MBA NewsLink - A Publication of the Mortgage Bankers Association

Volume 1 | Issue 68 | Friday, October 18, 2002

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	"As we continue to deal with the aftermath of 9/11, I expect the legislation to provide some needed certainty for the insurance markets, while removing an important obstacle that now stands in the way of development projects across the nation." —House Financial Services Committee Chairman Michael Oxley, R-Ohio, expressing optimism that terrorism insurance legislation would reach President George W. Bush’s desk before the end of the year.

Top National News
Mortgage Rates (Washington Post)
Deal Is Close on Terrorism Insurance (Wall Street Journal)
Housing Starts Up to 16-Year High in September (Washington Post)
Mortgages Headed to 5 Percent in 2003, Advisory Firm Says (CBSMarketWatch.com)
No Need for a Pen (Inman News Features)
Housing Market Is Sound--And for Good Reasons (Wall Street Journal)
Default 'Epidemic' in Windy City (Inman News Features)
German Funds Pour Money Into U.S. Properties (New York Times)

Residential Finance News
RERC Report Sees Optimistic Residential Outlook
Residential Briefs

Commercial/Multifamily Finance News
Terrorism Insurance Update: White House and Senate Reach Tentative Agreement
Office DealMaker of the Day

Spotlight: COMMERCIAL/MULTIFAMILY
In Commercial Real Estate, Capital Flow is King

Mortgage Rates
Washington Post (10/18/02) P. E2
Freddie Mac reports that interest on 30-year fixed mortgages climbed from 5.98 percent last week to 6.15 percent, the highest rate posted since mid-September. Last week's long-term rate was the lowest documented since 1971, when Freddie started monitoring interest rates.
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Deal Is Close on Terrorism Insurance
Wall Street Journal (10/18/02) P. A2; McKinnon, John D.; Rogers, David; Starkman, Dean
Progress has been made in resolving the differences among Capitol Hill lawmakers concerning legislation that would offer federal help to terrorism-insurance providers. The Bush administration and Senate Democrats on Thursday drew up an accord that was being floated for signatures. The compromise agreement seeks to consolidate future terror-related litigation in a single federal court--a concession by Democrats, who had wanted state courts--but allows for punitive damages against commercial property owners or others found liable for injury to victims--a concession by the GOP, which had sought to curtail punitive damages. Under the three-year bill, insurance firms would cover a basic minimum equal to 7 percent of their yearly premiums in the first year, 10 percent in the second, and 15 percent in third; while the federal government would cover 90 percent of the losses that exceed those three percentages.
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Housing Starts Up to 16-Year High in September
Washington Post (10/18/02) P. E4; Deane, Daniela
The Commerce Department reports that housing construction rebounded sharply last month to its highest level since 1986, much to the surprise of analysts. Instead of decelerating as normal when winter nears, housing starts rose 13.3 percent over August activity, translating into an annual rate of 1.84 million homes--the highest pace of construction in 16 years. Single-family home starts were even more impressive, climbing 18.2 percent during the month to a yearly rate of 1.48 million--the highest since November 1978. While single-family homebuilding skyrocketed, multifamily housing starts fell 4.4 percent in September as the nation's rental market continued to show signs of softening.
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Mortgages Headed to 5 Percent in 2003, Advisory Firm Says
CBSMarketWatch.com (10/17/02) ; Kerch, Steve
After studying the impact that Federal Reserve rate cuts have had on mortgage rates, StartBank concludes that borrowers could see 5-percent home loans next year. The investment-advisory firm specializing in mortgage company mergers and acquisitions found that as the Federal Funds target rate fell by 449 basis points over the past three years, mortgage rates fell 195 basis points--from 8.21 percent to 6.26 percent--compared to a Federal Funds rate decline of 313 basis points and a mortgage rate decline of 256 basis points in the 1990s. Today's spread is 45 percent higher than during the 1990s and 85 percent higher than the spread from 1995 through 1999. "As mortgage rates continue to trend downward, many investors are focusing--not upon how low mortgage rates will go--but rather, upon when the trend will reverse itself," explains StartBank CEO Richard Easton. "This pessimistic thinking is unwise. Mortgage rates actually have further room to fall, and are likely to fall throughout 2003."
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No Need for a Pen
Inman News Features (10/17/02)
Stewart Title Co. will use Silanis Technology Inc.'s ApproveIt Web server in its electronic closing platform, allowing agents as well as borrowers to endorse realty title and closing documents electronically. The technology will be applicable in both residential and commercial property deals. Electronic signature technology is designed to speed up the real estate closing process and offer lenders a paperless, post-closing process through an electric loan package.
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Housing Market Is Sound--And for Good Reasons
Wall Street Journal (10/17/02) P. A19; Garczynski, F. Gary
In a letter to the Wall Street Journal, National Association of Home Builders President F. Gary Garczynski discredits a recent report by the newspaper that compares the housing market with the stock market and raises concerns about artificially sustained home sales and prices. Garczynski insists that the market is strong due to solid indicators such as record-low interest rates, a lean inventory, low unemployment, and high demand as a result of the expanding population and immigration. Because the economy is not likely to quickly pick up steam, the industry official expects interest rates to remain low and continue to fuel the market. Rather than looking for a so-called housing bubble to burst, Garczynski says attention would be better served by focusing on the scarcity of buildable land in many local communities, which inflates prices and forces many first-time buyers out of the market.
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Default 'Epidemic' in Windy City
Inman News Features (10/16/02)
Foreclosures.com reports that a large number of defaults in the Chicago metropolitan area can be directly linked to predatory lending. Although an ordinance enacted last year barred predatory lenders from doing business in the city, abusive lenders simply turned their attention instead to the suburbs. By the time the state of Illinois established rules with stiff penalties for predatory lending, a wave of minority and elderly suburbanites had already been victimized by abusive lenders--which Foreclosures.com President Alexis McGee says often required mandatory single-premium credit life insurance wrapped into the loan. A spokesman for the Illinois Department of Banking and Real Estate confirms that the pattern of abusive lending sparked an flood of foreclosures in the Chicago area.
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German Funds Pour Money Into U.S. Properties
New York Times (10/16/02) P. C6; Brick, Michael
So far this year, Real Capital Analytics reports that German investors account for a little more than 50 percent of the $6.4 billion in total foreign capital that has been used to buy commercial real estate in the United States. The money enters this country from Germany in two forms: closed-end funds, which own no more than three assets; and open-end funds, most of which are owned by large German banks and insurance firms. One of the most recent deals to be completed by German investors was the purchase of the Commonwealth Tower in Rosslyn, Va., for $106.7 million; in fact, both the buyer and the seller were based in Germany. Scott Latham, a senior director of Cushman & Wakefield, expects these funds to move beyond single high-credit tenant office buildings in the Washington, D.C., metro area and New York City to invest in multi-tenant commercial properties in lower-tier markets.
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RERC Report Sees Optimistic Residential Outlook

