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“Retail sales growth of more than seven percent was reported in 2004 as consumers cashed-out nearly $120 billion of equity from their homes. We expect cash-out volume to decline by at least 30 percent in 2005.” --Bernard Haddigan, managing director of the national retail group at Marcus & Millichap.

Life Company Delinquencies Plummet in Fourth Quarter
Conference Explores Commercial Securitization for Lawyers

Retail Spreads to Remain Tight, Report Says
Foreign Investment in U.S. Securities Stays Strong

Global Platforms Land Non-Performing Loans

Archon Funds $70M on Nevada 'Lifestyle Center'

TRIA Renewal--No Slam Dunk on Capitol Hill

MBA, Members Raise $71,000 for Tsunami Relief

MISMO-CMSA Alliance Means 'True e-Commerce'

Electronic Transfers Huge Savings for CMBS Servicers

CREF Convention Sets Record

Von Berg Focuses on Educational Opportunities at MBA

Apartment and mixed-use properties dropped the most in the fourth quarter. Apartments fell by .18 percent to .01 percent while mixed-use properties dropped by .15 percent from the third quarter. Retail rose .01 percent from the third to fourth quarters to .06 percent by the end of the year, but retail property delinquencies remained consistent in 2004.

Retail property delinquencies rose .02 percent from 2003 to 2004 while mixed-use properties dropped from 1.44 percent delinquencies in 2003 to .01 percent last quarter. Hotels and motels had no delinquencies at the end of 2003, hit their peak at .39 percent after the second quarter in 2004 and slid to .06 percent in the last quarter.

Office delinquencies rose to .23 percent after the second quarter 2004, up from .014 percent in the first quarter, and dropped to .19 in the third quarter. The office delinquency rate was the highest rate for all four food groups during the fourth quarter but still dropped to .15 percent by the end of 2004. Industrial properties had a .07 percent delinquency rate, down .04 percent from the third quarter 2004.

Total commercial delinquencies fell to .08 percent from .12 percent in the past year. The Mid-Atlantic and East North Central regions showed an increase in delinquencies from the previous year, up .12 percent and .05 percent, respectively. The West North Central region, however, accounted for .6 percent of delinquencies, down from 1.19 percent the previous year and 1.24 percent in the first quarter 2004.

Commercial delinquencies dropped or remained even across different regions of the country from the third to fourth quarter. In New England states, delinquencies dropped to zero in the fourth quarter from .11 percent and in the Mountain region, delinquencies fell to zero from .13 percent in the third quarter. The West South Central region had the largest drop in delinquencies, from .39 percent on September 30 to .02 percent on December 31. The East South Central region fell from .17 percent in the third quarter to .03 percent in the fourth quarter.
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Conference Explores Commercial Securitization for Lawyers
MBA (2/17/2005) Rawak, Melissa

The American Law Institute and the American Bar Association, with support of The Capital Consortium, of which the Mortgage Bankers Association is a member, will hold the Seventh Annual Advanced ALI-ABA Course of Study: Commercial Securitization for Real Estate Lawyers, May 19 and 20 in Chicago.

Securitization is now a significant part of the real estate debt and equity markets. Conduit lenders are competing aggressively with traditional portfolio lenders for loans, and new rules apply to the negotiation and documentation of real estate commercial loans. Real estate finance, once a local or regional business, is now an integral part of global capital markets. Borrowers now have many choices available for public or private, securitized or non-securitized debt. Although securitization has provided access to new sources of capital, periodic turmoil in the capital markets demonstrates that securitization is not without risk. As a result, borrowers and their counsel must carefully consider the advantages and disadvantages of each financing choice.

This annual advanced course of study, comprising 12 full hours of instruction, is designed for real estate lawyers who need a better understanding of the basic elements of the securitization revolution. It answers many of the questions commonly asked: What is negotiable? What is not? What will it cost my client? What do the rating agencies really require? How do I protect my client against volatility in the capital markets? What happens if the lender or servicer encounters financial difficulty? What if the market changes or my client defaults? Whom do I talk to if there is a problem, a default, or a change in circumstances requiring an amendment to the documents?
 
