TARP Funding In Doubt, Corus’s Condo Empire Teeters in NPL Hell
There are two reasons, the Wall Street Journal notes, that one of the largest lenders in residential condominium construction in the nation–Corus Bankshares–is staring death in the face.
One is questionable strategic judgment [albeit, it becomes more questionable with 20-20 hindsight]:
Click on WSJ graph for expanded version.
With $8.4 billion in assets as of Dec. 31, Corus ranks as one of the biggest banks to flirt with failure this recession. The bank has been in regulators’ cross hairs for months because its once-diversified lending unit, Corus Bank, bet almost exclusively on condos during the housing boom. More than four-fifths of Corus’s loans are concentrated in construction and development projects, mostly condo buildings in speculative markets such as South Florida and Nevada and overbuilt cities such as Atlanta and Phoenix.
The other is an issue that very likely contributes to the paralysis that’s settled heavily on lenders’ connections to developers in single family as well as multifamily. The WSJ reports:
Treasury officials have said that a bank’s viability is a prime consideration in determining whether to grant TARP funds, but the denial of a request can depend on other factors. One red flag for regulators is a concentration in commercial real-estate loans, such as Corus has. Yet the move to establish a bank for toxic debt and other measures in the pending stimulus bill could offer relief for Corus.
The adrenelin goldrush among lenders into commercial real estate acquisition, construction, and development loans in the years 2003 through 2007 is the diametric opposite of the vortex of loss that financials and their residential development borrowers are enduring.
A cascade of failures is what observers most feared a year ago; now it’s what observers most expect.
Got Rent?
There used to be an unspoken newsroom guideline. Find three examples and call that a trend.
So is doubling, and tripling up in apartments a trend for real? Or could it be a hodgepodge of supposition, anecdotes and mother-in-law research? Remember Baby Boomers were supposed to pull up stakes in the suburbs and move to urban centers in droves? It’s a trend in the minds of media, but one that’s waiting to happen in real life.
Should we start writing a heartwarming chapter in the history of American society and culture based on families and extended families living in new harmony under a single roof?
We can almost hear the refrain now, “A Great Depression is a terrible thing to waste.”
Odd thing is, the multifamily world should be heroes right now. And they’re not.
They should be heroes because of the extraordinarily misguided and scandalous way that policy (deregulation with impunity), business (invention of mini-U.S. mints with no recognition of actual risk) and personal acquisitiveness converged to move more people into homeownership than should have been permitted, and more people into the business of real estate speculation than had any business being there.
Multifamily should be heroes now because apartments are the efficient, job-center centric, smart communities that address affordability and amenity with intelligence and profitability. Multifamily should be heroes because single-family mistook a quarter of the demand for three or four years as real, when all it was was wishful thinking–investor buyers.
Unfortunately, multifamily as an industry finds itself on “the line.” The apartment folks are not heroes because their model broke too, i.e. they believed their own hype like the rest of us, and got too greedy, and studied “the fundamentals” and “the fundamentals” were sound and strong, and wound up being very, very wrong.
[Reset button: Now we talk about "the longterm fundamentals" being strong.]
Now this:
NMHC President Doug Bibby in announcing the four-point program. “In the next two years, an estimated $80-$100 billion in multifamily mortgages will mature and need to be refinanced. With credit markets virtually collapsed, however, owners who are meeting their financial obligations but who—by sheer timing—are in the unlucky position of having their mortgages mature in 2009 and 2010 may be forced into foreclosure.”
Click on Doug Bibby
“We are facing serious risk of waves of defaults and bankruptcies of otherwise performing apartment properties unless the Federal Reserve and the Treasury Department take action,” said
Multifamily could have been the heroes right about now. But instead, they’re part an ever-lengthening queue of supplicants for special consideration and cash from an ever-more questionable pool of U.S. resources and tax payer money.
And it’s not that multifamily is not a big part of the answer for a housing crisis that–whatever the cause–must wrestle with demand destruction across every industry, job destruction, wealth destruction, and confidence destruction. Multifamily is part of the way of today and tomorrow. It’s smart community, and it’s better for the planet, and it’s easier on pocketbooks, and it’s largely connected with where we house our next generation of societal leaders, as well as a host of critical but less-well-heeled populations. Not to mention people who just plain want to live in apartments.
