program (HAMP). The principal reduction can mean big savings for home owners too — the average amount reduced on a principal reduction is more than $65,000, or 31 percent of the unpaid balance on the mortgage, according to new Treasury Department data.
Principal reductions under HAMP began in October 2010, serving as an alternative to a short sale or deed-in-lieu of foreclosure for cash-strapped home owners. Only loans not guaranteed by Fannie Mae and Freddie Mac are eligible for a principal reduction.
“The median loan-to-value ratio on modifications that went through principal reduction was 158 percent,” HousingWire reports in a recent article. “After the workout was complete, the borrower held an LTV of 115 percent, meaning he or she owed 15 percent more on the mortgage than the home was worth rather than being 58 percent underwater.”
Banks may find a principal reduction is better for them financially too. Banks report an average loss rate of 60 percent whenever borrowers complete a short sale, and an average 70 percent loss for homes in the foreclosure or REO process, according to Moody’s Investors Service.
Source: “Principal Reduction Outpaces Short Sales Under HAMP,” HousingWire (Dec. 12, 2011)
Principal reductions under HAMP began in October 2010, serving as an alternative to a short sale or deed-in-lieu of foreclosure for cash-strapped home owners. Only loans not guaranteed by Fannie Mae and Freddie Mac are eligible for a principal reduction.
“The median loan-to-value ratio on modifications that went through principal reduction was 158 percent,” HousingWire reports in a recent article. “After the workout was complete, the borrower held an LTV of 115 percent, meaning he or she owed 15 percent more on the mortgage than the home was worth rather than being 58 percent underwater.”
Banks may find a principal reduction is better for them financially too. Banks report an average loss rate of 60 percent whenever borrowers complete a short sale, and an average 70 percent loss for homes in the foreclosure or REO process, according to Moody’s Investors Service.
Source: “Principal Reduction Outpaces Short Sales Under HAMP,” HousingWire (Dec. 12, 2011)
4 Tips to Help Your Buyers Refine Their Home Search
Are your buyers having a tough time wading through the inventories of homes to find the right home? Kelly O’Ryan, an office manager with Coldwell Banker in Lexington, Mass., offered some of the following tips in a recent article at RISMedia to help your home buyers narrow their search when looking for properties:
1. Have your home buyers make a list of all the must-haves for their future home, such as the number of bedrooms and school district they must have.
2. Make sure your buyers get pre-approved for a mortgage by a lender. This will help ensure they don’t look for homes that are only within their budget.
3. Encourage your buyers to research available homes on the Internet so they get a feel for what’s available. You can help them sort for properties within their price range and locate homes that fit their criteria. But have them review photos and videos of multiple homes on the Internet to help them narrow their search before you take them to view homes in-person.
4. Remind your home buyers to not get sidetracked when viewing homes at aesthetics that can be changed out easily, such as paint colors and light fixtures. Help them to see past any bad decor and focus in on items in the home that can’t easily be changed, such as the home’s location and lot size.
Source: “How to Lead a Refined Real Estate Search,” RISMedia (Dec. 12, 2011)
1. Have your home buyers make a list of all the must-haves for their future home, such as the number of bedrooms and school district they must have.
2. Make sure your buyers get pre-approved for a mortgage by a lender. This will help ensure they don’t look for homes that are only within their budget.
3. Encourage your buyers to research available homes on the Internet so they get a feel for what’s available. You can help them sort for properties within their price range and locate homes that fit their criteria. But have them review photos and videos of multiple homes on the Internet to help them narrow their search before you take them to view homes in-person.
4. Remind your home buyers to not get sidetracked when viewing homes at aesthetics that can be changed out easily, such as paint colors and light fixtures. Help them to see past any bad decor and focus in on items in the home that can’t easily be changed, such as the home’s location and lot size.
Source: “How to Lead a Refined Real Estate Search,” RISMedia (Dec. 12, 2011)
FHFA Sues Chicago Over Vacant Home Upkeep Law
In Chicago, lenders are required to maintain vacant homes in foreclosure, such as by keeping lawns mowed and tidy and attending to maintenance issues inside. Lenders found in violation can face daily fines up to $1,000. But the Federal Housing Finance Agency (FHFA) is suing the city of Chicago for its new ordinance, saying the city is overstepping its authority with the mandate.
FHFA, which oversees Fannie Mae and Freddie Mac, says the ordinance is unfair because it “imposes all the costs of home ownership without any of the benefits, such as the right to sell or lease the property,” according to an article in The Wall Street Journal.
The Chicago ordinance has been controversial from the beginning. Lenders have argued that it’s not fair for them to be held liable for upkeeping a property in the middle of the foreclosure process--property, which they say, they haven’t even officially taken ownership of yet.
One research firm estimates that about 1,900 homes are vacant in Chicago, residing in foreclosure limbo, and cost an estimated $36 million in maintenance costs.
"In many cases, by ignoring these properties you're doing a disservice to the community and a disservice to the investor," Tom Feltner, vice president of the Woodstock Institute, told The Wall Street Journal.
Last week, Las Vegas passed a similar ordinance that requires banks to register any homes with a defaulted mortgage and pay a $200 registration fee. Lenders who do not properly maintain the properties then may even face jail time.
Source: “Chicago Sued Over Vacant-Properties Upkeep Fee,” The Wall Street Journal (Dec. 13, 2011)
FHFA, which oversees Fannie Mae and Freddie Mac, says the ordinance is unfair because it “imposes all the costs of home ownership without any of the benefits, such as the right to sell or lease the property,” according to an article in The Wall Street Journal.
The Chicago ordinance has been controversial from the beginning. Lenders have argued that it’s not fair for them to be held liable for upkeeping a property in the middle of the foreclosure process--property, which they say, they haven’t even officially taken ownership of yet.
One research firm estimates that about 1,900 homes are vacant in Chicago, residing in foreclosure limbo, and cost an estimated $36 million in maintenance costs.
"In many cases, by ignoring these properties you're doing a disservice to the community and a disservice to the investor," Tom Feltner, vice president of the Woodstock Institute, told The Wall Street Journal.
Last week, Las Vegas passed a similar ordinance that requires banks to register any homes with a defaulted mortgage and pay a $200 registration fee. Lenders who do not properly maintain the properties then may even face jail time.
Source: “Chicago Sued Over Vacant-Properties Upkeep Fee,” The Wall Street Journal (Dec. 13, 2011)
House Flippers to Blame for Housing Downturn?
House flippers — made up of investors who bought up homes during the housing boom, possibly made a few upgrades to the home, and quickly resold the homes for high-dollar profit — played a larger role in causing the housing bubble than previously thought, according to a new federal report out by the Federal Reserve Bank of New York. The impact that speculative real estate investors played in driving the housing downturn has mostly been overlooked until now, the researchers note.