Coursework includes:
• An overview of the economics of the marketplace, presented by representatives of investment banks and other industry leaders
• How to build a bond
• The basic types of securitization structures (including the creation of special purpose, bankruptcy remote entities), along with their legal and practical consequences
• The role of the rating agencies and their requirements, explained by representatives of the leading agencies
• Securitized vs. portfolio loans: a comparison of the risks and rewards
• A brief, user-friendly discussion of tax issues and concerns in various types of transactions, offered by a tax expert
• An exposition of the mortgage loan and related documents developed for securitized lenders by the real estate industry's Capital Consortium
• Advice for dealing with servicers of loans after securitization
• Key opinion issues: How does borrower's counsel respond to a request for an overreaching opinion or a claim that the required form of opinion cannot be changed?

Tuition for this course is $995. Tuition entitles registrants to admission to all sessions, a set of study materials, continental breakfasts and refreshment breaks daily. To register, call 1-800-CLE-NEWS (800-253-6397) or visit the conference Web site, www.ali-aba.org. The conference will take place at the Omni Hotel in Chicago.

The conference is sponsored with the cooperation of the Capital Consortium, whose members include the Mortgage Bankers Association; the Bond Market Association; the Commercial Mortgage Securities Association; the National Association of Realtors; and the Real Estate Roundtable.
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“We expect spreads to remain relatively tight in 2005,” said Bernard Haddigan, managing director of the national retail group at Marcus & Millichap. “If retail sales growth decelerates at a more significant pace than expected, however, spreads are likely to widen as perceived risks rise.”

The U.S. Census Bureau yesterday estimated retail and food services sales for January at $347.7 billion, a drop of .3 percent. Those numbers, however, are small dips compared with 7.2 percent retail sales growth in the past year and 7.6 percent growth in total sales from January 2004. Retail trade sales from November 2004 to January 2004 remain up 7.1 percent compared to the past 12 months, despite a .4 percent drop in January from December 2004.

The retail sector experienced stronger growth in most businesses from December 2003 to 2004. Gasoline stations had a 17.3 percent growth in the past year but experienced 21.4 percent sales growth from 2003 to 2004. Building and material, garden equipment and supplies dealers had 14.1 percent growth, down from 14.4 percent in 2003 to 2004.

“Retail sales growth of more than seven percent was reported in 2004 as consumers cashed-out nearly $120 billion of equity from their homes,” Haddigan said. “We expect cash-out volume to decline by at least 30 percent in 2005.”

Marcus & Millichap expects segmentation of markets, submarkets and property subtypes to become more apparent as high-quality deals remain strong in 2005 and “lesser-quality properties” encounter mild resistance from loan sources, Haddigan said.
 
Fitch Ratings, New York, reported higher discrepancies in retail than any other property market based on its primary and secondary Property Metric Market (PMM) scores. The scores show high volatility in the retail primary markets of San Diego, San Jose and Orlando, as well as New Orleans, Denver, Raleigh and the four Texas primary markets.

Marcus & Millichap forecast Orange County, San Diego and San Jose to have the lowest retail vacancy rates in 2005, respectively, with the highest vacancy rate in San Antonio, the fifth highest vacancy rates in Orlando, the eighth highest retail vacancy rates in Dallas-Fort Worth and the tenth highest in Tampa.

Fitch said nearly 35 percent of the rankings in retail secondary markets are in the two most volatile PMM categories, and include a heavy concentration of markets in the south and southwest, “most notably in Texas and Florida.”

The top five overall markets in Marcus & Millichap’s 2005 national retail index, in order, include San Diego, Orange County, Washington, D.C., Fort Lauderdale and West Palm Beach. Denver climbed six spots. Austin and Orlando each moved up four spots.

