HUD’s Donovan Addresses FHA, HAMP Challenges
Housing and Urban Development Secretary Shaun Donovan spoke yesterday with National Public Radio news anchor Liane Hansen.
The focus was FHA and HAMP.
On a scenario for tougher standards of qualification for borrowers, here’s Donovan’s now-familiar refrain:
[Borrowers]
they would need to bring more cash to the closing table upfront. We’re looking at exactly the way to do that and, again, to try to ensure that we’re limiting the riskiest borrowers in our programs. So we’ll announce by the end of January exactly how we’re going to do that.But we’re looking at things like larger down payments, looking at, for example, we just lowered the percentage of what we call seller concessions. So, effectively, discounts to build into their loan upfront, which can make the loan somewhat riskier. So there’s a set of things that we’re looking at that combined together we think will help make FHA loans safer.
As for the oft-maligned Making Homes Affordable mortgage loan modification program, Donovan comes out swinging at the banks.
So those trial modifications, even though they’re not permanent, are lowering payments, are helping to avoid foreclosure. And the vast majority of those we didn’t expect to be permanent modifications at this point, because the end of the trial period hasn’t come up yet.
What we said, though, is that we are very concerned about the low number that have converted at this point. We are concerned that the servicers, frankly, aren’t doing a good enough job.
So, we need to watch closely and see what happens over the next month and beyond to see that banks are doing a better job. And if they’re not, there are going to be some serious consequences in terms of the way that we oversee the program. And we’re going to look at others ways to try to get these modifications to the permanent stage.
Futures Speak–Will Pin Stripes Rules Apply?
Futures look as if they’re going to open lower today amid anxiety among Wall Street players about how soon we’ll see the Fed start exiting its zero-bound interest rate policy.
Still, lots of analysts are calling for an okay December and a Santa Clause rally–though tepid.
You’d think the Yankees won the World Series, or something.
We love that line “past performance is no guide to future returns.”
Notes from the Trenches: If I knew then What I know Now
Here’s a first person account from St. Lawrence Homes’ Rich Ohmann, brother of the company’s founder Bob, and a part of the management team that has weathered a year-plus trying to emerge from Chapter 11 bankruptcy protection.
I can’t even begin to count how many times I’ve heard those words in the last year. It seems as if everyone believes that we are all smarter for the experience of surviving an economic tsunami, a tidal wave of fiscal destruction. I’ve got news for the collective all, bankers, contractors, builders, suppliers, magazine publishers, cable TV outlets, jet sellers and yacht brokers….the list is endless: We aren’t any smarter now and we weren’t idiots way back when.
The key difference between the then and now is really only the fact that we are now forced and are therefore begrudgingly willing to deal with issues that were glaringly obvious. How do I know this? I’ve lived in a pressure cooker for the past 12 months and have worked for a company that was forced to confront every single issue and problem head on in order to survive. Without fail at each meeting someone says the magic phrase, ‘If we only knew then what we know now.’ In retrospect I should have started an over and under pool on the length of time between the basic introduction and the uttering of the phrase.
Here’s what we knew then:
- Developers had no business dictating a ‘lot to package’ price for their lots. Market forces should have driven what we paid for lots. Gutting profits to pay egregious lot costs destroyed the long term financial strength of the developer’s clients and thus destroyed the developers themselves. If you extract the golden egg you will most certainly kill the goose.
- Bankers can be your friends but the relationship with their institutions is only a money deal and friendship isn’t going to rule the day. The fact that you can (or could) borrow doesn’t have any relation to whether you SHOULD borrow. Thankfully building speculatively isn’t in the cards in the near future; it shouldn’t have been a big part of the past either. At the end of the day you can have more fun for less money betting black or red on a Vegas roulette wheel.
- If you’re a builder, build. If you’re a developer develop. If you are banker loan money, collect payments. Do what you do best and nothing else. It’s simplistic but true. Never do anything that someone else is better at just to try and gain competitive position or make more money. Greed is good……for nothing.