MBA (10/18/02) Sorohan, Mike
The U.S. real estate market has demonstrated "unusual strength" that has carried the nation’s economy through recent and current downturns, according to Real Estate Research Corp.’s 2003 Industry Outlook. And the good news for the industry is that the report predicts continued steady growth over the next year.

"It is hard not to see why residential real estate prices have risen steadily as homeownership replaces stocks as the household investment of choice," the report said. "Since we expect rate increases to be limited over the next year, we do not anticipate a material change in the sales of existing homes or in new home construction. Price increases are likely to be moderate as lenders tighten financial credit."

Kenneth Riggs, CEO of RERC, said that despite the report’s prediction that overall economic recovery will be "flat to modest" because of the war against terrorism, stock market uncertainty and unemployment, consumer spending and demand for real estate would spur economic recovery by mid-2003.

"The U.S. population continues to grow at a rate of around 2.8 million people per year, adding, on average, a city the size of Cleveland or Seattle each year for the foreseeable future," Riggs said. "Given this growth and the need for places where people can live, work and play, the demand for real estate will continue."

The report said that unlike previous residential real estate cycles, "no evidence" exists this time of substantial unsold inventory or supply imbalances—in other words, a housing price "bubble"—that could lead to fallout in the market or material decline in values.

"Although we have an oversupply of some property types during this economic downturn, other property types will always be in demand," Riggs said. "For example, there will always be a shortage of homes for first-time homebuyers."

Should the Federal Reserve Board raise interest rates next year, the report said that the result would be a "slowing of price appreciation" in most regional markets. "Low rates alone cannot sustain home price appreciation indefinitely. With substantial barriers to new home construction, and rising population and employment, the outlook for the housing market remains positive," the report said.

Additional information about the RERC report, "Dawning of a New Era; RERC Industry Outlook 2003," can be found at the group’s Web site, www.rerc.com.
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Residential Briefs

MBA (10/18/02) Murray, Michael; Sorohan, Mike
American Home Mortgage Holdings (AHM), New York, announced its earnings for the third quarter with earnings per share (EPS) up by 29 cents per share compared to the same period last year.