Fact is, most of multifamily is about profit-making business. It seems that–whatever their respective value to society’s dire needs are right now–no industry escaped self-destructive behavior that came with the desire to grow faster than ever between, say 2002 and 2007.
Blaming an evil single-family, homeownership juggernaut on one’s current capital challenges is disingenuous, and it deflects accountability among leaders who need to take a hard look at the lessons of the past decade of denial, and face them head-on.
We hope Congress and the Federal agencies listen to the NMHC.
The Treasury Department and the Federal Reserve can prevent a complete collapse of the apartment sector under existing authority they have as part of the Troubled Assets Relief Program (TARP). Specifically, they can take action through their previously announced Term Asset-Backed Securities Loan Facility (TALF) to help bring badly needed liquidity to the apartment sector until the credit crisis is resolved. We strongly urge them to take the following actions:
The Federal Reserve should use its authority under TALF to purchase highly rated commercial mortgage-backed securities (CMBS). This would restore investor confidence, restart trading in the frozen CMBS market and establish a market-clearing price for a variety of real estate assets, including commercial and multifamily mortgages.
In separate action, the Federal Housing Finance Agency should exempt multifamily loans from GSE mortgage portfolio limits through December 31, 2010 or until a new secondary market structure for multifamily loans is operational, whichever comes first. Based on Fannie Mae’s and Freddie Mac’s strong multifamily loan portfolio performance, exempting these loans will have virtually no impact on the overall portfolio risk of the two enterprises.
The single-family housing meltdown confirms that homeownership alone is not sufficient to meet our housing and community needs. We need a more balanced housing policy—and that policy needs to begin with ensuring a consistent and abundant flow of capital to rental housing.
We know that embedded within the rhetoric and the antagonism of the association’s statements, there is truth to them. We need a strong apartment business community as we never did before.
We also know that this is not an Us vs. Them issue. Best business practices–single-family for-sale or multifamily for-rent–would have kept companies out of “the line” needing a hand-out from taxpayers.
Let’s hope there are second chances, and that there’s finally some lessons learned from the lunacies of the past.
Housing Arithmetic Lesson
Calculated Risk is at it again.
Several posts today that get at vacancy rates, for homeowners and rental units, and shadow rentals.
Stimulus whatever is up against the following phenomenon to work through. (Sorry, forgot to flow in the picture last night with the link).
Click on graph to link to CR analysis.
A normal rate for recent years appears to be about 1.7%. There is some noise in the series, quarter to quarter, so perhaps the vacancy rate has stabilized in the 2.7% to 2.9% range.
This leaves the homeowner vacancy rate almost 1.2% above normal, and with approximately 75 million homeowner occupied homes; this gives about 900 thousand excess vacant homes.
Here’s what Citi Investment Research senior analyst for home builders Josh Levin has to say about the vacancy data.
What’s New – Today the Census Bureau released 4Q08 vacancy rate and homeownership data. As we have noted before, we think vacancy rate analysis is a superior way to measure excess housing supply. In our opinion, vacancy rate analysis remedies many of the deficiencies of the popular but misleading months’ supply metric of homes for sale. Based on the latest data we calculate that there are ~2.2 million excess homes in the housing stock.
Yet, there may be good news in the fact that Census Bureau data miscount what’s real.
USA Today writes about one of the reasons there’s little to no pricing power in rents.
Here’s the mainstream media take on what’s happening:
The weak economy — which has brought surging foreclosures, sinking property values, vanishing home equity and mounting job losses — is playing a major role in family dynamics, pulling relatives under the same roof to pool their resources and aid relatives who’ve lost their homes.
Siblings are moving in with one another to help pay the mortgage. Adult children who’ve lost homes to foreclosure are moving back home with Mom and Dad. Even spouses in the throes of divorce are putting off separating, living together in awkward cold wars because they can’t sell their houses.
That’s in large part because those losing homes often have nowhere else to go. Many live paycheck to paycheck: Nearly 61% of local and state homeless coalitions are seeing an increase in homelessness since the foreclosure crisis began in 2007, according to an April 2008 study by the National Coalition for the Homeless. Only 5% said they hadn’t seen an increase. The survey found that more than 76% of homeowners and renters who must move because of foreclosures are staying with family and friends.