The speculative investors used low downpayments and subprime credit in buying up multiple homes at once, the report says. Their actions attributed to home prices in some areas being inflated, researchers say.
"This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family," researchers note in the report.
House flippers made up a big piece of the real estate market during the housing boom. According to the report, more than one-third of all home mortgages from 2006 were to people who already owned at least one home. What’s more, “in Arizona, California, Florida and Nevada, where average home prices more than doubled from 2000 to 2006, investors made up nearly half of all mortgage-backed purchases during the housing bubble,” the Associated Press reports. “Buyers owning three or more properties represented the fastest-growing segment of home owners during that time.”
When home values began to fall in 2006, investors defaulted on their loans in large numbers, accounting for more than 25 percent of seriously delinquent mortgage balances, according to the report. In investor hot-spots like Arizona, California, Florida, and Nevada, investors accounted for more than a third of seriously delinquent mortgage balances from 2007 to 2009.
The report urges lenders and regulators to take action to limit speculative borrowing in order to avoid a future housing downturn.
Source: “Flippers’ Housing Bust Role Larger than Thought,” The Associated Press (Dec. 12, 2011
The speculative investors used low downpayments and subprime credit in buying up multiple homes at once, the report says. Their actions attributed to home prices in some areas being inflated, researchers say.
"This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family," researchers note in the report.
House flippers made up a big piece of the real estate market during the housing boom. According to the report, more than one-third of all home mortgages from 2006 were to people who already owned at least one home. What’s more, “in Arizona, California, Florida and Nevada, where average home prices more than doubled from 2000 to 2006, investors made up nearly half of all mortgage-backed purchases during the housing bubble,” the Associated Press reports. “Buyers owning three or more properties represented the fastest-growing segment of home owners during that time.”
When home values began to fall in 2006, investors defaulted on their loans in large numbers, accounting for more than 25 percent of seriously delinquent mortgage balances, according to the report. In investor hot-spots like Arizona, California, Florida, and Nevada, investors accounted for more than a third of seriously delinquent mortgage balances from 2007 to 2009.
The report urges lenders and regulators to take action to limit speculative borrowing in order to avoid a future housing downturn.
Source: “Flippers’ Housing Bust Role Larger than Thought,” The Associated Press (Dec. 12, 2011
Fed Offers Nothing New
Those keeping tabs on the Federal Reserve’s movements were looking for a change in the central bank’s communication strategy when officials emerged from their final policy meeting of the year on Tuesday. Some analysts were even anticipating the Fed to launch a third round of ‘Quantitative Easing’ measures.
All expectations went unfulfilled, as the nation’s central bankers announced no new policies or economic stimulus programs, and stuck to their traditional messaging surrounding forecasts for short-term interest rates.
In its policy statement issued following the meeting, the Fed reiterated that it will keep the federal funds rate – the rate at which banks lend to one another – in the range of 0 to 0.25 percent at least through the middle of 2013. The benchmark rate has not budged in over three years.
Analysts were hoping for more definitive guidance that tied expectations for the rate increase to specific targets for indicators such as inflation and unemployment.
Fed officials said they are prepared to employ the tools in the central bank’s arsenal to promote a stronger economic recovery should it be determined that additional stimulus is needed, but at this time, no new policy actions were enacted.
The Federal Reserve’s policy committee said information received since it last met in November suggests “the economy has been expanding moderately, notwithstanding some apparent slowing in global growth.”
The Fed’s statement cited “some improvement in overall labor market conditions” but stressed that the unemployment rate “remains elevated.” The committee said it continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.
According to the committee, household spending has continued to advance, and longer-term inflation expectations have remained stable. The housing sector, however was described still “depressed.”
Dan Green, whose daily blog covers mortgage rates and market trends, notes that Wall Street wasn’t expecting no policy change and no QE3, and in response, mortgage rates dipped to new lows following the Fed’s (non) announcement.
The Fed said it will continue to extend the average maturity of its securities holdings as announced in September, and will maintain its existing policy of reinvesting principal payments from its holdings of GSE debt and agency mortgage-backed securities into new mortgage bonds
All expectations went unfulfilled, as the nation’s central bankers announced no new policies or economic stimulus programs, and stuck to their traditional messaging surrounding forecasts for short-term interest rates.
In its policy statement issued following the meeting, the Fed reiterated that it will keep the federal funds rate – the rate at which banks lend to one another – in the range of 0 to 0.25 percent at least through the middle of 2013. The benchmark rate has not budged in over three years.
Analysts were hoping for more definitive guidance that tied expectations for the rate increase to specific targets for indicators such as inflation and unemployment.
Fed officials said they are prepared to employ the tools in the central bank’s arsenal to promote a stronger economic recovery should it be determined that additional stimulus is needed, but at this time, no new policy actions were enacted.
The Federal Reserve’s policy committee said information received since it last met in November suggests “the economy has been expanding moderately, notwithstanding some apparent slowing in global growth.”
The Fed’s statement cited “some improvement in overall labor market conditions” but stressed that the unemployment rate “remains elevated.” The committee said it continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.
According to the committee, household spending has continued to advance, and longer-term inflation expectations have remained stable. The housing sector, however was described still “depressed.”
Dan Green, whose daily blog covers mortgage rates and market trends, notes that Wall Street wasn’t expecting no policy change and no QE3, and in response, mortgage rates dipped to new lows following the Fed’s (non) announcement.
The Fed said it will continue to extend the average maturity of its securities holdings as announced in September, and will maintain its existing policy of reinvesting principal payments from its holdings of GSE debt and agency mortgage-backed securities into new mortgage bonds
Foreclosure Sales Slow on West Coast
With the holiday season approaching, the research and tracking firm ForeclosureRadar is seeing declines in the number of completed foreclosures in four of the five states it monitors along the country’s West Coast.
ForeclosureRadar’s coverage area includes Arizona, California, Nevada, Oregon, and Washington. Only Arizona saw foreclosure sales rise in November, up 25 percent from October. The company notes, however, that Arizona’s increase last month simply offset the 20 percent drop seen in October and is still well below the state’s average monthly sales for the year.
“It’s great to see the banks slow down foreclosures and evictions for the holidays,” said Sean O’Toole, CEO and founder of ForeclosureRadar. “We expect that the numbers will drop even further in December.”
ForeclosureRadar says it’s not unusual to see foreclosures slow for the holidays. Come January though, O’Toole says it will be back to business as usual with at least a small surge as banks play catch up after the delays.
Foreclosure starts were up slightly in Nevada (+6.4 percent) and Washington (+5.0 percent), but ForeclosureRadar described the increases as “insignificant” given the recent declines in those states due to legislative changes and legal challenges.