AHM’s revenues rose 130 percent to $73.7 million for the third quarter, up from $32 million for the same period in 2001. In the first nine months of 2002, revenue rose 71 percent to $148.1 million compared to $86.4 million in the first nine months of 2001. Meanwhile, EPS for the first nine months of this year increased by 50 cents compared to the same period last year, before the cumulative effect of change in accounting principle.

AHM is a retail originator online and offline, with its online operation handled by MortgageSelect.com. The company's online mortgage channel, MortgageSelect.com recently entered into an agreement with LendingTree and eRealty to provide customers with a network of real estate brokers through MortgageSelect.com. AHM also signed six new private label agreements with financial institutions.

Data-Vision, Mishawaka, Ind., and First American Credco, Poway, Calif., have completed an agreement that will allow Data-Vision lender-customers to use First American Credco’s online rules-based decisioning platform to pre-qualify borrowers for loans.

The agreement, announced yesterday, enables Data-Vision, functioning as an application service provider, to connect its lenders’ Web sites with First American Credco’s credit information services.

John Dempsey, vice president of sales for Data-Vision, said the agreement "answers a call from the lending industry" for earlier decision-making.

Stewart Title Co., Houston, said it selected Silanis' ApproveIt Web Server product as a key component for its SureClose electronic closing platform. The Silanis product will provide Stewart Title agents and customers with the ability to electronically sign title and closing documents for both residential and commercial real estate transactions.

Stewart Morris, president and CEO of Stewart Information Services Corp., said the SureClose platform would enable the company to take advantage of the expanding e-mortgage initiatives throughout the United States.

"With electronic signatures, we want to accomplish two things," Morris said. "We want to make signing quicker and more convenient for the thousands of home sellers, buyers and refinancing customers who choose Stewart as their title insurance and closing professionals. And we want to provide our lender customers with the benefits of managing the post-closing process using an electronic loan package rather than a paper package."
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Terrorism Insurance Update: White House and Senate Reach Tentative Agreement

MBA (10/18/02) Murray, Michael
The White House and Senate have reached a tentative agreement on all aspects of pending terrorism insurance legislation, a source close to the action told MBA NewsLink. Language for a consensus bill is being finalized and should be completed soon, the source said. If the House also agrees to the legislation, action on the bill could take place either next week or possibly the week of November 11, following the November elections.

Negotiations between the House Democrats and Republicans continued this past weekend. Insiders suggest that the chances of passing legislation for a federal backstop on terrorism insurance now stands at better than 50-50.

Rep. Michael Oxley, R-Ohio, chairman of the House Committee on Financial Services, released a statement late yesterday confirming reports that the House, Senate and White House are "close to a final conference report on terrorism insurance legislation." According to sources, insurance companies are expected agree to the bill’s provisions.

"As we continue to deal with the aftermath of 9/11, I expect the legislation to provide some needed certainty for the insurance markets, while removing an important obstacle that now stands in the way of development projects across the nation," Oxley said.

According to the source, the White House has been putting "unbelievable pressure" on the House of Representatives to pass the bill and that President Bush wants this bill to pass through Congress.

If an agreement were reached this week, a final vote would not take place on the bill until early next week but no later than the week of November 11.

The issue holding up passage of House and Senate bills currently in conference committee involves tort reform. Republicans have demanded "liability provisions" from punitive damages in any lawsuits that could occur following terrorist attacks. While Republicans want the lawsuits to be tried in front of a judge, Democrats have insisted that attorneys should be able to litigate for punitive damages in front of a jury.

"They’re making good inroads on tort reform and getting into the dialogue on tort reform measures, but they are not going to include an outright ban on punitive damages," the source said.

Insiders said that trial lawyers are most concerned that disregarding punitive damages could set a precedent for subsequent legislation. Trial lawyers favor jury trials because there is a greater opportunity for large punitive damage awards. A judge, however, might be less inclined to award them.
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DealMaker of the Day

MBA (10/18/02) Murray, Michael
Red Mortgage Capital Inc., Columbus, Ohio, has provided FHA financing for an assisted living facility located in Lake Jackson, Texas. The borrowers, Hearthstone Assisted Living, Inc., Houston, received $3.975 million with a 35-year term at a fixed interest rate of 6.65 percent on an FHA 232/223 (f) refinance loan. It is the first FHA financing completed by Hearthstone.