If we add this up, 820 thousand excess rental units, 900 thousand excess vacant homes, and 150 thousand excess new home inventory, this gives about 1.87 million excess housing units in the U.S. that need to be absorbed over the next few years. (Note: this data is noisy, so it’s hard to compare numbers quarter to quarter, but this is probably a reasonable approximation).
These excess units will keep pressure on housing starts and prices for some time.
Better stick with CR for insight into the data, and what it predicts.
REIT or Wrong, They’re Minding Their Balance Sheet
From MULTIFAMILY EXECUTIVE, by Les Shaver: Households are doing it. City governments are doing it. Lenders are doing it. So, why wouldn’t it make sense for residential REITs to get on the bandwagon of spiffing up their balance sheets, even if the longterm fundamentals remain strong for the rental market? Well, of course, they are doing just that. Multifamily Executive senior editor Les Shaver reports on a number of key players who’ve shed debt and pushed maturities to later in a prospective recovery cycle.
Here’s the rationale:
Says Taylor Schimkat, senior associate for Green Street Advisors, a Newport Beach, Calif.-based REIT consulting and research firm: “If the REITs have the capacity, it makes sense for them to retire their near-term, unsecured bonds early [and where possible at a discount to par] and push out their maturities.”
Looking to pare debt-related expense is not the only way REITS are trying to get ahead of a tidal wave of job and commercial real estate deterioration sweeping into the multifamily landscape.
Shaver also reports on a number of companies who need to write-down assets based on underwhelming demand vs. pro forma-ed properties. Here’s his take on strategic and tactical moves by AIMCO and Camden ahead of a spate of Q4 earnings calls among REITs in the next couple of weeks.
Still, there is no shortage of bulls still at large in the residentail REIT arena. Have a look at commentary from Investment U, picked up at SeekingAlpha this morning.
Round-up Round-up
Thanks for your patience with the light posts for the past week or so as we took in much-needed time with the family. Happy New Year all! Now it’s time to catch up with vengeance.
Look here for sign-posts and perspectives on housing and design, inside and out, coming to you from the reporters, commentators, experts, and editors at Hanley Wood Business Media brands.
First a bit of de-briefing:
- Builder editorial director Boyce Thompson ticks off a 2008 “low-light reel” of signal events and developments in housing, each of which have ramifications that reach well into 2009. Check out “Builder’s Top 10 Housing Stories of 2008.”
- Just before the holidays, Multifamily Executive senior editor Les Shaver put across a sobering report on how two of the multifamily industry’s powerhouse companies, AvalonBay Communities and Forest City Residential, have ceased new development projects and announced reduction in workforce plans.
- Big Builder manages to strike upon a [scant] showing of bright spots in its review of 2008′s most significant high-volume home builder events in Lisa Brown’s round-up, “2008: News in Review.”
- Hanley Wood Market Intelligence lays out the landscape as it exists today in its “Key Indicator Alert,” which you can sign up for free on this link.
The thought for today as we get back into the swing of things without much time to let too much predispositional grumpiness to kick in: look at business trend information for insight, but don’t believe for an instant that anomalies will trump trends this year. So don’t let brilliance cancel wisdom. Uncertainty principles will rule, which could be a good thing. After all, the only positive thing about the devil we know is familiarity.
Back soon with news and insights from around and about.
Fannie Flags Renters for Relief
The New York Times reports:
It is the first nationwide effort to provide widespread relief to renters ensnared by the unfolding mortgage crisis, and it will effectively transform Fannie Mae — a government-controlled mortgage finance company — into a national landlord. It may also increase pressure on private lenders to establish similar programs and on lawmakers to pass renter relief.
“There are renters all around the country who have been holding up their end of the bargain and paying their rent faithfully, but the landlord got into trouble, and so the renter is now unfairly facing eviction,” said John Taylor, president of the National Community Reinvestment Coalition, a consumer advocacy group. “It’s really good news that Fannie Mae is doing this. Now the question is whether private sector will follow suit.”
That makes all taxpayers landlords, doesn’t it?