“Four of the bottom five markets in the national retail index are located in the Midwest,” Haddigan said. “While market fundamentals will remain relatively stable in these markets and economic improvement is anticipated, employment gains are forecast to remain below national growth rates.”
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Foreign Investment in U.S. Securities Stays Strong
MBA (2/17/2005) Murray, Michael

SAN DIEGO—A weakened dollar does not appear to hamper foreign investors in the U.S., at least for the short term—because there is little alternative.

Foreign investors own 45 percent of U.S. long-term securities as of 2003, after a nearly 100 percent increase in foreign-owned treasury debt between 2002 and 2003. Foreign-owned U.S. treasury securities increased to more than 40 percent in 2002, up from 35 percent in 2000. Japan is the largest holder of foreign-owned U.S. treasury and agency debt, $348 billion and $102 billion, respectively, followed by China with $147 billion in treasury debt and $91 billion in agency debt.

“We see no end in sight in foreign demand for U.S. securities simply because there is not that much happening elsewhere to demand this money, except in China,” said Jay Brinkmann , vice president of research and economics at the Mortgage Bankers Association, speaking at MBA’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo. “I think that is what’s driving some of the climate to China’s purchases. There’s much stronger internal demand there for money.”

Brinkmann said the role of China in U.S. treasury purchases is “very much overstated” and overrated in the press.

“Their purchases just don’t earn them the headlines they’ve been getting,” Brinkmann said.

China, traditionally more of an agency buyer with more Freddie Mac debt securities purchased in 1999, matched agency purchases with treasury securities in 2003, Brinkmann said. In 2004, China backed out of the market considerably and turned toward U.S. treasury debt with Japan and other foreign investors. Japan still accounts for most of Asia’s $230 billion in U.S. treasury securities, Brinkmann said.

“Japan and, to a lesser degree, China, are clearly risk-averse,” Brinkmann said “They’re primarily treasury debt players and then agency. If we can move the Asian markets, even slightly, a few points toward CMBS [commercial mortgage backed securities] or toward other types of securities like [CMBS], any kind of ABS, I think it will have a significant beneficial impact on spreads even if we see the general interest rates increase over the course of the year, as we are expecting.”

The U.S. CMBS market is a borrower’s and bond seller’s market, industry participants said. Net operating income (NOI) does not show much growth right now and interest rates are rising.

“If capital does not flow in, based on delinquencies as [interest] rates rise, or another capital asset class replaces capital, it might give some investors some thought,” said Daniel Smith, senior vice president of North American debt at GE Commercial Finance Real Estate, Addison, Texas. “For right now, there is just a ton of capital throughout the spectrum in an industry that has a relatively flat NOI. It’s an interesting dichotomy right now.”

Across the board, yields, cap rates, and spreads are “coming down and moving in,” said Charles Spetka, president of CW Capital Investments, Needham, Mass.

“Spreads continue to tighten and credit standards continue to erode as [lenders] chase deals, but I don’t see that changing in the near future,” Spetka said. “Borrowers should borrow as much as they can right now while it’s good. It’s a great time to be a borrower. It probably won’t be true at some other point in the future. I just don’t know when.”

MBA Chief Economist Douglas Duncan’s theme for 2005 is “Global Issues on the Margin.” He said foreign capital ownership presents a potential risk for this year as CMBS spreads are back to a level similar to fall of 1998. At that time, an Asian currency crisis and Russian bond default led to a significant flight to quality and widened spreads along with “a certain amount of chaos” from the capital management meltdown.

“But we have seen a return to spreads very similar to what they were prior to that time frame,” Duncan said. “That is what we view as reasonable.”
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Credit Suisse First Boston (CSFB), headquartered in Zurich, Switzerland, and Ocwen Federal Bank FSB, West Palm Beach, Fla., are looking at securitization opportunities in Germany. CSFB hopes for the same results as it did when it went to Japan, when Japanese banks came under pressure from regulators on problem loans and there was a need to sell non-performing loans.

