The percentage of second mortgage originations that were closed-end increased progressively over the year to 22 percent of dollars and 32 percent of loans in the second half of 2005 from 18 percent of dollars and 24 percent of loans in the first half.  This increase held true among both piggyback and stand-alone seconds. The average loan amount was much higher for stand-alone loans than for piggyback loans, $86,000 and $56,000, respectively.

The survey covers mortgage origination activity during the third and fourth quarters of 2005. This survey collects detailed information on first-lien and second-lien originations for single family properties. New information collected in this survey effort includes origination data on first-time homebuyers, housing type (single-family attached, single-family detached, etc.) and additional mortgage products.

Please contact Mike Cevarr at mcevarr@mortgagebankers.org for more information on the Year-End 2005 Mortgage Originations Survey.
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Retail construction remains the highest property type in the bidding phase and it continues to increase. Condominiums and retail property types had the largest jump in projects entering bidding from their recent historical average, according to the PPR/Reed Construction Trak.

“Retail is probably the property type that we are most worried about,” said Olivia Fowlie, senior real estate economist at P&PR. In the retail market, Milwaukee, Houston, San Antonio, Seattle and San Francisco had the most space entering bidding, based on percentage of inventory.

“It is driven by demand but it is really driven by yesterday’s demand,” Fowlie said. “We are looking at all these great retail sales over the past few years [and] a lot of them have been driven by the housing market—that’s all [fluid]. The retailers are building into those demand levels which are not going to be there in a lot of markets over the next few years as these projects deliver.”

Planning does not necessarily translate to construction for all property types. Ceremonial groundbreakings and apartment or condominium phases can stretch development out and warehouses tend to be planned projects within large distribution parks, built on an “as-needed basis,” Fowlie said.

However, most projects that go into bidding start in 60 days and the “planning line has been increasing very quickly in the past several years,” Fowlie noted. She said that bidding and starts were usually steady in the past few years but now bidding is beginning to increase.

The Richmond, Charlotte and San Francisco apartment market had the most units entering the bidding phase in the first quarter, based on percentage of inventory, but condominium conversion has helped take away from excessive apartment construction.

“The apartment market by itself—minus the condo market—is in pretty good shape in terms of construction,” Fowlie said. “Office has been very tame as well.”

Office space in the bidding phase has been relatively steady, despite its highest level in years, according to P&PR. In the first quarter, 27.3 million square feet of office space went to bid nationally. Charlotte, Raleigh, Palm Beach County, the Inland Empire and Orlando saw the most office space as a percentage of inventory entering bidding in the first quarter.

Warehouse is the only property type with the amount of space dropping in bids. Analysts cautioned, however, that the warehouse planning and construction cycle is significantly shorter than it is for other property types. Las Vegas, Minneapolis and Charlotte topped the bidding list for warehouse.
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Based on a 78 percent loan-to-value (LTV) ratio, the 10-year interest-only loan carries an interest rate of 5.74 percent and moves to a 30-year amortization schedule after the first four years. Replacement reserves are capped at two years’ payments.

The debt service coverage ratio (DSCR) is at 1.01, but the borrower provided a letter of credit for $1.6 million as additional security, and elected to personally guarantee the top 20 percent of the loan amount, effectively bringing the DSCR to 1.42, according to Union Capital.

The undisclosed borrower has been an active developer in central and eastern Virginia since 1952. He developed thousands of single-family homes and has built many of the 23 apartment projects (9,316 units) he currently owns. Union Capital financed 25 multifamily properties for the developer in the past five years, for a total of $355 million.

Bexley at Matthews Apartments, developed in 2001, has an occupancy rate at 90 percent. The complex includes 240 one, two and three-bedroom garden apartment units with a clubhouse and leasing office, a club room with bar and kitchen, a fitness center and a pool. Average rent is $781 per month and amenities also include a spa, car care center and playground.

Union Capital Investments also provided and $4.65 million in permanent financing for the refinance of Mars Hill Shopping Center. The 26,400 square foot retail shopping center is 30 miles from downtown Atlanta in Acworth, Ga.

The fixed-rate loan, based on a 79 percent LTV with a DSC of 1.39, is for a 10-year term with a 30-year amortization period and carries an interest rate of 5.82 percent.

The Mars Hill Shopping Center includes a tenant mix of AutoZone, Porter Paint, Bank of America and Manhattan Bagel Co. The loan was structured with an earn-out of $550,000 until AutoZone takes occupancy.

Tenant improvement/leasing commission (TI/LC) reserves are capped at $25,000 and were collected at closing. Once the expiring leases this year renew, or the space rents at market for five years, $15,000 of the $25,000 will be released to the borrower.

Union Capital Investments said the borrower owns a number of commercial properties in Georgia, including three strip shopping centers, two free-standing restaurants and a site which is leased to BP North America.
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A full day is devoted to the appraisal review process to help insure quality assurance along with case studies reinforcing these principles. Students will also find that a great take-away from the class are case studies. The new guidelines are geared to increased awareness of red flags, and this becomes evident through the case studies.

