(Orawin Velz is director of economic forecasting in the Mortgage Bankers Association’s economics and research department. She can be reached at ovelz@mortgagebankers.org.)
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The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.
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“What happens in the cities of Africa and Asia and other regions will shape our common future,” said Thoraya Ahmed Obaid, executive director of UNFPA. “We must abandon a mindset that resists urbanization and act now to begin a concerted global effort to help cities unleash their potential to spur economic growth and solve social problems.”

Growth of cities will greatly influence development in the 21st century. The UNFPA report urges analysis and pre-emptive action because changes are large and are anticipated to occur rapidly—too rapidly for government planners and policymakers to simply react. Between 2000 and 2030, Asia’s population is expected to increase from 1.36 billion to 2.64 billion; in Africa, 294 million to 742 million; and in Latin America and in the Caribbean, from 394 million to 609 million.

While urban population numbers will skyrocket in these countries, some of these areas were deemed to be new emerging economies in the Merrill Lynch report—they are expected to play an increasingly important role in the global economy going forward. China and Russia are two of the top 10 countries with the fastest-growing HNWI populations—experiencing 7.8 percent and 15.5 percent growth in 2006, respectively. Brazil and India showed continued strength based on domestic private consumption and competitive service and manufacturing sectors.

Latin America experienced gross domestic product growth of 4.8 percent in 2006, and attracted substantial foreign direct investment. The region's HNWI population jumped by 10.2 percent in 2006 as it continued to outperform the global average of 8.3 percent. The growth of these areas forecasts potential for high levels of population growth to meet the varying demands of an emerging economy. However, there is some resistance and ignorance, according the UNFPA report.

“Though countries vary, most urban growth is the result of natural increase rather than migration. Migration actually has a positive impact on cities,” the UNFPA report said. “Cities demonstrate clear advantages in reducing poverty. Yet the potential advantages are not being realized in practice, because cities, trying to discourage migration, have neglected the poor and ignored their potential. As a result poverty is growing faster in urban areas than rural areas today.”

Improved lives for urban migrants, especially having adequate urban housing is necessary to accommodate the population growth and also for the peoples’ well-being. Education, health care and employment opportunities and facilities are also required to first meet the needs for the new urban areas, but also to enable the migrants to become accustomed to new ways of living while taking advantage of better educational and vocational opportunities.

“Addressing the large gaps between urban potential and reality means first accepting urban growth and reacting positively to it. This, in turn, calls for advocacy and political commitment,” the UNFPA report said.

Urban space is increasing faster than urban population—by 2030, developing countries will triple their urban land area and industrialized countries will grow 2.5 times. The push for urban sprawl is also related to peri-urbanization, the presence of economic and residential activities in transitional areas between the countryside and city, usually where land is cheaper and less regulated.

“Countries may have to revive the urban and regional planning functions which structural adjustment and breakneck globalization have put on the back burner,” the UNFPA report said. “Rather than utopian master plans, the need is for realistic planning which accepts urban growth as inevitable and operates in a regional rather than a strictly urban context. A ‘city-region’ approach, reaching out to, and coordinating current urban and local governments, would address social and environmental concerns, including the essential contribution of the urban poor.”

Emerging economies cited in the Merrill Lynch report, often crossing into areas where there was the strongest separation between the very wealthy and the very poor, proved resilient, with continued growth in HNWI populations and strong investor cash flow. Singapore and India experienced the larges growth of HNWI population, where increases in 2006 over 2005 were at 21.2 percent and 20.5 percent, respectively. However, economic growth is expected to slow in 2007 as mature economies grow more moderately.

GDP and market capitalization growth rate, two primary drivers of wealth generation, accelerated in 2006, which led to an increase in the number of HNWIs around the world as well as the amount of wealth they control. Emerging markets, such as China and India—areas of predicted urban growth, sustained GDP growth at rates of 10.5 percent and 8.8 percent in 2006, respectively—often outperforming the rest of the world.