Notice of trustee sale filings rose 34.7 percent from October to November in California. ForeclosureRadar’s data show the increase came primarily from filings by Bank of America, up 52 percent, and Wells Fargo, up 23 percent.
The company points out that it is not unusual to see an increase in foreclosure sales each January. These rise in trustee sale filings would be necessary in preparation for that, ForeclosureRadar explained.
Sales to third parties, typically investors, have increased significantly year-over-year across most of ForeclosureRadar’s coverage area.
The largest increases in third-party foreclosure sales were seen in Arizona and Nevada at 101.6 percent and 79.9 percent, respectively. Other states saw higher numbers as well – California, up 29.4 percent, and Washington, with a 6.7 percent annual increase.
ForeclosureRadar’s coverage area includes Arizona, California, Nevada, Oregon, and Washington. Only Arizona saw foreclosure sales rise in November, up 25 percent from October. The company notes, however, that Arizona’s increase last month simply offset the 20 percent drop seen in October and is still well below the state’s average monthly sales for the year.
“It’s great to see the banks slow down foreclosures and evictions for the holidays,” said Sean O’Toole, CEO and founder of ForeclosureRadar. “We expect that the numbers will drop even further in December.”
ForeclosureRadar says it’s not unusual to see foreclosures slow for the holidays. Come January though, O’Toole says it will be back to business as usual with at least a small surge as banks play catch up after the delays.
Foreclosure starts were up slightly in Nevada (+6.4 percent) and Washington (+5.0 percent), but ForeclosureRadar described the increases as “insignificant” given the recent declines in those states due to legislative changes and legal challenges.
Notice of trustee sale filings rose 34.7 percent from October to November in California. ForeclosureRadar’s data show the increase came primarily from filings by Bank of America, up 52 percent, and Wells Fargo, up 23 percent.
The company points out that it is not unusual to see an increase in foreclosure sales each January. These rise in trustee sale filings would be necessary in preparation for that, ForeclosureRadar explained.
Sales to third parties, typically investors, have increased significantly year-over-year across most of ForeclosureRadar’s coverage area.
The largest increases in third-party foreclosure sales were seen in Arizona and Nevada at 101.6 percent and 79.9 percent, respectively. Other states saw higher numbers as well – California, up 29.4 percent, and Washington, with a 6.7 percent annual increase.
Prices Decline Slightly But Show Signs of Stabilizing
While home values are continuing to decline, they are beginning to stabilize as the market nears the bottom, according to the Zillow Real Estate Market Report released Tuesday.
Since their peak in May 2007, prices have fallen 23.7 percent, according to Zillow’s data.
On a yearly basis, prices fell 5.1 percent in October, arriving at $147,000.
However, on a monthly basis, prices fell just 0.3 percent, demonstrating a deceleration in decline.
“As expected, home values continue to fall in the back half of this year due to an abundance of housing supply relative to demand,” said Dr. Stan Humphries, Zillow’s chief economist. “Potential buyers remain on the sidelines or doubled up in other households, despite record high housing affordability and historically low mortgage rates.”
Zillow, based in Washington, measures 156 metropolitan statistical areas (MSAs) each month. In October, prices declined in 95 MSAs and rose in 39.
Prices in the remaining 22 MSAs remained relatively unchanged over the month.
Some of the harder hit areas are starting to see a reprieve from their sharp declines in home values.
Miami’s prices remained essentially unchanged for the month, and hard-hit areas of Phoenix and Detroit saw slight gains – 0.2 percent in Phoenix and 1 percent in Detroit.
On a yearly basis, 10 of the 156 MSAs experienced rising prices.
In addition to stabilizing prices, Zillow reported another positive sign for the market in its most recent report. The foreclosure liquidation rate fell for in October to 8.1 out of every 10,000 homes.
This contrasts the record high reached one year ago – 10.7 of every 10,000 homes.
While Zillow reports some slight positive signs for the market, Humphries says the “crisis of consumer confidence along with high rates of negative equity, are the biggest factors hindering a housing recover.”
“However, I’m encouraged by the positive, albeit slow, progress in working down the unemployment rate, which should help to improve consumers’ appetites for buying homes,” he continues.
Since their peak in May 2007, prices have fallen 23.7 percent, according to Zillow’s data.
On a yearly basis, prices fell 5.1 percent in October, arriving at $147,000.
However, on a monthly basis, prices fell just 0.3 percent, demonstrating a deceleration in decline.
“As expected, home values continue to fall in the back half of this year due to an abundance of housing supply relative to demand,” said Dr. Stan Humphries, Zillow’s chief economist. “Potential buyers remain on the sidelines or doubled up in other households, despite record high housing affordability and historically low mortgage rates.”
Zillow, based in Washington, measures 156 metropolitan statistical areas (MSAs) each month. In October, prices declined in 95 MSAs and rose in 39.
Prices in the remaining 22 MSAs remained relatively unchanged over the month.
Some of the harder hit areas are starting to see a reprieve from their sharp declines in home values.
Miami’s prices remained essentially unchanged for the month, and hard-hit areas of Phoenix and Detroit saw slight gains – 0.2 percent in Phoenix and 1 percent in Detroit.
On a yearly basis, 10 of the 156 MSAs experienced rising prices.
In addition to stabilizing prices, Zillow reported another positive sign for the market in its most recent report. The foreclosure liquidation rate fell for in October to 8.1 out of every 10,000 homes.
This contrasts the record high reached one year ago – 10.7 of every 10,000 homes.
While Zillow reports some slight positive signs for the market, Humphries says the “crisis of consumer confidence along with high rates of negative equity, are the biggest factors hindering a housing recover.”
“However, I’m encouraged by the positive, albeit slow, progress in working down the unemployment rate, which should help to improve consumers’ appetites for buying homes,” he continues.
Attorneys General Expect to Reach Settlement Before Christmas
The state attorneys general and the nation’s five largest mortgage servicers have been supposedly close to a settlement for quite some time. The latest estimate, according to the Des Moines Register is that they are likely to reach a settlement before Christmas.
The Des Moines Register attributes this information to Iowa Attorney General Tom Miller, head of the committee negotiating a settlement with the banks, who said the
settlement would release the banks from legal claims on past servicing and foreclosure practices but would not provide any release on claims regarding securitizations.
Miller reportedly said the deal would be complete by Christmas regardless of whether or not California participates.
California Attorney General Kamala Harris withdrew from settlement negotiations in October but can still rejoin.
Though the exact amount of the settlement is unknown, Bloomberg reported it will likely be in the range of $25 billion.
In addition, Miller told the Des Moines Register the settlement requires “substantial principal reductions” for underwater homeowners as well as a new set of servicing standards.