Coon explains: "Because of the way the questions are asked about documentation, history, and data sources, there will be hints on the form that would represent red flags. Come to the Appraisal Workshop and learn what to investigate!"

Registration is $895 for MBA members, $1,343 for nonmembers. Registration fees include workshop tuition, workshop materials, and lunch. Register online or call (800) 348-8653. To learn more, visit the program Web site at www.campusmba.org.
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According to Paul Miller, an equity analyst at Friedman, Billings, Ramsey Group Inc., Washington, D.C., the secondary market plays a key role in how this question is answered.

“The [evolving] secondary market is resulting in the changing of how loans are being originated out in the market,” Miller said. “It is also going to determine who is going to be successful and dominate in the future of the mortgage banking space.”

To understand where the industry is today, Miller cited how the industry looked in the past. “In the 1990s, it was a very fragmented market. The Top five originators only controlled 10 percent of the market. It was also controlled by the GSEs [government-sponsored enterprises],” Miller said. “If you didn’t have Fannie Mae or Freddie Mac around for security you couldn’t really go out and sell. The GSEs dominated the trading of securities.”

“On top of that if you had a 30-year fixed rate mortgage, because where the thrift industry was, you could not manage interest rate risk—you basically sold it to Freddie and Fannie,” Miller added. “They have had a huge advantage. The non-agency market was very small probably less than 5 percent in the trading in 1995.”

However, the landscape of today’s market looks drastically different. “Today the Top five originators now control 50 percent of the market,” according to Miller. Some larger companies in the industry could try to dominate the market, he added.

“The GSEs are less dominate in the mortgage-backed securities (MBS) market. In the past couple of years, we have seen the non-agency market grow bigger than the GSE market,” he said. “I think the GSEs don’t really understand what is going on. They believe that we are going to go back to the 30-year fixed rate mortgage and their day of the GSE dominance will come back.”

“The secondary markets now are mature. They have passed the GSE time span. I think the GSEs will become something of less and less importance in the world, just like the FHA program,” Miller added.

To remain competitive in the mortgage lending space, vertical and horizontal integration will have to be considered, Miller said. “When we talk about horizontally and vertically integrated, we think, that is where the big mortgage players have to go,” he said.

Vertical integration means companies will originate, service and keep in portfolio the loans that they think are the better credit, for a better return in equity on their capital, Miller predicted. They will also trade the loans on a capital markets desk, taking away business from Wall Street.

“Not only will you [the lender] have to do everything, but you also have to be an originator of prime, Alt-A, subprime and other niche products,” Miller said. “We think today are mortgage banks that are doing very well are able to deliver all these products. The mortgage banks that are struggling out there are mainly niche players. Some of your pure 30-year fixed rate lenders are really struggling to make money out there. Why? Because people that can deliver all four channels are subsidizing the 30-year channel and the pay out and option ARM. We think the big originators have to diversify into other products or they will continue to become less important in the mortgage world.”
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A historical view of the REIT market revealed that there was no way for the small investor to invest in real estate. “REITs were formed in 1960 as a way for the individual investor to invest a few hundred dollars in shares at the time in an equity REIT,” Chicaferro said. “At the time, small investors were becoming owners of shopping centers or multifamily housing.”

In 2001, New York–based Standard & Poor’s put REITs on the map through the S&P 500 as a recognizable investment for individual investors. Currently, 175 to 200 exist REITs nationwide with assets of $475 billion in property or loans. To qualify as a REIT it must have 75 percent of there assets in real property or at least 75 percent of revenue must come from real estate.

Chicaferro said REITs have two advantages: they are tax-exempt and they trade at a higher multiple compared to mortgage companies assuming they are both in the real estate business. “Straight mortgage companies trade at a four times multiple. Loan REITs trade at eight times multiple. Over the years, several mortgage companies have converted to REITs,” Chicaferro said.

For Thornburg Mortgage, the investor is the focus. “We want to pay a nice, safe return to the investor. All REITs should look at the business that way,” Chicaferro added. “If you are thinking about forming a REIT or looking at a REIT for an investment, management should focus on the stockholder.”

According to Chicaferro’s research, there is a strong interest in REITs that focus retail, wholesale, correspondent or a combination of the three. “The market today, the original quote for new production in residential was $2.8 trillion of production,” he said. “That has been downgraded to the $2.3 trillion, a $500 billion drop because of the higher interest rate although; $2.3 trillion is still a large number to me.”

Several types of REITs make up the market. Equity REITs total 92 percent of the total in the market. Mortgage or loan REITs are a growing sector. Thornburg entered into the mortgage REIT business in 1993, Chicaferro said. Hybrid REITs consist of only 2 percent of the market. “I don’t think that is going to get much larger. I think it will remain the third smallest of the three," he said.”

Chicaferro said he expects to see the REIT sector continue to grow especially with the added advantages of its rate of return and tax shelter.
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