- You can’t eat wood unless you’re a termite. Holding on to real estate in a slumping market is a bad plan. It was bad in the 1920′s, the 1970′s, and the ‘90′s and certainly in 2007/2008. You can’t get away from taking your lumps. If you have children I have an example for you. I have a six year old. Getting him to take medicine is tough. I always make him do it though since it will make him better. It’s true in real estate too. The market sets pricing. Pay attention to the market.
- There’s only 52 weeks in the year. Make every one of them count. I’m not just talking about the obvious like selling houses and closing quickly. Manage better and constantly. Innovate, create, motivate…..anything except stagnate.
- It’s not what you make it’s what you keep. Profit is a worthy prize. Unit volume, dollar volume and other bragging rights measurements are just worthless if gained at the expense of fiscal performance.
There’s no substitute for the absolute unfiltered truth. Don’t take this to mean that any of us aren’t truthful. We’re just really good at dressing up the truth in fancy presentation, award winning brochures and other really wonderful disguises. Subtlety isn’t really necessary with your tradesman, your bankers, your lawyers, or your employee’s and even more so when a crisis is looming.
When it was finally clear that we had no choice but to find a way to reorganize we approached the situation with open doors and full candor. We armed everyone who would be affected by our filing with facts and clearly stated our intentions to stay open and find a way to continue the company. In the end it was astonishing that we rallied almost everyone who had a stake in the survival of the company around the single focused goal of survival for the future.
We moved through our case and encountered only a few challenges, all without success against the company. We found subcontractors willing to speak on our behalf. We had customers who took the stand to tell how they only wanted their homes finished. In the end our survival has cost everyone involved dearly.
We are forever changed by the experience. We certainly aren’t smarter but we’re certainly more in touch with acting quickly on the things that we know to be true.
I would encourage everyone to make a list of the things that you should change. Tick them off one at a time quickly. You don’t need a market study, a consultant, or anyone else. You’ve gotten where you are with your street smarts, prove your worth. There’s no time for delay.
Find something that you’ll never, ever do again. There’s an old real estate joke about the real estate prayer: ”Give me one more great market and I promise that I won’t buy a boat and a plane.” My brother Bob, the owner of St. Lawrence Homes, has his one thing to never do again. He told me that if he ever bought another piece of raw ground to hit him over the head. Under my desk right now is a Louisville Slugger.Maybe we are smarter now than we were.
Desperate Words from Home Building’s Trenches
A home builder who’s fighting for dear life with operations in two regions called in a panic. He’s got new product coming on line, designed and priced to offer buyers a new-home alternative to resale and distressed sales cropping up all over his markets.
But he’s got two problems:
- One is that his new product line is residential over retail and office units, and he can’t get banks to appraise the residential units in a way that reflects any value in the commercial units.
- Two, he’s had not one, but two potential mortgage lenders come back with word that FHA loans now require a minimum 640 credit score for borrowers.
Getting his units valued and getting his customers loans for places where buyers could qualify on the remaining 60 days of the $8,000 first-time buyer tax credit are now big sudden headwinds, after all the investment and construction operational speed and efficiency in getting the product ready to go online before the tax credit expiration.
FHA loans, which dropped to single-digit percentage share of new-home mortgages in the first part of the decade thanks largely to the proliferation of subprime and other exotic mortgage products, now account for six or more out of every 10 new-home loans, and without the FHA to back lenders now, many borrowers would be out of options.
On Sept. 4, The Wall Street Journal reported:
Some economists say the FHA’s lending has been crucial to preventing a deeper bust in property. Thomas Lawler, an independent housing economist, said “the alternative could have been a complete meltdown of housing finance” that would have ultimately led to much larger losses. Critics have said the FHA, which has never had a chief risk officer, isn’t able to manage such a large portfolio in an unstable market.
Policymakers have used the FHA to stabilize the housing market by pushing it to offer credit with far easier terms than that offered by most private lenders. For example, it will back loans with down payments as low as 3.5%.
