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	"This is a very transparent business. Don't bring us a loan that you can see is going to break. Make it see through so that we can see what is happening." - Lee Cotton, chairman and chief executive officer at ARCap REIT Inc., discussing the commercial mortgage backed securities market.

Top National News
Housing Market Shows Signs of Slowing (Atlanta Journal-Constitution)
More News: Federal Deposit Insurance Corp. (Washington Post)
Office Buyers Ignore Vacancies (Wall Street Journal)
Insuring Against Terrorism (New York Times)
Pork for Insurers (Washington Post)
Home-Builder Optimism Dips Slightly From High Levels (CBSMarketWatch.com)
FNIS Launches Web-Based Lead Tool (Inman News Features)
Controversial Lending Law Snarls Sales of Homes (Cleveland Plain Dealer)

Residential Finance News
War Weighs Heavy on Economic Outlook
Residential Briefs

Commercial/Multifamily Finance News
Lenders, Borrowers Discuss CMBS
Office DealMaker of the Day
Commercial Briefs

MBA News
MBA to Simplify Member E-Mail Process

Spotlight: Technology
Industry Application Developer Finds a Technology Match

Housing Market Shows Signs of Slowing
Atlanta Journal-Constitution (10/17/02) P. 1G; Kanell, Michael E.
Housing is important to the overall economy, among other reasons, because it creates real estate, construction, and landscaping jobs while fueling consumer spending by freeing up cash through refinancing. Though home sales are on pace to hit a new record of 6.5 million units this year, Economy.com economist Celia Chen is skeptical about the ability of the market to continue driving economic growth. Her view is supported by new market data such as the Mortgage Bankers Association's Wednesday report that home loan applications slipped 2 percent last week and last week's survey results from ABC/Money magazine showing that consumer comfort took a dive last week and has yet to regain momentum. While any collapse in housing prices will most likely hurt only the most overpriced locales--such as Boston and Washington, D.C.--experts insist that home prices in all areas cannot continue to outpace income, which is already causing some properties to sit unsold for longer periods of time.
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More News: Federal Deposit Insurance Corp.
Washington Post (10/17/02) P. E2
Donald E. Powell, chairman of the independent Federal Deposit Insurance Corp., surprised fellow federal bank regulators in a recent speech by suggesting a change in the bank regulating system that would eliminate the numerous federal agencies and implement a single U.S. regulator. At the present time, it is not known whether the Bush administration supports Powell's overhaul proposal.
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Office Buyers Ignore Vacancies
Wall Street Journal (10/17/02) P. B6; Rich, Motoko
Real Capital Analytics Inc. and Reis Inc. report that office property buyers have closed or inked deals worth a total of $32.1 billion since the start of 2002, even as the nation's office vacancy rate rose to nearly 16 percent in the third quarter--its highest level in nine years. Prices for office buildings are rising at a steep rate, as evidenced by Boston Properties Inc.'s $1.06 billion acquisition of Citigroup Inc.'s headquarters in September. Financial pros point out that the strong market for commercial property transactions is one of the few lines of business actually nourishing the nation's investment banks. Ron Sturzenegger, head of real-estate investment banking at Bank of America, comments, "The good news is that real-estate investment banks across Wall Street are going to hit there budgets, which may be a challenge for other industry groups."
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Insuring Against Terrorism
New York Times (10/17/02) P. A30
The editors of the New York Times are calling on President Bush to back up his political rhetoric by stepping up the pressure on House Republican leaders to make a deal with Senate Democrats in hopes of passing terrorism insurance legislation before lawmakers break to hit the campaign trail later this month. The holdup is that a majority of GOP lawmakers refuse to accept a bill unless it bans punitive damages, while Democratic legislators remain hesitant to back any measure that they believe will diminish plaintiffs' ability to seek such damages. The Times editorial staff applauds the White House for being open to accepting severely limited punitive damages. The editors urge immediate congressional action on the matter, noting: "Private insurers faced more than $40 billion in claims from the Sept. 11 attacks, and the industry is not in a position to sustain another catastrophe of that magnitude."
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Pork for Insurers
Washington Post (10/16/02) P. A24
In a staff editorial, the Washington Post has come out against congressional legislation that would give America a terrorism insurance package, stating that "the case for government provision has grown weaker. Congress is poised to shower taxpayers' money on insurance companies for no good reason." Post editors point to conflicting reports on the impact that lack of terrorism coverage has had--the real estate lobby claims it has delayed or halted $15 billion worth of construction projects, while the Mortgage Bankers Association's own estimate is much lower at $3.7 billion and a Federal Reserve survey finds no terror-related decrease in lending at all. The Washington Post suggests that the reality is that only a few trophy buildings in major cities such as New York and Chicago have had problems getting insurance, "and that a similarly small number of construction projects have been held up." That much said, it says the Bush administration is backing a measure "whose policy merits are debatable, but whose one certain effect is to subsidize insurers and real-estate financiers."
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Home-Builder Optimism Dips Slightly From High Levels
CBSMarketWatch.com (10/16/02) ; Kerch, Steve
The National Association of Home Builders' index on housing-market activity fell one point to 62 for October. While the components measuring builders' expectations for homebuyer traffic at subdivisions and for future sales declined, the component measuring builders' outlook on current sales improved. "On the strength of continuing low mortgage rates and sound house-price performance, builders still have a very good outlook on the current marketplace," comments NAHB President Gary Garczynski. Indeed, the builders' group projects 2002 as a record-setting year for sales of new single-family homes at 945,000 units, compared to an all-time high of 908,000 in 2001.
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FNIS Launches Web-Based Lead Tool
Inman News Features (10/16/02)
Lead Locator--an online resource developed by Fidelity National Information Systems (FNIS)--lets lenders search the company's national property database via SiteXData.com for mortgage leads based on loan-to-value ratio, loan characteristics, property and ownership traits, market value, location, and available equity. The FNIS Data Services database features over 150 million property, ownership, sales, and mortgage records for nearly 1,200 counties nationwide as well as refinance, second mortgage, and credit line data and telephone numbers for over 350 counties.
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Controversial Lending Law Snarls Sales of Homes
Cleveland Plain Dealer (10/15/02) P. A1; Murray, Teresa Dixon
Cleveland's controversial predatory lending law imposes severe restrictions on high-cost loans in an effort to protect borrowers, but neither city officials nor those in the mortgage industry understand all of its provisions. For instance, the law bans loans with annual percentage rates (APRs) of 9 percent and prepayment penalties but allows APRs of 14 percent if the borrower completed home-loan counseling. These and other confusing provisions have prompted almost 100 nationwide lenders to stop making loans through the city's mortgage brokers; while many area banks have scrapped home-equity lines, variable first mortgages, and loans purchased from brokers to avoid a possible conflict with the municipal law--which is the only one of its kind nationwide. The measure has also triggered a lawsuit filed by the American Financial Services Association, which insists that the city law cannot override state law, which forbids municipalities from writing mortgage rules.
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MBA (10/17/02) Murray, Michael
Doug Duncan, chief economist at the Mortgage Bankers Association of America, told participants yesterday at ULI's Washington conference on real estate capital markets that war with Iraq could lead to a double dip recession, while no war could lead to a smoother economic recovery.