REIT it and Weep–Levered Mall Developers Face Default
From MULTIFAMILY EXECUTIVE, by Les Shaver: Cash is king. Having it is regal. Needing it urgently now is tantamount to financial D-day. Two of the nation’s largest retail developers were each embroiled in a negotiation moment of truth late Sunday as they sought extensions on huge debt payments due this past Friday at midnight.
Reports The Wall Street Journal:
General Growth, which owns and manages more than 200 U.S. malls, amassed a $27 billion debt load in an acquisition spree in recent years. The $900 million loan General Growth is trying to extend is backed by two luxury malls on the Las Vegas Strip: Fashion Show mall and the Shoppes at the Palazzo.
If the lenders on that loan declare General Growth in default, it would trigger cross defaults of other General Growth debts and force the company to seek bankruptcy-court protection. Though the two-week extension of the loan expired Friday, the lenders didn’t declare General Growth in default as negotiations continued through the weekend.
MultiFamily Executive senior editor Les Shaver takes a look at the leverage positions of top REITs in the multifamily space, observing that most will dodge the bullet on either tripping covenants or needing to rush around to raise capital to repay maturing debt. Why? Even in their exuberance, they tended to keep leverage below the 70% level.
The three apartment REITs with the most leverage on their books are Denver-based AIMCO, Birmingham, Ala.-based Colonial Property Trust, and Richmond Heights, Ohio-based Associated Estates Realty Corp. Alexandria, Va.-based Avalon Bay Communities has the lowest leverage in the sector with 34 percent liquidity leverage and 34 percent solvency leverage, according to Green Street. In fact, AvalonBay came in second in the entire REIT universe.
Expecting cap rates to rise even further, Green Street, the Newport Bach, Calif.-based REIT consulting and research firm, ran a scenario where they go up 150 basis points in the multifamily space. Under that scenario, AIMCO’s liquidity leverage pushed up to 76 percent; its solvency leverage moved to 81 percent. For Colonial, the numbers would edge up to 78 percent and 82 percent, respectively; for Associated, they rise to 77 percent and 83 percent, respectively.
Obama Taps Shaun Donovan to Head up HUD
Announcing that New York City Housing Commissioner Shaun Donovan is his choice as Secretary for the Department of Housing and Urban Development, the president-elect said:
”We need to approach the old challenge of affordable housing with new energy, new ideas, and a new, efficient style of leadership. We need to understand that the old ways of looking at our cities just won’t do.”
HUD Secretary Nominee Shaun Donovan
A question that has already arisen in pre-coverage of Obama’s pick would be, ‘why not one of the qualified minority housing leaders mentioned as on the incoming president’s short list?’
Housingfinance.com reported Nov. 24 that names under consideration included a number of African-American and Latino housing leaders, and Builderonline.com mentioned Donovan as a “long-shot“ among candidates for the role.
Even as the president-elect kept his thinking close to the vest on a Housing Secretary, housingfinance.com reported:
Several prominent mayors, including Miami’s Manuel Diaz and Atlanta’s Shirley Franklin, have been rumored to be in the running.
Saul Ramirez Jr., a former deputy HUD secretary and executive director of the National Association of Housing and Redevelopment Officials, has also been mentioned as a candidate in recent news reports. Adolfo Carrion Jr., Bronx borough president, and Nelson Diaz, who has been a judge and HUD general counsel, also have been cited as possible housing chiefs.
Perhaps the choice of New Mexico Governor Bill Richardson as Commerce Secretary opened up the realm of choices for Obama for HUD Secretary. On paper, Harvard-trained architect Donovan’s credentials look impeccable, both from a practical, in-the-trenches standpoint, management experience, and a basis in theory in public service and housing planning issues.
The Wall Street Journal/Associated Press notes:
Mr. Obama praised Mr. Donovan’s record at the New York City Department of Housing Preservation and Development, where he managed a $7.5 billion plan with a goal of putting a half-million New Yorkers in affordable housing. The Harvard-educated architect also kept foreclosures to a minimum in the city’s low- and moderate-income home ownership plan, with just five out of 17,000 participating homes.
A Newsweek correspondent Adam B. Kushner broke the news of the choice in his blog on Friday. Here, he quotes Donovan verbatim on the way the dots connect between Washington and the housing crisis.