“Most opportunities are in sub and non-performing loans,” said Robert Brennan, managing director at CSFB, speaking at MBA's Commercial Real Estate Finance/Multifamily Housing Convention & Expo.

In Germany, distressed opportunities with subperforming loan portfolios are changing lending assignments into securitizations. William Shepro, senior vice president of commercial finance at Ocwen, uses its asset management, java-based system “Real Sam,” to convert language and currency for servicing the non-performing, securitized loans.

“We grow with our customers overseas,” Shepro said. “We manage deals and participate in profits. Hopefully, we are pricing deals right.”

CSFB does not concern itself with hedging currency risk in Europe and Asia because it is done at the macro treasury level, Brennan said. He said the profit in Europe and Asian commercial mortgage backed securities (CMBS) is not as it was in the U.S. in the early 1990s because of the “legal technology” and its complexity in the U.S. today but valuation support related services and standards continue to develop in Europe and Asia.

“They don’t do [a securitization] the same way in Europe and Asia as we do in the U.S.,” Brennan said. “It has to go through ratings agencies with a certain amount of standards and those standards are still developing, so there is opportunity.”

“The world is getting smaller,” Shepro said. “As the industry grows, it will require a more transparent market overseas. The market will require better systems as investors will want to know more about the deals.”

“I think they [Europe and Asia] will mature at a faster pace because there is so much interest in setting up securitizations in Europe and Asia by global banks,” Brennan said. The securitizations in Europe generally stay in Europe and the same is true for Asian investors purchasing securities in Asia. “They tend to stay in the same currency and they tend to stay in the same market,” Brennan said.

Brennan said it is important not to underestimate the cultural differences, including the language barrier. Few people can understand the language as well as the real estate complexities, particularly in Asia. “We need to speak and read the language and have a presence in the local markets,” Brennan said.

Charles Manger, partner at Manger PLLC , Seattle, speaks 11 languages, including Japanese. Manger said there are numerous opportunities around the world to work with governments and set up urban communities. Manger described Japan as a “big, black hole” and the “government has written deals to absorb the risk.”

Brennan said U.S. companies who venture overseas need to be aware that the pace is slower in some countries and “everything is more expensive,” such as the cost to house employees in Western Europe and Japan.

Shepro said licensing can be more difficult in other countries and while it is fairly easy to file for foreclosure in Taiwan, Italy takes longer and the jury is still out on Germany. The differences not as prevalent in the actual foreclosure but the time and steps taken to do the foreclosure are “very different,” he said.

Despite the challenges to move ex-pats outside of the U.S., particularly to China because of time differences, analysts recommend a mix of ex-pats and locals.

“Each side likes to work in the way they’re accustomed to working,” Manger said.
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The lifestyle center has more than 97 percent occupancy to 54 tenants, including national and regional retailers, restaurants and offices, such as REI, Pottery Barn/Williams Sonoma, Ann Taylor Loft and P.F. Changs. The mixed-use property consists of 212,540 square feet of retail and office space in nine buildings located in the heart of the Green Valley Ranch master-planned community in Henderson. The development’s 88 residential condominiums are not part of the collateral.

Average household incomes within one mile and three miles of the lifestyle center in Henderson, are $90,500 and $87,372 respectively. Comparable properties report occupancies of 95 percent to 100 percent and the overall Las Vegas market and southeast Las Vegas sub-market maintained occupancy rates of at least 95 percent since 2000. 

“We believe The District is positioned for long-term success, as the development provides a unique retail experience not available elsewhere in Henderson,” said James Abbee, vice president at Archon Financial. “In addition to a great mix of retail and restaurant tenants, the project benefits from the traffic generated by the adjacent Green Valley Ranch Resort & Casino.”