The prospect of war, a decline in the stock market combined with a drop in consumer spending, and a lack of expansion in business through business-fixed investment as a result of the recovery of corporate profits create the potential for a double dip recession, Duncan said.

"That's not our forecast," Duncan said. "We do not forecast a double dip [recession] but those are the things that I think will bring that into a possibility."

But Duncan also said that oil prices could actually lower following a war because of production patterns changing in Iraq with political changes. Additionally, risk premiums on international transactions could decline if the problem with Iraq is solved.

"That is a significant economic benefit that is often overlooked," Duncan said. "Trade is so important in a global economy."

Duncan noted that concerns remain on debt-load for consumer spending and the possibility of a deflationary environment leading to a double-dip recession.

"We have a good reason to be optimistic," Duncan said. "But in the short term, there are going to be some challenges."

Duncan said that the Federal Reserve Board could cut interest rates by another 50 basis points. "[The Fed] would rather deal with a burst of inflation down the road than with the implications of deflation today when cash is king and borrowers get in trouble," Duncan said.

There are fewer jobs in the payroll sector but more jobs in the household sector, but Duncan said that job additions in the small business sector could have been missed but picked up in the household sector, factoring into consumer confidence. He noted that while consumer spending has held up during the recession, a decline could occur based on dropping dollar volumes in household portfolios. He said that there has been a loss of 85 percent of one year's income in the stock market affecting more than 50 percent of households, mostly in the upper income group. The result of stock market losses could also have an effect on consumer confidence as well as spending.

Regardless, Duncan said that Gross Domestic Product by the end of 2002 should be at about 2.5 percent-a fairly mild recovery-and next year's GDP could range between 2.7 percent to 3 percent. In addition, Duncan said demographics appear favorable for multifamily housing as baby boomers begin to hit retirement age and look into condominiums or possibly assisted living facilities.