As default rates in FHA loans notch up–7.8 of FHA loans are late 90-days plus, i.e. in default, per Inside Mortgage Finance – stress gets added to their guidelines to banks. This means more nail-biting for home buyers who may have qualified at a lower credit score even a month ago.
These stories are legion.
In a virtually no-debt available environment, private home builders are pulling out the stops to meet the market at least half way. They’re virtually locked out of lending for cheaper land reloads, and loans to go vertical are almost as scarce.
This latest set of tidings out of the banks make it abundantly clear why more and more privately funded home builders say “bank” like it’s just another four-letter word.
Home Builders Buy–and Bide–Time via Debt Moves
Tell us, have we tired of the phrase “the new normal” yet?
Also, do those who favor Adam Smith policy eat more of one kind of breakfast cereal at some point in their formative years, whereas the ones who adopt John Maynard Keynes’ principles to manage through economic hard times eat, say, Lucky Charms?
The question of the moment for businesses that make a living — or try to — in new residential construction is what to do in a mixed-signals economy other than dodge the carcasses of America’s regional banks and try to convince another buyer that a new home for 25% more is still better than a used home coming out of foreclosure.
To look at how public home builders are behaving–especially in managing their near-term debt maturities–a long runway to recovery is what they’ve got in mind. They’ll comp better year-on-year when we arrive in 2010, but regaining profitability may be more likely to occur on a run-rate basis during the back half of the year rather than on a 2010 fiscal year measuring stick.
Everybody with debt due in 2010, ’11, and ’12, has been working hard to get terms extended, with varying success. In this environment, what collateralizes that debt as it gets extended is slippery. Everybody’s got to have more cash capital backing loans, so borrowers are performing financial acrobatics to collateralize debt that’s pushed down the road to where it’s less menacing.
Home builders are averse to have cash sitting in a bank account as collateral for their debt, so they’ll alternatively look to supply lenders with a letter of credit that would allow the lender to come after the whole amount if there’s a default.
This is all to say that 2010 looks as if it’s another year of living dangerously for home builders. With jobs ranks still shrinking and household formations in a slow-down mode, expectations around cash from home sales have more to do with keeping the lights on and the wheels turning than generating a whole lot of equity growth.
Which is fine if you’re a public company, … one that can get the runway … toward the new normal. Ok that’s the last use of that term except to take pot shots at others who’ll go on to use it to death.
JP Morgan Research Marks a Housing Market Turn
This morning, Michael Rehaut, home building and materials analyst at JP Morgan, writes:
While fundamentals will likely not demonstrate an uninterrupted solid rate of improvement over the next 6-12 months, we believe that not only is housing solidly past its trough, but over the next 24 months will continue to recover and drive further upside to the current rally in the homebuilder stocks. Importantly, we believe a key distinction between today and the last three and a half years, during which time we have largely maintained our negative stance, is that during the downturn not only did supply rise, but demand also consistently fell as different buyers exited the market. Today, despite being elevated, supply appears more manageable, while demand has begun to stabilize and even slowly reemerge. In such an environment, we believe the builders will once again demonstrate positive order growth – historically a powerful positive catalyst – and home price declines will near their end, resulting in the abatement of impairment charges.
The moving target on supply is the foreclosure wave and how and when it gets absorbed during the 24-month period Rehaut eyes for stabilizing of home building’s landscape. As for demand, despite an uptick in the past quarter, some $12.2 trillion in lost household wealth will probably weigh heavily for some time on home buyer motivations. That figure knocks psychology as well as financial means for a loop in predicting buyer behavior.
“The desire is still there for the American Dream of homeownership,” says Senator Johnny Isakson (R-Ga.), who’s backing a hotly contested measure to extend and expand an $8,000 tax credit due to expire Dec. 1. Isakson is convinced that the domino-effect of a sudden, forceful, brief shove in demand for all price points in housing with taxpayer money would pay off in jobs, stabilized household equity, consumer spending, corporate earnings, and resumed economic expansion. “It wasn’t the focus on homeownership that was the problem, it was lending money to people who could not afford homeownership.”