In other developments, Bloomberg reported Monday that former chairman of the FDIC, Sheila Bair, is being considered as a monitor for the settlement. As such, she would be charged with making sure banks comply with all aspects of the agreed upon settlement.
The Des Moines Register attributes this information to Iowa Attorney General Tom Miller, head of the committee negotiating a settlement with the banks, who said the
settlement would release the banks from legal claims on past servicing and foreclosure practices but would not provide any release on claims regarding securitizations.
Miller reportedly said the deal would be complete by Christmas regardless of whether or not California participates.
California Attorney General Kamala Harris withdrew from settlement negotiations in October but can still rejoin.
Though the exact amount of the settlement is unknown, Bloomberg reported it will likely be in the range of $25 billion.
In addition, Miller told the Des Moines Register the settlement requires “substantial principal reductions” for underwater homeowners as well as a new set of servicing standards.
In other developments, Bloomberg reported Monday that former chairman of the FDIC, Sheila Bair, is being considered as a monitor for the settlement. As such, she would be charged with making sure banks comply with all aspects of the agreed upon settlement.
Monday, December 12, 2011
More Owners Opt for 'Strategic Default'
Strategic defaults are on the rise due mainly to two factors: the growing number of mortgages where the outstanding balance is greater than the home's current market value, and continued high unemployment.
A study by the Mortgage Bankers Association warns that the trend could have a significant harmful impact in certain markets.
"While the merits of such a choice can and will continue to be debated, what is indisputable is that the possibility to strategically default has certainly been brought to the attention of current homeowners like never before, with potentially negative consequences for housing markets," said Michael Seiler, who headed the study.
Source: "More Homeowners Opt for 'Strategic Default'," Sioux City (Iowa) Journal (Dec. 10, 2011)
A study by the Mortgage Bankers Association warns that the trend could have a significant harmful impact in certain markets.
"While the merits of such a choice can and will continue to be debated, what is indisputable is that the possibility to strategically default has certainly been brought to the attention of current homeowners like never before, with potentially negative consequences for housing markets," said Michael Seiler, who headed the study.
Source: "More Homeowners Opt for 'Strategic Default'," Sioux City (Iowa) Journal (Dec. 10, 2011)
BofA Considers Renting REOs Back to Former Owners
In facing large inventories of foreclosures, Bank of America is considering a program that would allow investors to buy a foreclosed home and then rent it back to the former home owner, HousingWire reports.
Bank of America is looking for ideas on how to handle the large inventories of foreclosures in some areas where demand hasn’t picked up.
"We are looking at programs where you can capture somebody before the REO process and offer a deed-for-lease," Ron Sturzenegger, who leads the bank's legacy asset servicing division, explained to HousingWire. "We would go to the customer and say, 'We'll do a short sale. Will you be interested in leasing your property back? We're still going to sell the property. You will no longer be the owner. But you can be a tenant now in that same property and save you from moving on.'"
The program is still in very early stages and more details need to be worked out, Sturzenegger noted.
Source: “BofA Developing Foreclosure Rental Programs to Deal With Distressed Properties,” HousingWire (Dec. 9, 2011)
Bank of America is looking for ideas on how to handle the large inventories of foreclosures in some areas where demand hasn’t picked up.
"We are looking at programs where you can capture somebody before the REO process and offer a deed-for-lease," Ron Sturzenegger, who leads the bank's legacy asset servicing division, explained to HousingWire. "We would go to the customer and say, 'We'll do a short sale. Will you be interested in leasing your property back? We're still going to sell the property. You will no longer be the owner. But you can be a tenant now in that same property and save you from moving on.'"
The program is still in very early stages and more details need to be worked out, Sturzenegger noted.
Source: “BofA Developing Foreclosure Rental Programs to Deal With Distressed Properties,” HousingWire (Dec. 9, 2011)
Banks, GSEs Spend More Money to Spruce Up REOs
Foreclosed homes continue to hamper nearby property values. In some cities, foreclosures were found to decrease nearby property values up to $17,000, according to a new report from the Government Accountability Office (GAO).
More programs are being aimed at rehabbing foreclosed homes so the harm to property values won’t be as great.
According to the GAO report, Fannie Mae and Freddie Mac doled out $953 million last year to maintain and fix up vacant homes.
"We are committed to stabilizing communities and helping the housing market recover," a Fannie Mae spokesperson told HousingWire. "Our goal is to sell REO properties at a competitive market rate, and maintaining our properties is an important part of achieving that goal."
Since 2008, investors and nonprofits received $6 billion in grant money from HUD’s Neighborhood Stabilization Program to maintain and fix up vacant homes. In Detroit, the city spent $20 million last year demolishing vacant homes or rehabbing ones that could still be saved after neglect.
Wells Fargo & Co. said recently it will donate $5.53 million to 52 nonprofit groups through its Leading the Way Home Program Priority Markets Initiative so that the groups can purchase and redevelop foreclosed and abandoned homes.
"These grants will help stabilize and rebuild local communities," Kimberly Jackson, executive director of Wells Fargo's Housing Foundation. "We want to do what we can to make resources available to support efforts led by nonprofits to revitalize neighborhoods in cities that have felt the effects of financial difficulties and a challenging economy."
Source: “GSEs Spend Nearly $1 Billion on Property Preservation,” HousingWire (Dec. 9, 2011) and Wells Fargo
More programs are being aimed at rehabbing foreclosed homes so the harm to property values won’t be as great.
According to the GAO report, Fannie Mae and Freddie Mac doled out $953 million last year to maintain and fix up vacant homes.
"We are committed to stabilizing communities and helping the housing market recover," a Fannie Mae spokesperson told HousingWire. "Our goal is to sell REO properties at a competitive market rate, and maintaining our properties is an important part of achieving that goal."
Since 2008, investors and nonprofits received $6 billion in grant money from HUD’s Neighborhood Stabilization Program to maintain and fix up vacant homes. In Detroit, the city spent $20 million last year demolishing vacant homes or rehabbing ones that could still be saved after neglect.
Wells Fargo & Co. said recently it will donate $5.53 million to 52 nonprofit groups through its Leading the Way Home Program Priority Markets Initiative so that the groups can purchase and redevelop foreclosed and abandoned homes.
"These grants will help stabilize and rebuild local communities," Kimberly Jackson, executive director of Wells Fargo's Housing Foundation. "We want to do what we can to make resources available to support efforts led by nonprofits to revitalize neighborhoods in cities that have felt the effects of financial difficulties and a challenging economy."
Source: “GSEs Spend Nearly $1 Billion on Property Preservation,” HousingWire (Dec. 9, 2011) and Wells Fargo
More Contracts Come With a Contingency
More offers are coming with a contingency: The buyer wants the house but the seller has to give them more time — 30 to 60 days, possibly — to try to sell their own home before they’ll make the deal final, more real estate professionals are reporting.