Bruce Francis, senior director of the Las Vegas office of Houston-based L.J. Melody & Company arranged both transactions on behalf of a single purpose borrowing entity with American Nevada Holdings as its key principal.

“The asset reflects the great qualities of its sponsorship and fundamentally is well-positioned for growth,” Francis said.
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Skarin said Democrats in Congress favor a two-year extension of TRIA, but he added that Capitol Hill generally had little enthusiasm for reauthorization of the TRIA program, compared to a private sector approach. However, he said many on Capitol Hill, especially Democrats, believe that some federal government involvement will be necessary for any solution.

MBA members said the industry needs TRIA to ensure continued health of the commercial and multifamily real estate markets, pointing out that a market vehicle offering affordable terrorism insurance does not exist. Members told Weiss and Skarin that lending on high-profile properties and on properties in "higher risk" locations for terrorist attacks might cease or drop sharply without extension of TRIA. MBA members also pointed out that a failure to renew TRIA would increase real estate borrowing costs in the capital markets and possibly diminish the flow of real estate capital.

“Failure to extend TRIA without an acceptable alternative in place would be tragically short-sighted,” said Robert Vestewig, COO of GEMSA Loan Services , Houston, and chair of MBA’s Legislative Committee . “September 11 showed what an impact on the economy a terrorist act can have. TRIA provides a mechanism to cushion the blow on the economy and on commercial/multifamily real estate in particular.”

TRIA extension is a key issue for MBA, and will be at the forefront of MBA’s National Policy Conference, April 19-20, in Washington, D.C.

 “We’re working hard to bring our members’ views before Congress,” said Gail Davis Cardwell, MBA's senior vice president of the commercial/multifamily group. “The April meeting will afford lenders, investors, and mortgage bankers an opportunity to highlight the importance and urgency of TRIA’s extension before their Representatives and Senators in Congress.”

Please click on the following link for additional information about MBA's National Policy Conference. For additional information on TRIA, please see MBA’s TRIA Issue Paper.

(Leanne Tobias is director of MBA's Commercial/Multifamily group).
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The MBA/Habitat tsunami disaster response fund raised $59,040 from 72 member companies and nearly $4,000 from 27 members of MBA staff. MBA matched the amount of donations from staff, bringing that total to $7,970 and the overall total to $71,000.

“Habitat is a good choice for the funds because they are literally going to build homes where there are people who are homeless,” said MBA President and CEO Jonathan Kempner.

Habitat for Humanity International already had a presence in Sri Lanka, Thailand, Indonesia and India prior to the disaster. With an organizational infrastructure already in place in several of the affected areas, rebuilding efforts began immediately. Additionally, MBA and Habitat have a longstanding partnership of facilitating safe and affordable housing in the U.S.

“MBA expresses its sincerest gratitude to our member companies and staff who responded quickly and unselfishly to this enormous tragedy,” Kempner said.
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The agreement builds on the strengths that CMSA and MISMO bring to the relationship.  CMSA has established one of the industry’s key data standards–the Investor Reporting Package (or IRP), which is used to exchange information throughout the CMBS sector. MBA established MISMO as the industry’s data standards body responsible for developing the technical framework for the use of a powerful technology tool known as XML (Extensible Markup Language) throughout the entire mortgage industry. CMSA and MISMO will work cooperatively to develop the XML version of the CMSA’s IRP. This XML version of the IRP will be based on MISMO’s existing data architecture for commercial and multifamily mortgages. 

The strategic importance of this agreement is far-reaching, because it is based on the concept of a single architecture.  XML provides tremendous benefits to users through its flexibility and ease of use. XML is a language for describing data, but it is not “monolithic.” It is highly customizable, and firms can develop their own “dialects” of this language. 