Samuel Butler, senior managing director at the Fort Worth office of Red Mortgage Capital, arranged the FHA loan to refinance one of four loans in a multiple property pool of four assisted living facilities. Red Mortgage Capital had financed Hearthstone’s four assisted living facilities through a bridge financing line last year.

Hearthstone Assisted Living’s goal on the transaction was to permanently finance the loans from the bridge finance line in the pool using the FHA loan as well as Fannie Mae’s senior housing loans, Butler said.

Butler noted that Hearthstone wanted to try the FHA product and that HUD staff in Houston processed the application quickly and achieved the borrower’s financial objectives of putting the loan into permanent financing and getting Hearthstone out of recourse debt and the bank relationship.

"[The FHA 232/223 (f)] is long term, fully assumable non-recourse finance," Butler said. "It’s the only game in town for 35-year fixed rate, fixed term, non-recourse, fully assumable financing."

The 58-unit, 83 bed assisted living property, built in 1998, is about 60 miles south of Houston with a facility surrounded by a hospital, a pharmacy and a skilled nursing center.
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In Commercial Real Estate, Capital Flow is King

MBA (10/18/02) Murray, Michael
Strong capital flow in commercial real estate markets is a result of "a perfect storm of events that have occurred," says Robert Rosenfeld, principal, JBG Rosenfeld Retail, Bethesda, Md.

Rosenfeld, speaking at ULI’s Washington Conference earlier this week, said that the convergence that has led to the strong capital flow has included low interest rates and a weakness of investment in other classes. But he cautioned that increases in available capital could also inflate commercial real estate values while interest and cap rates drop. Residential real estate parallels the inflated value concept, he said, but different factors, such as supply and demand dynamics, affect residential real estate and the suggestion of a housing "price bubble."

Rosenfeld defined cap rates as a property’s net operating income (NOI), income subtracted by expenses and before debt service, divided by the price. The lower the cap rate, the higher the value of the property.

David Doyle, managing director, Friedman, Billings, Ramsey & Co. (FBR), Arlington, Va., said that as cap rates fell in the United Kingdom, a huge flow of capital led to marginal capital for other alternatives and that "creates its own effect." In the United States, with traditional real estate, lenders have put floors on cap rates and the market will probably revert and get back to becoming more effective, Doyle said.

But Michael Doyle (no relation), managing director of real estate, Cigna Companies, Hartford, Conn., said that the result of high capital flow is also a tightening of spreads. Doyle said his biggest competition with commercial mortgages comes from downgraded public bonds showing much wider spreads. As for interest rate floors, he pointed out that companies setting floors either want to go out on a "risk spectrum" or are getting out of commercial mortgages.

Cap rates in the D.C. metropolitan market have experienced a 100 basis point shift, Rosenfeld said, but it is not all about interest rates. He said that some part of that 100 basis point change will stick over the short to medium term, but long-term projections are still unknown. Some industry participants have mentioned a paradigm change that could be occurring in the commercial market, but others believe that cap rates move higher once interest rates rise.

The discussion prompted Doug Duncan, chief economist at the Mortgage Bankers Association of America and moderator of the discussion, to ask if there is too much money in real estate.

When the panel did not reply, Duncan asked half-jokingly, "I think the answer to that is yes but you would rather not say it?"

Doyle said that Cigna does worry somewhat about cap rates as it pertains to the possibility of a paradigm shift, but he added paradigm shifts do not usually last.

"Every kind of paradigm shift I’ve ever seen never pans out," Doyle said. "We’re comfortable making loans with a significant amount of equity. If some of the equity takes a hit, we still think we can get out, even at a high interest rate."

On a local basis, Rosenfeld said that part of "the perfect storm" is a weakness in other geographic markets helping Washington, D.C. as values have risen significantly in the last six months. However, there is a greater appreciation for risk-adjusted returns, he added, and the internal rate of return (IRR) is more realistic than it had been in the late 1980s.

"Every deal is being seen by everybody," Rosenfeld said.

Rosenfeld added, however, that there has been some tightening in the market with uncertainty in the economy and the possibility of war against Iraq. Nevertheless, the long-term effect in cap rates, interest rates, values, and the possibility of a paradigm shift in the market have yet to be determined.

The discussion also explored a media-hyped potential housing price "bubble," causing one land developer in the audience to ask a commercial mortgage banker, "If a tree falls in the forest, does anybody hear it?" The banker responded, "I always thought that the tree made a sound."
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