“Urbanization—the increase in the urban share of the total population—is inevitable, but it can also be positive. No country in the industrial age has ever achieved significant growth without urbanization. The potential benefits of urbanization far outweigh the disadvantages. The challenge is learning how to exploit its possibilities,” the UNFPA report said.
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The National Affordable Housing Trust Fund Act, introduced by Committee Chairman Barney Frank, D-Mass., and Reps. Maxine Waters, D-Calif.; John McHugh, R-N.Y., and Jim Ramstad, R-Minn., would be funded from amounts provided in two other bills that have cleared the House: H.R. 1427, the Federal Housing Finance Reform Act; and H.R. 1852, the Expanding Americans Home Ownership Act. Under the bill, 60 percent of funds would be allocated directly to local communities, with the remainder to be granted to states, insular areas and Indian tribes.

Frank said the trust fund would be the “largest expansion in federal housing programs in decades.”

“The growing shortage of affordable housing is one of the most serious social and economic problems facing our country,” Frank said. “Given our severely constrained fiscal realities, we are today doing the best we can to address this—creating a low-income housing trust fund that will be paid for in ways that do not draw from federal tax revenues.”

Frank said the Financial Services Committee will hold a hearing to discuss the legislation on July 12 at 10:00 a.m. ET in room 2128 of the Rayburn House Office Building.
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Since careful review of third-party reports is an integral element of the underwriting process of commercial/multifamily properties, and part of this process is the review of Seismic Risk Assessments for properties located in areas that are highly prone to earthquakes, MBA has led the effort to develop standards that can be widely adopted by commercial real estate finance companies, due diligence consultants and rating agencies.

"ASTM is one of the largest voluntary standards development organizations in the world and is an important source for technical standards for materials, products, systems and services," said Tom Kosonen, managing director of Bear, Stearns & Co. and chair of MBA's Seismic Work Group. "In working with ASTM over the last few years, we have truly achieved our main goal, that being the official release of these two integral seismic risk assessment standards."

For commercial real estate loans made in areas of the country with a significant degree of earthquake activity, lenders typically require an earthquake probable maximum loss study  in order to fund a loan. The purpose of the PML study is to examine the potential susceptibility of a commercial project to earthquake damage. For those properties that have a significant likelihood of sustaining earthquake damage of more than 20 percent of property value, most lenders require earthquake insurance to be in place.

However, the lack of a widely adopted earthquake PML study standards has caused a wide variation in earthquake PML study results and concerns have been raised within the industry. Consequently, MBA formed the Seismic Work Group to work with ASTM to revise E2026-99 (now E2026-07) in a manner that would allow for its more widespread adoption and enhanced seismic risk assessment uniformity while creating the Standard Practice for Probable Maximum Loss Evaluations for Earthquake Due-Diligence Assessments (E2557-07) document, which is intended to address securitized mortgages.

With the release of these two standards, MBA's Seismic Work Group is also preparing the Seismic Handbook, intended to demystify how seismic studies are performed and provide instruction on incorporating the revised ASTM standards into seismic reports. The Seismic Handbook will be released later this summer.
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Kim Diamond, managing director at Standard & Poor's, New York, said a true gatekeeper for the CMBS market is difficult in times of rampant liquidity, and all market participants—rating agencies, originators and investors—have a responsibility to maintain the industry's integrity.

"I think it's incumbent on all to assume responsibility for the industry," Diamond said.

Rating agencies historically play the role of monitoring issuer underwriting standards, but given the current state of liquidity in the CMBS market and the challenges in the residential subprime market, CMBS players need to enhance their roles as "quasi-gatekeepers," Diamond said. She noted that residential subprime concerns became "a healthy wake-up call, causing people in the CMBS sector to listen, and open their eyes and ears.”

However, Alan Todd, executive director and head of CMBS research at JP Morgan, New York, said despite “sometimes-noted superficial commonalities" between subprime and commercial real estate underwriting trends, JP Morgan’s June report revealed that none of the same fundamental deterioration has affected the CMBS market.