"In a strong real estate market, it's harder to get away with (a sell contingency)," Eric Tyson, co-author of "Home Buying for Dummies" told the Chicago Tribune. "It adds another element of uncertainty to the deal."
Many sellers will continue to show homes to potential buyers during the contingency period, but since it’s listed in the multiple listing service, some buyers might be less apt to take a look.
“Most contingency agreements contain a kick-out clause: If your dream home's seller receives a noncontingent offer during the set time period, you typically have a day or two to rescind the contingency or risk losing the home,” according to the Tribune article.
Oftentimes, seller's agents will want to visit the buyer’s home before agreeing to a contingent sale offer to check the home’s condition and location and see whether it’ll likely sell in the time period, the article notes. “The seller's agent may even have a hand in setting the price or determining how long the home should be on the market before a price drop,” according to the article.
Source: “Contingency Sale Offers Becoming More Acceptable,” Chicago Tribune (Dec. 9, 2011)
"In a strong real estate market, it's harder to get away with (a sell contingency)," Eric Tyson, co-author of "Home Buying for Dummies" told the Chicago Tribune. "It adds another element of uncertainty to the deal."
Many sellers will continue to show homes to potential buyers during the contingency period, but since it’s listed in the multiple listing service, some buyers might be less apt to take a look.
“Most contingency agreements contain a kick-out clause: If your dream home's seller receives a noncontingent offer during the set time period, you typically have a day or two to rescind the contingency or risk losing the home,” according to the Tribune article.
Oftentimes, seller's agents will want to visit the buyer’s home before agreeing to a contingent sale offer to check the home’s condition and location and see whether it’ll likely sell in the time period, the article notes. “The seller's agent may even have a hand in setting the price or determining how long the home should be on the market before a price drop,” according to the article.
Source: “Contingency Sale Offers Becoming More Acceptable,” Chicago Tribune (Dec. 9, 2011)
Housing Market Sees Signs of Stability: Clear Capital
The housing market may be stabilizing as house prices and REO saturation rates show little change on a quarterly and yearly basis, according to Clear Capital’s most recent Home Data Index.
Nationally, prices rose just 0.3 percent while REO saturation rate was relatively unchanged at 24.6 percent over the most recent quarter, according to Clear Capital data ending in November. Clear Capital measures housing data on a rolling quarter, which compares the most recent four months with the previous three.
“With only a one percent drop in national home prices since January and virtually no change in prices over the last six months, strong evidence suggests the big swings that many market participants are accustomed to could become a thing of the past,” said Dr. Alex Villacorta, director of research and analytics at Clear Capital.
Villacorta also reiterated a point he and other analysts made at a panel discussion a few days ago at the Five Star MPact Conference and Expo: Market data must be granular to be effective.
“Although many of the nation’s major markets are experiencing no significant movement in prices, there are still several micro markets that are underperforming the overall market due to high levels of REO saturation,” Villacorta said in the Home Data Index.
He continued: “As lien holders continue to process their foreclosures and the flow of REOs continue to come to market, it will be critical for industry participants to ensure they understand the micro economic nature of specific markets.”
Over the recent quarter, prices changed by less than one percentage point in three of four U.S. regions, while the Midwest demonstrated a price increase of 1.2 percent.
The West was the only region to post a decline, falling 0.8 percent over the quarter. This decline is slightly lower than the quarterly price decline reported last month in the region – 1 percent.
“As this improvement comes at the beginning of the winter slow down, it suggests the stubborn quarter-over-quarter and year-over-year declines seen consistently in the hard hit region may be easing,” stated Clear Capital’s report.
The Northeast posted a 0.5 percent increase for the quarter, and the South posted a 0.2 percent increase.
While price changes did not vary drastically from region to region, they also did not vary widely from market to market.
The difference between the No. 1 highest performing market – Washington D.C. – and the 15th highest performing market – Cleveland, Ohio (1.7 percent) was just 3.1 percent.
However, the difference between the top and bottom ranked markets on the list of 15 lowest performing markets was much greater. In the No. 1 spot, Atlanta posted a 9.7 percent decline, while Dallas, at No. 15, posted a 0.4 percent decline.
Atlanta’s decline is likely the result of a decrease in transactions and an increase in distressed properties.
In keeping with Villacorta’s assertion that some markets are underperforming due to high REO saturation rates, Atlanta’s REO saturation rate is 42.8 percent, significantly higher than the national rate of 24.6 percent.
Also notable, Florida, which has seen a 59.1 percent decline in prices since their 2006 peak, has seen a 12 percent decline in REO saturation over the past year.
Additionally, four Florida metro markets – all of which experienced high foreclosure rates and sharp price declines over the past two years – held positions on the list of 15 highest performing markets for the second month in a row. Orlando, Tampa, Jacksonville, and Miami are now seeing rising prices.
Nationally, prices rose just 0.3 percent while REO saturation rate was relatively unchanged at 24.6 percent over the most recent quarter, according to Clear Capital data ending in November. Clear Capital measures housing data on a rolling quarter, which compares the most recent four months with the previous three.
“With only a one percent drop in national home prices since January and virtually no change in prices over the last six months, strong evidence suggests the big swings that many market participants are accustomed to could become a thing of the past,” said Dr. Alex Villacorta, director of research and analytics at Clear Capital.
Villacorta also reiterated a point he and other analysts made at a panel discussion a few days ago at the Five Star MPact Conference and Expo: Market data must be granular to be effective.
“Although many of the nation’s major markets are experiencing no significant movement in prices, there are still several micro markets that are underperforming the overall market due to high levels of REO saturation,” Villacorta said in the Home Data Index.
He continued: “As lien holders continue to process their foreclosures and the flow of REOs continue to come to market, it will be critical for industry participants to ensure they understand the micro economic nature of specific markets.”
Over the recent quarter, prices changed by less than one percentage point in three of four U.S. regions, while the Midwest demonstrated a price increase of 1.2 percent.
The West was the only region to post a decline, falling 0.8 percent over the quarter. This decline is slightly lower than the quarterly price decline reported last month in the region – 1 percent.
“As this improvement comes at the beginning of the winter slow down, it suggests the stubborn quarter-over-quarter and year-over-year declines seen consistently in the hard hit region may be easing,” stated Clear Capital’s report.
The Northeast posted a 0.5 percent increase for the quarter, and the South posted a 0.2 percent increase.
While price changes did not vary drastically from region to region, they also did not vary widely from market to market.
The difference between the No. 1 highest performing market – Washington D.C. – and the 15th highest performing market – Cleveland, Ohio (1.7 percent) was just 3.1 percent.