Builderonline.com’s Boyce Thompson has doubts an extension to the credit is in the cards thanks to the incipient broader economic recovery.
But the sustainability of the current recovery is what’s in question. Minus a home buyer tax credit, particularly in the seasonal low-ebb of housing from December through February, we’d be looking at another brutal stretch for an industry that could put people back on payrolls.
Is Rehaut right to look at year on year comps ahead and conclude we’ve reached the bright line moment? He’s not going too far out on a limb with a prediction for improvement over the next 24 months.
Still, we think too many signals are in conflict to say we’ve turned the corner just yet. That might be because our viewpoint is the many home building enterprises still living on the vapor of their cash reserves and a few sales here and there.
A Look in the Rearview: Bottom Uncertain, Fannie in Limbo
The housing oriented government sponsored entities–Freddie Mac and Fannie Mae–have been in the eye of the residential real estate, financial, and economic maelstroms.
Within the far-reaching financial system regulation make-over President Barack Obama outlined today were designs for the near-term future and oversight of the GSEs that do not include their imminent re-privatization.
Here’s a report from Inman News.
Fannie Mae and Freddie Mac are likely to remain in government conservatorship until at least next year, the Obama administration indicated today in unveiling a sweeping plan to overhaul the financial regulatory system.
The mortgage giants’ “continued stability and strength” is needed during “these difficult financial times,” the administration said in a report outlining proposed changes to the regulatory system.
The proposed changes, which will require congressional approval, would include a new financial services oversight council to identify emerging systemic risks and a new national bank supervisor to oversee all federally chartered banks.
In addition, the plan would eliminate the federal thrift charter and other loopholes that the administration says allowed some depository institutions to avoid bank holding-company regulation by the Federal Reserve.
General Growth Collateral Damage
General Growth Properties succumbed this morning, with a Chapter 11 filing in U.S. Bankruptcy Court in New York, taking with it The Rouse Company and residential real estate entities including The Howard Hughes Corporation.
The Wall Street Journal reports extensively on what it terms “one of the largest real-estate failures in U.S. history, capping a precarious, months-long effort to juggle the crushing $27 billion debt load it shouldered in past acquisition sprees.”
The Las Vegas Sun runs this story this morning.
Earlier Wednesday, debt rating agency Standard & Poors said it had learned that a loan backed by the Grand Canal Shoppes at the Venetian resort was transferred to special servicing after General Growth, the mall owner, couldn’t come to terms with servicer LNR Partners Inc. on an extension. This means General Growth is in danger of defaulting on the loan.
The balance on the loan, which matures May 1, is $393.7 million, S&P said.
The New York Times notes the list of the key creditors:
Among the companies listed as General Growth’s 100 largest unsecured creditors are Eurohypo, a unit of Germany’s Commerzbank that holds $2.6 billion worth of loans; Wilmington Trust and the Bank of New York Mellon, representing several classes of bonds; casinos including Mandalay Bay and the Venetian; and an assortment of retailers such as Sephora, Guess?, Borders and Macys.
In its bankruptcy filing, General Growth said that it sought permission to retain a bevy of advisers, including the investment bank Miller Buckfire, the turnaround consulting firm AlixPartners and the law firms Weil, Gotshal & Manges and Kirkland & Ellis. The document was signed by Marcia L. Goldstein, the chair of Weil’s well-known bankruptcy practice.
An industry observer draws our attention to dismaying specifics with respect to the residential development implications in GGP’s filing. Here’s our note this morning from “Jennifer.”
Click on image for access to Summerlin, Nev., info
Key to the discussion of which entities are in bankruptcy is the definition of “GGP Group”. Page 62 of the document says “GGP, along with its approximately 750 wholy owned Debtor and Non-Debtor subsidiaries and affiliates, collectively “GGP Group”. On that same page there is a footnote to the document which says that its Exhibit “A” lists all of the entities for which Chapter 11 bankruptcy was filed on April 16th.