"Despite wider spreads and steeper credit curves, aggregate delinquencies remain under 10 basis points with the majority of the delinquent and defaulted loans localized in the multifamily sector," Todd said, adding that delinquencies are still low in the CMBS market and any negative changes in commercial real estate fundamentals are 12 to 18 months away "at the earliest."

Todd said it will ultimately be investors, with the most to lose economically, who will ensure stability in the CMBS industry. Twice this month, on loans signed off by ratings agencies and b-piece buyers, AAA investors removed themselves from the loans within days of pricing, according to Todd.

“It’s the first time we’ve seen that,” Todd said.

"The investors clearly have the biggest influence in the sense that they vote with their dollars," said Stacey Berger, executive vice president at the Bethesda, Md. office of Midland Loan Services.

Servicers face the challenge of bidding on CMBS loans in a highly competitive arena, and they walk a fine line between credit and pricing. Potential default is not factored into current bids, and servicers have no say in underwriting standards.

"[Midland] is very much credit-sensitive," Berger said, noting that low default rates are keeping servicing costs lower. "When defaults increase, our cost of servicing goes up dramatically."

In April, Diamond noted that deteriorating underwriting and origination standards for commercial mortgage loans, as well as increased liquidity, fierce competition among loan originators and an influx of new buyers, could push defaults higher in CMBS loan pools.

This month, Fitch Ratings, New York, reported increases in multifamily, industrial and self-storage property delinquencies for May while the overall rate of CMBS delinquencies dropped. Total CMBS loan delinquencies fell one basis point each in April, a 0.32 percent drop, and May, 0.31 percent. The decline was primarily based on a large drop in office delinquencies for both months.

Retail and hotel properties ended May with a lower delinquent dollar balance than in March, but multifamily, industrial, self-storage and other CMBS ended last month with a higher delinquent dollar balance than at the end of April, according to Michelle Thomas, director at Fitch.

Multifamily delinquencies, for example, increased more than 7 percent, by $25.9 million, mostly based on four related loans in one $22.3 million transaction in Oklahoma that defaulted at maturity, and five unrelated loans in Texas totaling $13.5 million.

Prepayments are also increasing, and CMBS analysts report "jitters" in the market from Asset-Backed Securities Collateralized Debt Obligations. The Securities and Exchange Commission launched nearly a dozen investigations into CDOs, collateralized loan obligations and the Bear Stearns hedge funds near-collapse in the subprime mortgage market.

"Given the current uncertainty surrounding CDO marks and the expectation that future ABS remittance reports are likely to get worse before they improve, we expect lower-rated synthetic spreads will remain soft as investors contemplate the likelihood of additional hedge fund disruptions, the potential resulting [in] unwinding of positions and the ramifications these events may portend," Todd said.

As for rating agencies, their responsibilities include being consistent and transparent, and issuing opinions that help level the playing field, Diamond said.
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Mark Fisher, senior director at CBRE | Melody, arranged the financing on behalf of Kane Realty Corp., based in Raleigh. The loan was completed with a fixed rate of 6.01 percent and in cooperation with Bryan Kane, a Raleigh-based mortgage broker. The financing replaced an existing $105 million loan provided two and a half years ago.

“Although there was a significant prepayment penalty, the new loan’s increase and favorable terms created the right opportunity,” Fisher said.
 
In 2001, locally based Kane Realty acquired the property for $16 million, with the intent to redevelop the parcel with retail, apartments and office space.

The shopping center at North Hills consists of 13 separate buildings containing ground floor retail and second- and third-story office space in some sections. Major tenants include a 160,000 square-foot Target, JC Penney and Regal Cinema. It is part of a larger Kane development that includes an 80,000 square-foot Lassiter shopping center; a 40,000 square-foot Alexan shopping center; a nearly 300-unit Alexan at North Hills apartments; the nearly 50-unit luxury condominium, “Lassiter;" and a 229-room Renaissance Hotel.