However, the difference between the top and bottom ranked markets on the list of 15 lowest performing markets was much greater. In the No. 1 spot, Atlanta posted a 9.7 percent decline, while Dallas, at No. 15, posted a 0.4 percent decline.
Atlanta’s decline is likely the result of a decrease in transactions and an increase in distressed properties.
In keeping with Villacorta’s assertion that some markets are underperforming due to high REO saturation rates, Atlanta’s REO saturation rate is 42.8 percent, significantly higher than the national rate of 24.6 percent.
Also notable, Florida, which has seen a 59.1 percent decline in prices since their 2006 peak, has seen a 12 percent decline in REO saturation over the past year.
Additionally, four Florida metro markets – all of which experienced high foreclosure rates and sharp price declines over the past two years – held positions on the list of 15 highest performing markets for the second month in a row. Orlando, Tampa, Jacksonville, and Miami are now seeing rising prices.
GSE Execs Say Defined Foreclosure Timelines Are Necessary
Representatives from both Fannie Mae and Freddie Mac upheld the companies’ practice of assessing penalties against servicers who fail to meet defined timelines for processing foreclosures.
Speaking to mortgage professionals at the Five Star MPact Conference in Dallas, Steve Clinton, Freddie Mac’s SVP of single-family operations, said “clearly the better outcome for both Fannie and Freddie is to keep the borrower in the home” with a loan modification offered early in the default process.
But as Edward Seiler, a director in Fannie Mae’s National Servicing Organization, acknowledged, sometimes servicers are faced with a difficult decision – sometimes “a borrower just shouldn’t be in that home,” Seiler said.
In such a situation, it’s critical that servicers complete the foreclosure process in a timely manner to clear bad loans from the pipeline and limit losses for the GSEs and taxpayers, according to the companies’ execs.
Rep. Elijah Cummings (D-Maryland) recently began inquiring about policies in place at Fannie and Freddie that fine servicers when they don’t complete a foreclosure action within the window of time established by the GSEs’ servicing guidelines.
Cummings says internal records show the GSEs assessed $150 million in fines against servicers last year for not processing foreclosures fast enough.
“I am concerned that these penalties, at least some of which were ordered by the Federal Housing Finance Agency (FHFA), may have contributed to widespread abuses by mortgage servicing companies and law firms attempting to meet arbitrary deadlines to expedite foreclosures,” Cummings said in a letter sent last month to Edward DeMarco, acting director of FHFA.
Cummings cites a June 2010 report from FHFA’s Office of Conservatorship Operations which concluded that “servicers, attorneys, and other supporting personnel were overloaded with the volume of foreclosures … documentation problems were evident, and law firms … were not devoting the time necessary to their cases.”
Clinton and Seiler stress that the foreclosure timeline mandates come into play only after all loss mitigation options are exhausted.
“Our biggest problem was loans from a year and two years ago were just sitting there,” stagnant in the foreclosure pipeline, Clinton said.
Fannie Mae and Freddie Mac have synchronized their individual foreclosure timeline requirements with the coordinated Servicing Alignment Initiative that went into effect October 1.
Clinton notes that the timelines and penalties have been in place for some time, but with the newly enacted guidelines, the GSE have aligned their parameters in order to help simplify and standardize procedures for their servicers.
“We don’t want the money” from penalties, Clinton said, “we want the behavior,” in terms of servicer compliance with both foreclosure prevention and foreclosure processing procedures.
In today’s environment of mass default, Clinton says the industry needs mass loss mitigation – effective procedures, standardized evaluations, and timely resolutions.
Speaking to mortgage professionals at the Five Star MPact Conference in Dallas, Steve Clinton, Freddie Mac’s SVP of single-family operations, said “clearly the better outcome for both Fannie and Freddie is to keep the borrower in the home” with a loan modification offered early in the default process.
But as Edward Seiler, a director in Fannie Mae’s National Servicing Organization, acknowledged, sometimes servicers are faced with a difficult decision – sometimes “a borrower just shouldn’t be in that home,” Seiler said.
In such a situation, it’s critical that servicers complete the foreclosure process in a timely manner to clear bad loans from the pipeline and limit losses for the GSEs and taxpayers, according to the companies’ execs.
Rep. Elijah Cummings (D-Maryland) recently began inquiring about policies in place at Fannie and Freddie that fine servicers when they don’t complete a foreclosure action within the window of time established by the GSEs’ servicing guidelines.
Cummings says internal records show the GSEs assessed $150 million in fines against servicers last year for not processing foreclosures fast enough.
“I am concerned that these penalties, at least some of which were ordered by the Federal Housing Finance Agency (FHFA), may have contributed to widespread abuses by mortgage servicing companies and law firms attempting to meet arbitrary deadlines to expedite foreclosures,” Cummings said in a letter sent last month to Edward DeMarco, acting director of FHFA.
Cummings cites a June 2010 report from FHFA’s Office of Conservatorship Operations which concluded that “servicers, attorneys, and other supporting personnel were overloaded with the volume of foreclosures … documentation problems were evident, and law firms … were not devoting the time necessary to their cases.”
Clinton and Seiler stress that the foreclosure timeline mandates come into play only after all loss mitigation options are exhausted.
“Our biggest problem was loans from a year and two years ago were just sitting there,” stagnant in the foreclosure pipeline, Clinton said.
Fannie Mae and Freddie Mac have synchronized their individual foreclosure timeline requirements with the coordinated Servicing Alignment Initiative that went into effect October 1.
Clinton notes that the timelines and penalties have been in place for some time, but with the newly enacted guidelines, the GSE have aligned their parameters in order to help simplify and standardize procedures for their servicers.
“We don’t want the money” from penalties, Clinton said, “we want the behavior,” in terms of servicer compliance with both foreclosure prevention and foreclosure processing procedures.
In today’s environment of mass default, Clinton says the industry needs mass loss mitigation – effective procedures, standardized evaluations, and timely resolutions.
Sunday, December 11, 2011
Housing Still Great Investment, Americans Say
Sixty-two percent of Americans say that purchasing a home is a good investment over the next 10 years, according to the Mortgage Index Study conducted on behalf of Bank of America.
Affordability ranks high among the 1,104 consumers surveyed nationwide. For those considering a home purchase within the next year, 62 percent reported contacting a lender or using online tools to determine affordable monthly mortgage payments, according to the survey. Seventy-four percent also said they plan to use their personal savings for a down payment on a home.
According to the survey, consumers most popular piece of advice for others looking to buy a home soon: Don’t “buy more house than you can afford.”
Source: “Bank of America Survey: Consumers Cautious About Home Affordability,” Inman News (Dec. 8, 2011)
Affordability ranks high among the 1,104 consumers surveyed nationwide. For those considering a home purchase within the next year, 62 percent reported contacting a lender or using online tools to determine affordable monthly mortgage payments, according to the survey. Seventy-four percent also said they plan to use their personal savings for a down payment on a home.
