MBA (9/5/02) Murray, Michael
Loans that are not standard Fannie Mae and Freddie Mac fare should expect recent default numbers to increase, according to the Nonprime Mortgage Report (NMR), issued this week by the University Financial Associates (UFA), Ann Arbor, Mich.

The report said that higher unemployment and economic uncertainty in the form of a potential “double-dip recession” have contributed to a more than 30 percent increase in the nonprime mortgage default risk since 1999.

The NMR Default Risk Index for summer 2002 showed a 10-point rise from one year ago. The index has had a 100-point average from 1990 to 2000, but in 2002 the default risk hit 107, compared to 97 in 2001.

“A double-dip recession would cause [the NMR Default Risk Index] to continue to climb and an improving economy would work in the other direction,” said Dennis Capozza, professor of finance at the University of Michigan and a principal at UFA. “Right now, it’s looking like a weak economy and the double-dip scenario is getting more likely.”

Capozza noted that nonprime lenders should expect defaults on current originations to be 30 percent higher than the average loans originated in 1998 and 1999 and 7 percent higher than the average rate on mortgages originated in the 1990s with a number of factors to blame. Between 1990 and 1991, the index hit just above 140 but dropped into the 80s area between 1993 and 1994. It rose between 1994 and 1995 that had its lowest drop in default risk between 1998 and 1999.

Poor economic conditions, such as a recession, or the potential of a double-dip recession could cause weak payment performance from the borrower, Capozza said. But he said the Federal Reserve Board’s easing of key interest rates has brought a positive effect.

“It reduces the stress of the borrower because they are making a lower mortgage payment,” he said.

But Capozza added that the risk is still rising because the accommodating interest rate policy of the Fed is not sufficient enough to offset the eroding prospects for both the consumer and the underlying housing collateral.

The NMR’s predictions are based on analyses of economic conditions in each state and its localities, as well as the relationship of the conditions to loan profitability. The analysis includes assessing “millions of mortgage loans” to the vulnerability of each state to loan losses and prepayments.

UFA publishes a detailed analysis of each state every quarter, focusing on the best and worst places to lend. NMR predicted the increased defaults in southern California in the mid-90s.

Loans are based on having a “constant-quality,” such as the same borrower, loan and collateral characteristics while the index reflects only the changes in economic conditions, which have been less than favorable in the last two years, rather than the prior two-year term.

The Mortgage Bankers Association will issue its quarterly National Delinquency Survey on September 9.
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Fannie Mae’s 11th annual National Housing Survey, released yesterday, found that 70 percent of Americans saw buying a home as a “safe” and “smart” investment. This was nearly double those who said that an IRA or 401(k) plan was a “safe investment with a lot of potential.” Just 38 percent of respondents made that attribution.

Additionally, the survey said that nearly 25 percent of respondents said they planned to purchase a home within the next three years. More than 85 percent said that the value of their home had increased “at least a little” since they owned them, and 61 percent said their home value had increased “a lot.”

Fannie Mae Chairman and CEO Franklin Raines said that homeowners and potential homeowners were “encouraged” by the lowest interest rates in years. [The Mortgage Bankers Association of America’s Weekly Application Survey reported yesterday that the interest rates for 30-year fixed-rate mortgages fell below 6 percent, a record, and the lowest rates since 1963.]

“The highest percentage of Americans since 1994 say now is a very good time to buy a home, and a quarter of Americans plane to do so in the next three years,” Raines said.

The report also noted that potential minority homeowners believe they face “numerous obstacles” in purchasing a home. Nearly one-third (32 percent) of African Americans surveyed said they believed their credit rating would be a major obstacle to obtaining a mortgage, compared to 23 percent of all adults. Additionally, 27 percent of African Americans said that job security was a “growing worry” that could prevent them from making the decision to buy a home. And nearly two-thirds of African Americans said that not knowing how to get started would be a “major obstacle” or “minor obstacle” in purchasing a home now.

Meanwhile, Freddie Mac’s quarterly Conventional Mortgage Home Price Index, also issued yesterday, showed that home values increased by an annualized rate of 7.6 percent nationwide during the second quarter. While the rate was down slightly from the revised annualized rate of 7.9 percent for the first quarter, Freddie Mac economists said the growth suggested “robust” appreciation, particularly over the past six quarters.

Freddie Mac Chief Economist Frank Nothaft said that while he expected home price growth to slow still further this year, that given current economic conditions the GSE had revised its 2002 forecast for house price appreciation from 4-5 percent to 6-6.5 percent.

“The rate of appreciation, coupled with low mortgage rates, will ensure that housing will continue to provide support for the current economy throughout the rest of the year,” Nothaft said.

The Freddie Mac index indicated that all regions of the country showed some price appreciation, ranging from a high of 3.3 percent (13.8 percent annualized) in the Mid-Atlantic region (New Jersey, New York and Pennsylvania) to just an 0.4 increase (1.8 percent annualized) for the East South Central Division (Alabama, Kentucky, Mississippi and Tennessee).