At a City Hall briefing in July, Donovan talked about the housing challenges facing Washington policymakers:
Q: Do you think there’s enough of an understanding in Washington of why New York needs the kinds of investments that you want them to adopt for New York?
A: I guess I would enlarge the question a little bit. I think the fundamental challenge has been to demonstrate to the American people that they know affordable housing is important. What they don’t necessarily know is that government knows how to do it right. … The truth is, when affordable housing works, it’s almost invisible. We’re doing today, and lots of folks in this room are doing mixed income developments. We have a project that is moving its way through the approval and construction process right now in the Bronx that will combine market-rate condominiums with supportive housing with the formerly homeless. We are combining and integrating market-rate and affordable housing in a way that nobody would have thought possible a few decades ago. And, frankly, it means that we have to get out and tell the positive story, because a lot of folks don’t even know that there’s affordable housing in that building or that it’s part of their community. The image that remains is this old outdated image of public housing that failed. We’ve got a lot of work to do to explain the advances that we’ve made and what we’ve learned and to demonstrate that yes, in fact, we will use taxpayer dollars wisely in terms of rebuilding. I think there is an opportunity, given the subprime crisis. A mentor of mine that I worked for in my first government job in Washington said, “A crisis is a terrible thing to waste.” In fact, we have an opportunity, despite the terrible things that are happening in neighborhoods because of the subprime crisis, to really reframe the housing challenges, nationally, as a result of what we’ve seen over the last few years. Housing is on the national agenda again maybe for the first time in a generation. We have an opportunity, I think, to really utilize that to reframe the issue.
Is Donovan not the right guy for this job at this moment?
Gloves Come off on Fix Housing First
From PROSALES, by Craig Webb: When home builders get stuck not being able to build homes, alliances might wind up being the next best thing to build. In a sweeping effort to reel in comrades at arms in an all out war with economic and financial system stresses that have all but paralyzed residential construction amid home value destruction, the Fix Housing First coalition of home builders, manufacturers, materials suppliers and their Capitol Hill persuaders (i.e. lobbyists) seems to be making progress at expanding its ranks.
Craig Webb, editor of ProSales, reports on a National Lumber and Building Material Dealers Association announcement in support of Fix Housing First‘s proposed tax-credit-cum-mortgage-rate-buydown shock treatment to get consumer confidence, spending, and home buying to finally put a floor on home prices. Webb reports:
NLBMDA chief O'Brien
The National Lumber and Building Material Dealers Association (NLBMDA) today added its voice to a coalition of builders and construction suppliers urging Congress to approve a housing stimulus plan this year.
NLBMDA called on Congress to enhance and extend the Home Buyer Tax Credit for primary residences purchased between April 2008 and December 2009, to up to 10% of the home price up to a maximum of $22,000, depending on geography. In addition, buyers should have access to discounted 30-year fixed-rate mortgage financing that would encourage eligible home buyers to enter the market.
Of no surprise, not all housing organizations want to see a lot of Congressional focus on stimuli that could rekindle home buying. The National Multi Housing Council, which practically blames for-sale new-home builders for the global economic crisis, has come out in vocal opposition to a Fix Housing First extra-enzyme program.
Says NMHC president Doug Bibby:
NMHC's Doug Bibby
“We understand the desire of lawmakers to bolster the economy and stem the tide of foreclosures, but new homebuyer tax credits, seller-financed downpayments and interest rate buydowns will not stimulate the economy or stop house prices from falling further. They are simply bailouts for the for-sale housing market, the very sector of our economy that helped trigger the global economic crisis.
“The only issue a homebuyer tax credit addresses is the oversupply of single-family houses, which is something best left to the marketplace–not taxpayers–to correct. Oversupply situations happen in every industry, and the housing industry will recover with or without Congressional action, just as it has in past oversupply situations. Moreover, why should taxpayers help out an industry that recognized a downturn was coming and still kept overproducing?”
Guessing who’s fighting to fix and who’s fixing to fight might be just the antidote to another day of bleak economic and financial reports from all your usual sources.
Here’s some links to orient yourself to the dots-connected housing and construction news of the moment:
- From HousingWire.com: Foreclosures Drop in California, as Lenders Boost Workout Attempts
- From Builderonline.com: Louisville, Colo.-based McStain Neighborhoods will shut its headquarters offices.