According to the survey, consumers most popular piece of advice for others looking to buy a home soon: Don’t “buy more house than you can afford.”
Source: “Bank of America Survey: Consumers Cautious About Home Affordability,” Inman News (Dec. 8, 2011)
Industry Approaches 1M Loan Modifications This Year
About 885,000 borrowers have received permanent loan modifications this year, according to October data from HOPE NOW. The voluntary alliance of mortgage industry participants announced last month that the industry had completed 5 million modifications since 2007.
“With almost a million loan mods completed this year, it is clear that the industry and its partners continue to invest a tremendous amount of resources into assisting homeowners across the country,” said HOPE NOW executive director Faith Schwartz Wednesday with the release of the October data.
The industry completed almost 80,000 modifications in October after completing a little more than 90,000 in September.
Of the 80,000 modifications completed in October, more than 53,000 were proprietary modifications, while 26,102 were completed through HAMP.
Of the year-to-date modification total of 885,000, about 582,000 are proprietary, while 303,426 were completed through HAMP.
About 79 percent of all proprietary loan modifications completed in October included principal and interest payment reductions. On about 74 percent of the loans, the reductions in principal and interest were at least 10 percent.
Additionally, about 86 percent of proprietary modifications completed in October were fixed-rate modifications.
HOPE NOW also reported that foreclosure starts rose during the month of October, while foreclosure sales fell.
Foreclosure starts increased 7 percent, rising from 196,000 in September to 209,000 in October.
Foreclosure sales fell 5 percent over the month from 68,000 to 64,000.
Delinquencies of 60 days or more fell along with foreclosure sales, dropping 6 percent from 2.81 million in September to 2.65 million in October.
While Schwartz credited the industry for its efforts in accomplishing more than 5 million loan modifications since 2007 and its evolving efforts in borrower outreach, she stated, “The work is not done.”
However, HOPE NOW continues to conduct borrower outreach events throughout the nation to assist struggling homeowners.
“HOPE NOW recently wrapped up its 2011 homeowner outreach schedule – including 15 separate events with close to 12,000 attendees. Events are being planned for the first quarter of 2012 in Charlotte, Miami and Tampa, plus several cities to be determined,” Schwartz said.
“With almost a million loan mods completed this year, it is clear that the industry and its partners continue to invest a tremendous amount of resources into assisting homeowners across the country,” said HOPE NOW executive director Faith Schwartz Wednesday with the release of the October data.
The industry completed almost 80,000 modifications in October after completing a little more than 90,000 in September.
Of the 80,000 modifications completed in October, more than 53,000 were proprietary modifications, while 26,102 were completed through HAMP.
Of the year-to-date modification total of 885,000, about 582,000 are proprietary, while 303,426 were completed through HAMP.
About 79 percent of all proprietary loan modifications completed in October included principal and interest payment reductions. On about 74 percent of the loans, the reductions in principal and interest were at least 10 percent.
Additionally, about 86 percent of proprietary modifications completed in October were fixed-rate modifications.
HOPE NOW also reported that foreclosure starts rose during the month of October, while foreclosure sales fell.
Foreclosure starts increased 7 percent, rising from 196,000 in September to 209,000 in October.
Foreclosure sales fell 5 percent over the month from 68,000 to 64,000.
Delinquencies of 60 days or more fell along with foreclosure sales, dropping 6 percent from 2.81 million in September to 2.65 million in October.
While Schwartz credited the industry for its efforts in accomplishing more than 5 million loan modifications since 2007 and its evolving efforts in borrower outreach, she stated, “The work is not done.”
However, HOPE NOW continues to conduct borrower outreach events throughout the nation to assist struggling homeowners.
“HOPE NOW recently wrapped up its 2011 homeowner outreach schedule – including 15 separate events with close to 12,000 attendees. Events are being planned for the first quarter of 2012 in Charlotte, Miami and Tampa, plus several cities to be determined,” Schwartz said.
Gloves Come Off as Lehman, Equity Residential Fight Over Control of Archstone
After a federal judge on Tuesday cleared the way for Lehman Brothers Holdings Inc. to exit the largest bankruptcy in history, the battle is officially on for control of Archstone, Lehman’s largest real estate asset. The card includes Lehman in one corner, possibly teaming with investors that may or may not include Blackstone and Brookfield Asset Management, squaring off against industry heavyweight Equity Residential and Lehman's partners in Archstone, Barclays Capital and Bank of America Corp.
U.S. Bankruptcy Judge James Peck approved Lehman's plan to exit Chapter 11 reorganization by Jan. 31, more than three years after the world's fourth-largest investment bank collapsed, and plunged the global financial markets further into crisis.
Under the agreement, Lehman Brothers, which had $639 billion in assets at the time it filed for bankruptcy protection in September 2008, will pay out $65 billion to creditors over the next three years versus $450 billion in claims.
Included in Lehman's vastly scaled-down portfolio is a minority 47% stake in Englewood, CO-based Archstone. Barclays Capital and Bank of America Corp. own a combined 53% of the apartment company. Formerly Archstone Smith Trust, the firm was one of the nation's largest REITs at the time Lehman and Tishman Speyer Properties acquired it in a $22 billion leveraged buyout during the peak of the real estate market in 2007.
Chicago-based Equity Residential (NYSE: EQR), an apartment REIT headed by real estate tycoon Sam Zell, emerged as the top bidder to buy out the banks’ majority interest in Archstone. On Dec. 2, an EQR subsidiary entered into a purchase agreement with BofA and Barclays to acquire 50% of their interests in Archstone for a total consideration of $1.33 billion in cash, implying a total equity value of $5 billion.
The acquisition would give Equity Residential a 26.5% interest in Archstone, which has ownership interests in 77,000 apartment units in the U.S. and Germany. However, EQR's end game appears to be full ownership. Zell told the Wall Street Journal that EQR would "like to own the whole company."
Lehman Brother called the offer for Archstone "inadequate," noting in a securities filing that if Archstone were to be broken up and sold in pieces, its net value "would suggest at least an additional $1 billion of value" over the value implied in Equity Residential's offer.
"Lehman believes that the EQR purchase price does not take into consideration the value of Archstone’s platform, including its management, which Lehman believes is the best in the industry, nor does it take into account Archstone’s valuable strategic position within the apartment industry," Lehman stated in the filing.
Lehman said that Bank of America and Barclays failed to provide sufficient information to trigger a 10-day period under its agreements with the banks allowing Lehman to exercise its rights to make a counteroffer. Lehman further alleged it appears that the banks and EQR timed the delivery of the offer for just prior to Lehman’s hearing to confirm its Chapter 11 hearing this week, and the election of its new board of directors, "to optimize the chance that Lehman will not exercise its rights."