Duncan added that a 4 percent yield is a reasonable base on 10-year treasuries, barring a significant deflationary event, as money moves between stocks and bonds with a higher than normal correlation, and the yield could hit 5 percent at the most by next year if the economy continues to recover.

"Those are still pretty darn good rates," Duncan said. "I don't see a lot of scenarios that will push it beyond that."

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MBA (10/17/02) Sorohan, Mike
Total outstanding loans in the Federal Home Loan Banks' Mortgage Partnership Program grew to $34.5 billion at September 30, up 64 percent from the same period the previous year.

The MPF program, developed by the Federal Home Loan Bank of Chicago, is a risk-sharing partnership between the FHLBanks and its cooperative member banks designed as an alternative to selling fixed-rate mortgages in the secondary mortgage market.

MPF officials said that during the third quarter, more than $1 billion in MPF mortgages were funded in a single day for the first time. The median size for an MPF loan is $115,250.

The District of Columbia's Department of Banking and Financial Institutions has proposed amendments to its regulations that would implement elements of a predatory lending bill passed by the DC City Council earlier this year.

The department issued a proposal that would create a new chapter to Title 26A on "predatory lending practices." The regulations would codify provisions of the DC predatory lending law that would prohibit, among other things, single-premium credit insurance. It would also classify loans with interest rates above certain thresholds as "high-cost" loans that would subject these loans to additional regulations.

A comment period extends through November 3.

The Federal Deposit Insurance Corp. proposed a new federal supervisory structure for banking, securities and insurance that would eliminate inefficiencies and costs in the current system.

Under the proposal, the banking industry, the securities industry, and those companies that choose an optional federal insurance charter would each have its own regulator, which would meet regularly with the Treasury and the Federal Reserve to make decisions on policy, as well as on systemic risk, permissible activities and product regulation.

"All too often, when we engage in turf warfare, the ultimate losers are the industry and the marketplace," said FDIC Chairman Don Powell. "The price is paid in lost opportunities and lost competitiveness."

Neighborhood Gold, a provider of downpayment assistance grants, said it had made more than 5,000 grants during the third quarter.

The program, through The Buyer's Fund, Inc., a non-profit organization, provides downpayment funds as "gifts" to assist qualified low- and moderate-income applicants with downpayments and closing costs. Funds come from pre-existing monies raised by the program through private donations and service fees paid by sellers who enroll their homes in the program.
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MBA (10/17/02) Murray, Michael
In asking borrowers about the pros and cons of Commercial Mortgage Backed Securities, Jack Cohen, chief executive officer of Cohen Financial, Chicago, discovered a couple of "pros," but mostly "cons.

For that reason, Cohen has been traveling across the country to inform borrowers about the positive aspects of CMBS. At ULI Washington's "Real Estate Capital Markets" conference yesterday in Washington, DC, Cohen discussed what borrowers like-and dislike-about CMBS loans.

"A more sophisticated approach can win big," Cohen said in reference to a borrower planning how to use funds before applying for them. That plan, he said, could help not only the B-piece buyer from kicking out a loan but also improve negotiating power for the borrower.

According to Cohen, and a panel that included a B-piece buyer with two lenders, borrowers could ask for transferability of property, yield maintenance on defeasance and release provisions if they know what they are planning to do with the asset because "some things are negotiable."

For Lee Cotton, chairman and chief executive officer at ARCap REIT Inc., New Canaan, Conn., the negotiation process and borrower requests could force lenders and B-piece buyers to deliver good reasons for approvals or denials. If the reasons are not there, the requests could be delivered.

Some borrowers did appreciate the early rate lock in CMBS loans and the non-recourse aspects, but other borrowers had dislikes, such as servicing dilemmas, last-minute problems on loans that had been set up earlier and inflexibility.

Cohen said portfolio loans could be sold in the same manner that CMBS loans are sold to servicers. Although there are Real Estate Mortgage Investment Conduit (REMIC) restrictions, Cohen said that borrowers need a minimum standard of awareness on CMBS loans.

And Cotton noted that CMBS loans should be done with stabilized real estate assets and borrowers need to communicate their needs to lenders.

"This is a very transparent business," Cotton said. "Don't bring us a loan that you can see is going to break. Make it see through so that we can see what is happening."