- From Inmannews.com: Housing hints for president-elect Barack Obama
- From The New York Times: Columnist Floyd Norris writes about accountability and bailouts.
- The Wall Street Journal reports on Fed Chairman Ben Bernanke’s latest pronouncements as to the initiatives taken and those that may still be taken amid the crisis.
Gentle Ben says:
“The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain.” (Read the full remarks.) For this reason, policymakers will remain in close contact, monitor developments closely, and stand ready to take additional steps should conditions warrant.”
Hence, Friday’s market will proceed as it will proceed across the dark abyss to eventual recovery in the months down the road.
Affordable Housing on the Obama Radar
Nicolas Retsinas, director of Harvard’s Joint Center for Housing Studies–an inductee Friday into the Affordable Housing Finance magazine Hall of Fame in Chicago–accepted the same honor on behalf of Congressman Barney Frank (D-Mass.).
“Had Barney been able to be here with you, he would have,” said Retsinas. “Other than ‘thank you,’ he asked me to offer his support with the comment, ‘we have to stop being Marie Antoinettes.’ I said, with all due respect Congressman, but what do you mean, ‘we have to stop being Marie Antoinettes?’ Barney said to me, ‘For too long now, our answer to all our nation’s economic challenges has been to respond, “Let them own homes.” We have to stop doing that.’”
2008 Inductees
AFFORDABLE HOUSING FINANCE inducted five deserving individuals into its Affordable Housing Hall of Fame in November. These inductees were honored at a luncheon at the conclusion of AHF Live: The 2008 Tax Credit Developers’ Summit, held Nov. 5-7 at the Hyatt Regency Chicago.
Conrad Egan
• June: Conrad Egan, president and CEO of the National Housing Conference
• July: The late Clara Fox, founder of the
Settlement Housing Fund
• September: U.S. Rep. Barney Frank
• Silicon Valley Bank
• October: Nicolas Retsinas, director of
Harvard University’s Joint Center for
Housing Studies
• November: Carla Hills, former secretary
of the Department of Housing and
Urban DevelopmentAFFORDABLE HOUSING FINANCE created its Affordable Housing Hall of Fame in 2006 to recognize outstanding achievement in the industry. Past inductees have included leaders instrumental in the establishment of the low-income housing tax credit program and the Community Reinvestment Act.
Washington Post columnist and MSNBC political commentator Eugene H. Robinson addressed the same business community this past week at the AHF Live Conference, offering observations about what a Barack Obama presidency means–historically and for the moment. Where housing winds up among priorities that include healthcare, national security, infrastructure needs, and the immediate need to stimulate the economy, Robinson would not speculate. He did say that it makes sense that Obama’s focus on the less privileged middle class population would translate into housing initiatives as part of a strategic program he puts together once he forms his braintrust for both transition and a new administration.
However, in Multifamily Executive, senior editor Rachel Z. Azoff, zeroes in on expectations among multifamily and affordable community business leaders, who are counting on the President-elect to catalyze new momentum toward affordable housing solutions.
NLIHC's Linda Couch
“The expansion and implementation of the new national housing trust fund should be the No. 1 priority for the new administration,” says Linda Couch, deputy director of the Washington, D.C.-based National Low-Income Housing Coalition (NLIHC). “The resources serve the lowest income households and those are the households most in need of affordable housing.” Couch also expects Obama to push for increased funding for the Section 8 voucher program and to help combat homelessness.
Like every other part of the housing [and broader] economy, affordable development and finance has hit a hard wall as key parts of the complex layering of private and public finance have been sucked into the vortext of credit paralysis and risk aversion.
Multifamily Executive senior editor Les Shaver reports on how even market rate apartment deals have stalled amid wrenching credit and finance uncertainty in his report, Confidence in Apartment Sales, Credit, Even Occupancies Declines, NMHC Reports.
Considering what’s happening on the equity and debt markets, its little wonder deals aren’t going down. Among the other indices, the Equity Financing Index, fell to four, the lowest result on record, while the Debt Financing Index also declined to four—another record. A whopping 93 percent of respondents said financing conditions have worsened compared to three months earlier; one-sixth of respondents said that the crisis hadn’t affected their current activities.