Just like human language, it can be very difficult to understand information sent in a different dialect than your own. Things are greatly simplified if information is communicated in the same tongue. Through this Alliance, CMSA and MISMO have agreed to communicate information on commercial real estate and commercial mortgages in the same language–MISMO’s commercial-specific XML. As a result of this, the industry’s migration to the use of XML will be accelerated and firms will be able to realize its cost benefits and processes efficiencies in a much shorter timeframe.

This Alliance Agreement is MISMO’s first with an outside standards body. MISMO is also negotiating additional alliance agreements with other standards bodies such as PRIA (the Property Records Industry Association) and the Appraisal Institute. The purpose of an alliance agreement is to establish a formal relationship between otherwise non-affiliated groups that sets forth the rights, responsibilities and expectations of each group and their constituencies. For example, MISMO’s Alliance Agreement with CMSA clearly establishes that the IRP remains the property of CMSA, and that CMSA is the primary forum where changes to the form and content of the IRP take place. 

The agreement also establishes a new commercial workgroup dedicated to developing the XML version of the IRP, which will be led by CMSA’s appointed representatives to MISMO’s Commercial Working Group.

More information on MISMO can be found on its web site, at www.mismo.org.

(Daniel Szparaga is senior director of MBA's Commercial/Multifamily Business Group.)
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"The cost of a full file scrub is between $2000 to 2,500 per loan transfer, based on industry experience or the cost of outsourcing loan set-up to a third party provider," Berger said.

A "time-in-motion" study conducted last fall by the Mortgage Bankers Association and the Mortgage Industry Standards Maintenance Organization (MISMO) for the residential mortgage industry, said data transfers saved servicers up to $249 per loan.

"Given the magnitude and complexity of commercial versus residential loans, and the significant volume differential, a ratio of eight or ten to one does not seem unreasonable." Using this measurement, the industry as a whole could realize savings in excess of $25 million based on current volume. Berger noted that a number of servicers do not perform full file scrubs and a significant number of originator/servicers retain their loans and therefore the full extent of potential savings may not be realized.
 
James Cooke, attorney at the Washington, D.C. law firm of Ballard, Spahr, Andrews & Ingersoll, LLP, said different property types and unique deals make the commercial real estate side of data standards “much more complex.” Some MISMO standard can transfer from residential to commercial but there are also structural considerations.

“We are, in some respects, having to start from scratch,” Cooke said.

“Large lenders and investors are driving conversation,” said Jack Sponsler, director of product management at Emergis, Inc., Montreal. “Those things that were the impediments in the past are starting to go away.” Sponsler said pilot activity for internal unit discovery is a good place to start, particularly for SMART Docs and electronic signatures.

Dan McLaughlin, executive vice president and product division manager for the Mortgage Electronic Registry Systems, Inc. (MERS), noted that eMortgage systems are not always integrated with the loan origination systems used in a residential operation. "These eMortgage systems have been created as standalone systems, so many firms have to answer the question of how you use these new technologies with existing systems. Web services offer one possibility for exposing the data from a legacy system to a new application like eMortgage workflow. In any event, eMortgage and existing processes need to be integrated and automated in order to make economic sense."

MERS' eNote Registry was launched in April 2004 as an industry utility that will serve as the single source for information on the location and holder of the single authoritative copy of the electronic note used in a mortgage transaction. The eNote Registry is a different product from MERS' existing products for registering mortgages originated in the residential and commercial industries.

“In commercial, the documents are not all cookie cutter,” said Mark Aggrey, assistant vice president at GMAC Commercial Holding Corp., speaking about the SMART (Secure, Manageable, Archivable, Retrievable and Transferable) Document, the standard format for a true e-mortgage document.

GMACCM is now testing in-house with electronic signatures and the company hopes to have a pilot program for investors and borrowers or businesses. The e-signature seals a SMART Doc, the “header” is the basic document information and the “view” is the data in the document.

“The biggest issue for us is adoption,” Aggrey said with regard to SMART Docs and electronic signatures. “Most commercial mortgage participants still like to sign papers at the table and end it with a handshake.”
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