According to Cohen, loans can be structured in different ways with various tranches taking on different risks. He said that capital markets in the investment community are sophisticated in plotting points on a curve for the excess return on a risk-adjusted basis and a deal can be structured on anything if the borrower understands the needs of the various constituencies.

"The only important thing on a lease is that you have a financeable lease," Cohen said.

Barry Nectow, senior investment officer at John Hancock Real Estate Finance Inc., Boston, Mass., works with CMBS and portfolio loans. He said the deal itself might determine whether a borrower uses a CMBS or portfolio loan, but there are choices that the borrowing community needs to make and borrowers need to realize that there could be a price for certain choices.

Although there is more certainty of execution in a portfolio loan, borrowers can obtain information on rating agencies, such as finding out that rating agencies can give credit for amortizations, and communicate with B-piece buyers and lenders about further requirements, said Warren Friend, managing director at Morgan Stanley, New York.

"Portfolio lenders pay to get their hands dirty," Friend said.

Cohen added that commercial real estate will never have the dearth of capital seen in the late 1980s because of the liquidity from the CMBS market.

"More capital and lower pricing is based on a capital markets explosion in the last 10 years," he said.

But Cohen noted that monitoring the CMBS market for delinquencies is important because problems could arise if bondholders begin to view CMBS as a poor investment. But the dollar volume in the CMBS market has climbed dramatically in the past few years, as opposed to life insurance companies that have remained static, and Cohen said that CMBS is no longer last resort financing but a product that is here to stay.
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MBA (10/17/02) Murray, Michael
When Newcastle Partners purchased two industrial properties to be converted into one Class-A office building, it needed flexible financing through three different loans. Jonathan Soffer, director and Michael Grausz, vice president, at the San Francisco office of Cohen Financial, Chicago, arranged the financing for Newcastle Partners, San Francisco, on the purchase of the two buildings on Gillette Avenue in Irvine, Calif.

The acquisition required a two-year bridge loan, a $19.6 million redevelopment loan and a five-year, fixed rate, interest-only, non-recourse loan in the Commercial Mortgage Backed Securities (CMBS) market.

Newcastle specializes in developing and investing in class-A office and industrial properties with more than $240 million in owned or developed real estate assets in the San Francisco and Los Angeles areas.

Cohen Financial secured the two-year bridge loan for the acquisition of the property through Principal Commercial Acceptance, a subsidiary of Principal Finance. The loan included a component for Newcastle to upgrade and re-tenant the buildings as industrial properties.

But Newcastle negotiated a letter of intent for the larger of the two industrial buildings with Foote, Cone & Belding Worldwide Inc. (FCB), a large advertising firm headquartered in New York that wanted an office in southern California. As a result, the 99,000 square foot building needed to be converted into a class-A office building with above market tenant improvements and a two-level parking structure. However, according to Cohen Financial, the 15-year lease increased the property's estimated market value to $24 million.

Newcastle needed a loan to refinance the existing bridge loan, cover the construction costs and pay the leasing commissions that had increased following the letter of intent. But the financing also had to provide funds for leasing the second building and offer reasonable release prices and terms in case Newcastle found a buyer for the smaller property.

Soffer and Grausz found the funds for the $19.6 million refinance transaction through Cohen Financial's business unit that invests its own capital as well as funds under management. According to Cohen Financial officials, the funds provide competitive pricing, flexible structure and certainty of execution after an agreement on business terms.

With release provisions in tact on the note, Newcastle sold the smaller, 52,000 square foot warehouse and arranged permanent financing following construction and FCB Worldwide's move into its new office space.

Newcastle wanted to refinance the existing loan, cash out its equity at a low fixed rate with no prepayment penalty. But it faced an uphill challenge with a softening office market and unique property improvements that might need to be changed for future tenants. Also, although FCB was a credit tenant, the advertising agency had been facing the worst year in the advertising industry since the Great Depression.

Soffer and Grausz found non-recourse financing through Bear Stearns, New York, with a five-year, fixed-rate, interest-only loan. Despite accepting prepayment penalties, Newcastle took the Commercial Mortgage Backed Securities (CMBS) loan with a trade-off for low rates, capital to recoup equity, no impounds or reserves and no interest rate risk, paying interest-only debt reserves, Cohen Financial officials said.

According to Grausz, the lenders did not dictate programs to Newcastle Partners as the business plan shifted throughout the acquisition process but it was originally intended for a short to medium term play.

"The business plan was to buy the two buildings," Grausz said. "We gave [Newcastle] the options and this was what they felt most comfortable with."
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