Kane is also developing a 50-acre North Hills East, featuring a large multi-dimensional mixed use property of office, retail, apartments and senior housing.

“Development of North Hills and the adjacent properties has literally shifted the market, turning this entire area into one of Raleigh’s super-prime locations,” Fisher said.
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The PSAs are part of MBA's ongoing efforts to increase consumer financial literacy and to advise those who may face trouble making their loan payments to contact their lenders as soon as possible to make alternate arrangements and help avoid foreclosure.
 
The PSA campaign directs viewers to MBA's consumer information site, www.homeloanlearningcenter.com, where borrowers can get simple, easy-to-understand information about options that best fit their life circumstances when buying homes or choosing new loan products. The Web site provides impartial loan, credit and other valuable information using a simple, user-friendly approach.
 
MBA has also added a section to the Web site to assist borrowers who are facing trouble paying their loans. This section includes contact information for the nation's leading lenders and loan servicers so that borrowers can more easily contact their lenders to begin the process of exploring workout plans.
 
"As mortgage lenders, we understand how important consumer financial literacy is to our communities and to our industry," said MBA Chairman John Robbins, CMB. "And keeping consumers in their homes is our goal—no one wins in a foreclosure. Borrowers in danger of missing mortgage payments should immediately contact their lenders to discuss their options because lenders have a lot of incentive to work with borrowers to keep them in their homes."
 
Links for the new radio and TV spots can be found at MBA’s Web site, www.mortgagebankers.org.
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Experience two full days of general sessions, panel discussions and interactive sessions, focusing on issues currently affecting document custody professionals. Come early for workshops that serve as training sessions for rookies and refresher courses for the tried-and-true veterans of the industry. This is the perfect setting to network with your peers and enjoy San Antonio’s famous Riverwalk.

This conference offers a unique opportunity to network with business-to-business partners and industry peers. A variety of programming covers current topics affecting your business such as:

• eMortgage technology: improving productivity measurement
• Economic outlook
• MERS eRegistry and MISMO® updates
• Information security

New and experienced document custodians, quality assurance professionals or anyone else with a business that touches on the post-closing process, loan delivery, document control, or servicing issues, such as time management and customer service, should plan to attend this conference.

This year’s conference is at the Hyatt Regency San Antonio on the Riverwalk (www.sanantonioregency.hyatt.com/hyatt/hotels/index.jsp).

To register, go to http://store.mortgagebankers.org/ProductDetail.aspx?product_code=M2702038/REGIS. To view the conference web site, go to http://events.mortgagebankers.org/doccustody2007/default.html.
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This annual conference offers a unique opportunity for residential and commercial/multifamily mortgage professionals to stay informed about the latest issues re-shaping the real estate finance industry and to learn new rules and strategies for ensuring compliance and optimizing performance.

Attend this conference and hear from accounting and tax experts and seasoned industry financial analysts. This is also a great forum to earn CPE credits.

Register now and make hotel accommodations online at http://events.mortgagebankers.org/accounting2007/default.html or call (800) 793-6222, Monday–Friday, 9:00 a.m.–5:00 p.m. ET.

Accommodations are at the La Costa Resort and Spa, Carlsbad, Calif., (800) 854-5000 or (760) 438-9111, $199 single/double with $11 resort fee. Cut-off date for this special rate is October 5.

Sponsorship Opportunities
Conference sponsorship is the ideal vehicle to grab the attention of this important audience and position your company as a leader in the industry. For more information contact Phil Giorgianni at pgiorgianni@mortgagebankers.org or call (202) 557-2733.

For more information, visit the Conference web site, http://events.mortgagebankers.org/accounting2007/default.html.
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Nearly two years after Hurricanes Katrina and Rita, policymakers continue to debate the best approaches to resolve gaps in insurance coverage and other issues. However, for those of us in the industry, as well as consumers, action—not talk—is needed.