Links:
Fannie Mae: www.fanniemae.com
Freddie Mac: www.freddiemac.com
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The report, titled “U.S. Housing Market on Firm Foundation Since Sept. 11,” states that conventional housing, accounting for 64% of new home construction, has proven to be the most resilient aspect of the housing market since September 11, while multifamily, which represents 21% of the market, has suffered to a more surprising degree than expected.

"The strength of the conventional housing market has materially exceeded the expectations of most industry participants," said Lisa Sarajian, Standard & Poor's Managing Director, Real Estate Companies.

But multifamily housing real estate investment trusts (REITs) will likely experience weak operating conditions as long as conventional builders are doing well, which means multifamily REITs could remain under pressure for another six months to a year, Sarajian said. However, she noted that moderate leverage levels, sound liquidity positions, and minimal debt maturity needs for multifamily REITs should enable most of these rated companies to ride out the weak operating environment.

The good news, Sarajian said, is that this activity has prevented a more material economic downturn than might otherwise have been the case.

"But this current, very robust level of activity, absent a corresponding improvement in job or household formations, is probably not completely sustainable regardless of interest rates," Sarajian added.

As a result, Standard & Poor's believes that single-family housing starts will cool modestly as a gradually strengthening economy brings an end to declining interest rates. The potential for modestly lower housing starts, however, is not expected to negatively impact the credit quality of conventional homebuilders.

Meanwhile, the report also shows that while accounting for 15% of the market, manufactured housing has continued to battle high levels of repossessed inventory. More recently, it has been competing in some markets with conventional housing at lower price points. The ratings agency said that the outlook for manufactured housing industry participants likely remains negative until repossession levels level off or new finance participants enter this market.
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John Nelson, managing director in the San Francisco office and David Borge, vice president, L.J. Melody & Co. in the Orlando office arranged the funding for the transaction with Credit Suisse First Boston (CSFB), New York. The borrower, Falcon Real Estate Investment Co., Ltd., New York, is a 5-year single tenant purchase deal with a floating rate over LIBOR, but the interest rate and amortization was not disclosed.

Although Class A office buildings have been faced with the ongoing issue of terrorism insurance, it was not an issue on this deal, but Borge and Nelson said terrorism insurance continues to be a hindrance on other large deals across the country.

“It’s still an issue,” Borge said. “It just depends on the lender. It depends on the deal.”

According to Nelson, terrorism insurance is “absolutely” still an issue on other properties because it continues to be difficult to obtain for the property owner.

“Most [lenders] are requiring it,” Nelson said. “Sometimes you can’t get [terrorism insurance] depending on the property or the state [the property] is located in.”
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MBA (9/5/02) Murray, Michael
Behringer Harvard REIT I, Inc., a newly organized Maryland corporation, has filed a registration statement with the Securities and Exchange Commission (SEC) to sell a maximum of 80 million shares of common stock, and a minimum of 250,000 shares, for $10 per share to the public with an additional 8 million shares at $10 per share pursuant to its dividend reinvestment plan.

Behringer Harvard REIT I officials said the corporation was formed to acquire and operate institutional office buildings and other commercial real properties, and to provide mortgage financing for the commercial properties.
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“We are filling up quickly,” said Elaine Howard, the MBA’s senior director of conferences and meetings. “Registration is well ahead of record pace.”

“Decades of Discovery” (the convention’s theme) takes place October 20-23 at the Hyatt Regency in Chicago—an appropriate locale, since Chicago saw the birth of the MBA back in 1914. The convention features four educational tracks—Business, Educational, Management and Technology—and a number of major speakers and events.

Highlighting this year’s convention is former President George H.W. Bush, who will speak at the opening General Session on October 21. Other scheduled speakers include former New York City Mayor Rudolph Giuliani, HUD Secretary Mel Martinez, Freddie Mac Chairman and CEO Leland Brendsel and Fannie Mae Chairman and CEO Franklin Raines.

This year’s ticketed events also pack a punch. The Chairman’s Luncheon (October 21) features Apollo 13 Spacecraft Captain James Lovell Jr., who will share his experiences aboard the spacecraft that resulted in the award-winning film Apollo 13. Tickets for this event are $125.

The Sports Luncheon (October 22) features a Chicago institution—former Chicago Bears coach Mike Ditka. Twice named NFL Coach of the Year and the force behind the Bears’ Super Bowl XX team, Ditka will discuss his colorful career. Fox News personality Greta Van Susteren will moderate the Sports Luncheon; tickets are $125.

Club MBA, a popular convention event, this year features funk icons Kool and the Gang and the Fab Four, a Beatles tribute band. Tickets for this event are $190.

Additionally, the convention features an enormous Exhibit Hall featuring nearly 200 exhibitors and sponsors.

September 20 marks the early convention Registration deadline and the cut-off date for hotel room blocks. “To get a hotel room, you have to register first,” Howard said.

For more information about the 2002 MBA Convention, visit the convention Web site at http://events.mbaa.org/89th_annual/index.cfm.
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