At the bottom of page 64 of that document, I was startled to see the following comment blithely made by the Debtor: “In addition to its core shopping center business, the GGP Group also owns and develops large-scale, long term master planned communities. GGP Group has five master planned communities in and around Columbia, Maryland; Summerlin, Nevada; and Houston, Texas. These communities contain approximately 18,500 saleable acres of land.”
I then went to Exhibit “A”, listing the 200+ new Chapter 11 debtors and scrolled down. I saw Chapter 11 Debtor names which included entities with Town Center Drive in them, and five entities with “Howard Hughes” in them, including The Howard Hughes Corporation and Howard Hughes Properties, Inc., as well as reference to a Canal Shops entity.
The standard “First Day” motions for the bankruptcy cases have been filed, including the all important motion to obtain authorization to keey paying the Debtors’ employees, and to pay them any unpaid prepetition wages. There is no indication yet as to when the first day motions will be heard.
In the Debtor’s Motion for Joint Administration of Cases (Court Document #2) which I read, it says that the GGP Group has a large unsecured line of credit, but it doesn’t say anything about how much money is available to be drawn. That document also says that most of GGP Group’s financing is through mortgages on specific properties.
That does not bode particularly well for the Summerlin operation, because it means that any land sales which are occurring have their cash proceeds tied up, as “lender’s cash collateral”, which an angry mortgage lender is not necessarily likely to let them use.
I am afraid that this is not a good day in the history of Columbia, Maryland, Summerlin, Nevada and ??? in Houston, Texas.
The “Next Wave” of pain in real estate–based on trillions of dollars of commercial mortgage backed securities debt due over the next several years and not enough capital access to offset it–has now begun.
Residential gets another blow as a result.
Reality Bites as Ratings Agencies Downgrade REIT Debt
From MULTIFAMILY EXECUTIVE, by Les Shaver: Single-family sneezes and the world economy, including apartment real estate investment trusts that are assumed to run contracyclical to single-family for-sale trends, get pneumonia. The reason this venue is called Housing Crisis is that the convulsion hits equally both the supply and the demand side of housing, whether you’re talking for-sale or for rent. And it’s hitting not only the balance sheet but also the daily and weekly access to normal working capital, assuming steady cash flow.
There’s an analysis on how tumbling fundamentals and squeezed access to credit have put a pall on REITs’ business and risk outlooks for the next stretch from Multifamily Executive senior editor Les Shaver.
S&P said the ratings were prompted by constrained access to debt and equity capital and concern that the struggling economy will put even greater pressure on cash flow. The agency said “heavy credit revolver usage (in excess of 50 percent), weak debt service coverage, and an over-reliance on earnings from fee-driven and/or asset sales activity are key areas of focus.” It also views the common dividend coverage as a “drawback,” given the need for REITs to preserve liquidity.
“Fundamentals in the multifamily sector are coming under pressure,” says George Skoufis, a director for Standard & Poor’s. “Their debt protection measures are kind of weak. In the previous cycle, they came in with a little bit more of a cushion. Their numbers are a little weaker, and their leverage is a little higher.”
Multifamily and commercial construction lagged the residential for-sale downturn, and many have another leg or two down as employment deteriorates and corporate earnings erode by virture of more conservative money habits among consumers and challenged consumer sentiment. Too, anecdotally anyway, demand for one- and three-bedroom apartments has decline while demand has stayed strong for two-bedroom apartments–an indicator of increased “doubling-up” among people who might choose to live with roommates to weather the downturn.
Dimon in the Rough
Straight talk from one worth listening to.
Very telling speech on the failures and the “pro-cyclical” nature of many banking mechanisms. Given on March 11, 2009. Jamie Dimon, CEO of JP Morgan.
This is more about how and why we’re looking at a tax bill of trillions to deal with over the next stretch of years.
Hat tip: Wine Rex