Congress this month revisited flood insurance and flood insurance reform in the continued wake of the devastation and recovery in New Orleans and the Gulf Coast. The House Financial Services subcommittee on Housing and Community Opportunity recently held a hearing on H.R. 1682, the Flood Insurance Reform and Modernization Act of 2007. Additionally, the House Financial Services subcommittee on Oversight and Investigations and the Homeland Security Management subcommittee on Investigations and Oversight held a joint hearing on flood insurance issues exposed by Rita and Katrina.

Both hearings also examined the National Flood Insurance Program and its interaction with private insurers and the allocation of insurance claims. The House Financial Services Committee is expected to mark up H.R. 1682 later this summer and bring the bill to the House floor.

On the litigation front, major insurance companies are involved in preliminary arguments in a lawsuit filed by policyholders, who allege that insurers underpaid Katrina claims by colluding with a software manufacturer to keep property replacement costs artificially low. The suit alleges that insurers, through the software manufacturer, quoted prices for building materials that were “substantially lower” than standard market value when adjusting and resolving payment for Katrina claims.

Among these and other issues that have bubbled up as a result of the tough scrutiny of experienced individuals and entities that have committed their time to these efforts is the concept of “guaranteed replacement cost vs. replacement cost.” 

Until recently, challenges between two replacement-cost theories may have been less understood by many, especially homeowners. However, now that we are even more aware of the degrees of loss due to environmental catastrophes, it is timely to examine that gap, or, at the very least, to bring it to the attention of homeowners.

In a microscopic-sized nutshell: Up to about 10 years ago, most homeowner policies contained a “guaranteed replacement cost” clause that was understood to mean that the home would be rebuilt—essentially replaced. However, some insurance clauses guaranteed only “replacement cost,” which meant that the stated value of the home only was covered. This resulted in the potential to leave up to about 58 percent of property undervalued. 

Estimates suggest that more than one-fourth of homeowners—26 percent—are underinsured. This can be due to upgrades that have not been addressed in the policies at the time of installation or renewal. It can also be due to construction costs due to seasonal supply and demand, regional demands and regional inflation, It might be as simple as a lack of attention by the homeowner because of stresses on quality time among families with two working parents. 

Those potentially affected by the unintentional gaps created by the varying limits of coverage include the lender, the borrower, the servicer and those who ultimately have the beneficial interest in the mortgage, including a securitization trust.

It would appear that during loan origination—at the underwriting stage—if the amount of insurance was reviewed and considered due to varying factors to assess adequate coverage, and adequate coverage was ultimately maintained, the parties involved would all be better protected in the event of loss. So, a quick and relatively inexpensive step added to the process could potentially save an immeasurable amount of money that may have otherwise been lost.

If lenders, borrowers and investors would demand that coverage be evaluated at the underwriting stage, or at some point during origination, it would make sense that the parties would all be guaranteed proper, if not more adequate coverage.

As it is with compliance high cost and compliance rules engines, as well as with fraud detection engines, all of which the servicer and investor communities are becoming more aware, perhaps wider spread usage of a tool that addresses the underinsurance issue on the front end is another way to minimize many facets of potential risk. Now that the issue has been discovered, perhaps a solution of evaluating and confirming proper coverage will become a viable option for protecting the parties involved in the loan transaction.

One common misconception during my days as a compliance officer was that the compliance department was merely overhead—another department that just wanted to say "no." Instead, think of your compliance department as a haven to explain the challenges and changes ahead—a place that offers alternatives and working solutions that benefit all involved.

Compliance departments and compliance tools are not overhead; instead, they are critical parts of the proces that I refer to as a department that will offer solutions to provide "lack of loss" while assisting with risk management.

(The views expressed do not necessarily reflect the policies or views of the Mortgage Bankers Association. MBA NewsLink welcomes your articles on issues involving the real estate finance industry. Articles/inquiries should be sent to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)
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