Meanwhile, Bloomberg reported this week that Lehman is in talks with investors seeking to raise $2.6 billion, including Brookfield Asset Management Inc. and Blackstone Group LP, to exercise its right to counter EQR's offer and buy a controlling stake in Archstone.
If EQR is successful, it expects to fund the acquisition through a combination of cash on-hand, available borrowings under its $1.25 billion revolving credit facility, which could increase to a total of $1.75 billion; proceeds from the disposition of non-core apartment assets, bank debt and secured and unsecured debt, and equity offerings. Equity Residential and its subsidiary also obtained a commitment from Morgan Stanley Senior Funding, Inc. to provide a $1 billion bridge loan facility.
The sitution has captured Wall Street's attention. Among the scenarios being discussed is Lehman exercising its right of first offer and teaming with a large investor to cut a deal with EQR for a portion of Archstone's assets, retaining the remainder of the portfolio for an potential IPO to raise additional proceeds from real estate sales.
In any case, Lehman "came out swinging" against the EQR cash offer, a move likely to buy it more time in order to raise capital or execute a plan to maximize Archstone's value, Citi REIT analyst Michael Bilerman said in a research note.
"This response by Lehman clearly shows that EQR will have to put up a fight to acquire any interest in Archstone, and while shareholders were expecting such a fight, it nonetheless highlights the potentially long and uncertain road ahead," Bilerman said.
Sandler O’Neill REIT analysts Alexander Goldfarb and James Milam believe that Archstone CEO Scot Sellers and Lehman want to keep the company as an independent entity, and thus "will do everything they can to source the capital necessary to match EQR's offer."
The attraction of Archstone for EQR is clear as it would boost the REIT's penetration in core markets with one of the highest quality portfolios in the multifamily industry, rivaling that of its former office counterpart. Archstone's U.S. portfolio is concentrated in high-value markets such as Washington, D.C., Manhattan, Northern and Southern California, and Seattle.
"We have no doubt in EQR's ability to fund the announced transaction or a potential deal for the whole company, as EQR has ample capital options between secured and unsecured debt, bridge financing, term loans, equity issuance and dispositions," the Sandler O’Neill analysts said.
U.S. Bankruptcy Judge James Peck approved Lehman's plan to exit Chapter 11 reorganization by Jan. 31, more than three years after the world's fourth-largest investment bank collapsed, and plunged the global financial markets further into crisis.
Under the agreement, Lehman Brothers, which had $639 billion in assets at the time it filed for bankruptcy protection in September 2008, will pay out $65 billion to creditors over the next three years versus $450 billion in claims.
Included in Lehman's vastly scaled-down portfolio is a minority 47% stake in Englewood, CO-based Archstone. Barclays Capital and Bank of America Corp. own a combined 53% of the apartment company. Formerly Archstone Smith Trust, the firm was one of the nation's largest REITs at the time Lehman and Tishman Speyer Properties acquired it in a $22 billion leveraged buyout during the peak of the real estate market in 2007.
Chicago-based Equity Residential (NYSE: EQR), an apartment REIT headed by real estate tycoon Sam Zell, emerged as the top bidder to buy out the banks’ majority interest in Archstone. On Dec. 2, an EQR subsidiary entered into a purchase agreement with BofA and Barclays to acquire 50% of their interests in Archstone for a total consideration of $1.33 billion in cash, implying a total equity value of $5 billion.
The acquisition would give Equity Residential a 26.5% interest in Archstone, which has ownership interests in 77,000 apartment units in the U.S. and Germany. However, EQR's end game appears to be full ownership. Zell told the Wall Street Journal that EQR would "like to own the whole company."
Lehman Brother called the offer for Archstone "inadequate," noting in a securities filing that if Archstone were to be broken up and sold in pieces, its net value "would suggest at least an additional $1 billion of value" over the value implied in Equity Residential's offer.
"Lehman believes that the EQR purchase price does not take into consideration the value of Archstone’s platform, including its management, which Lehman believes is the best in the industry, nor does it take into account Archstone’s valuable strategic position within the apartment industry," Lehman stated in the filing.
Lehman said that Bank of America and Barclays failed to provide sufficient information to trigger a 10-day period under its agreements with the banks allowing Lehman to exercise its rights to make a counteroffer. Lehman further alleged it appears that the banks and EQR timed the delivery of the offer for just prior to Lehman’s hearing to confirm its Chapter 11 hearing this week, and the election of its new board of directors, "to optimize the chance that Lehman will not exercise its rights."
Meanwhile, Bloomberg reported this week that Lehman is in talks with investors seeking to raise $2.6 billion, including Brookfield Asset Management Inc. and Blackstone Group LP, to exercise its right to counter EQR's offer and buy a controlling stake in Archstone.
If EQR is successful, it expects to fund the acquisition through a combination of cash on-hand, available borrowings under its $1.25 billion revolving credit facility, which could increase to a total of $1.75 billion; proceeds from the disposition of non-core apartment assets, bank debt and secured and unsecured debt, and equity offerings. Equity Residential and its subsidiary also obtained a commitment from Morgan Stanley Senior Funding, Inc. to provide a $1 billion bridge loan facility.
The sitution has captured Wall Street's attention. Among the scenarios being discussed is Lehman exercising its right of first offer and teaming with a large investor to cut a deal with EQR for a portion of Archstone's assets, retaining the remainder of the portfolio for an potential IPO to raise additional proceeds from real estate sales.
In any case, Lehman "came out swinging" against the EQR cash offer, a move likely to buy it more time in order to raise capital or execute a plan to maximize Archstone's value, Citi REIT analyst Michael Bilerman said in a research note.
"This response by Lehman clearly shows that EQR will have to put up a fight to acquire any interest in Archstone, and while shareholders were expecting such a fight, it nonetheless highlights the potentially long and uncertain road ahead," Bilerman said.
Sandler O’Neill REIT analysts Alexander Goldfarb and James Milam believe that Archstone CEO Scot Sellers and Lehman want to keep the company as an independent entity, and thus "will do everything they can to source the capital necessary to match EQR's offer."
The attraction of Archstone for EQR is clear as it would boost the REIT's penetration in core markets with one of the highest quality portfolios in the multifamily industry, rivaling that of its former office counterpart. Archstone's U.S. portfolio is concentrated in high-value markets such as Washington, D.C., Manhattan, Northern and Southern California, and Seattle.
"We have no doubt in EQR's ability to fund the announced transaction or a potential deal for the whole company, as EQR has ample capital options between secured and unsecured debt, bridge financing, term loans, equity issuance and dispositions," the Sandler O’Neill analysts said.
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