S&P Downgrades Take Wind out of Housing’s Sails
CNBC’s interview with Alpine analyst Stephen Kim typifies Wall Street sentiment about a next leg downward for housing. Standard & Poor’s yesterday raised the bar for expected losses from risky loans underarching mortgage backed securities, signaling anticipation for a new wave of irrecoverable dollars invested in residential real estate bonds.
Failing home loans that lead to a tidal wave of foreclosures depress home prices and cause the feeback loop to repeat in a worsening viscious circle. Despite tiny signs, anecdotal evidence, and great hopes that Spring 2009 marked the end of the worst times for housing, it’s clear the pain shall continue through the end of the current year, reaching into 2010.
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.
Stimulus Redux
Are you ready for some Stimulus? The government spending programs are coming with almost the frequency of Monday Night Football.
House Speaker Nancy Pelosi is said to have begun outlining the principles and framework for yet another federal economic spending program that would presumably run in tandem with the $787 billion stimulus plan that is just making its way to the starting gate.
As a program that represents 2% of the U.S. Gross Domestic Product gets under way, why is there talk of yet another one on its heels?
Here’s what Joseph Stiglitz, a Nobel prize-winning econ icon from Columbia University in New York City says:
It is a relief that the US finally has a president who can act, and what he has been doing will make a big difference.
Unfortunately, what he is doing is not enough. The stimulus package appears big — more than 2 percent of gross domestic product (GDP) per year — but one-third of it goes to tax cuts. And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries) and falling asset prices, they are likely to save much of the tax cut.
Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level. America’s 50 states must maintain balanced budgets. The total shortfalls were estimated at $150 billion a few months ago; now the number must be much larger — indeed, California alone faces a shortfall of $40 billion.
…
In short, the stimulus will strengthen America’s economy, but it is probably not enough to restore robust growth. This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy. (more)
Many others agree, as formidable as the policy and spending initiatives seem in the headlines, that the actual “stimulus” parts of the economic recovery program rolling out are only about a third or less of the dollars that will get spent.
Most critics of the design of the program say that the economy won’t get the jolt it needs to shake itself out of its malaise.
So, another stimulus package will come up for debate in a Congress that has shown itself to revert to self-interest politics rather than answering the call to urgent, cohesive, united action in an emergency.
As talk of the new stimulus program arises, so too will talk of making a new go at a more compelling home-purchasing stimulus, a la, Fix Housing First.
All of the heated argument about what the amount of a home buyer tax credit would need to be, and whether that would put a false and unsustainable bottom under home prices, and who would benefit from such a program at whose expense.
Stimulus I was last July under George W. Bush, and we saw how much that did to stop the economic free fall. Stimulus II is just getting under way, and may be a step needed to get back to the starting line. Stimulus III may be the rally to arms the moment really calls for.
Will a home buyer tax credit — an effective one of $12,000 to $15,000 — make it for inclusion in the new design?
Will home builders of all shapes and sizes unite in their lobbying effort behind such a measure, and a mortgage buy-down program that would actually work?
Crossing the aisle should not just be rhetoric. It should get to be second nature.
Foreclosures: A Banker’s Perspective
The Charlotte Observer reports: Wells exec evaluates solutions for housing crisis.
Photo Courtesy of Charolotte Observer
In the nation’s collective brainstorm for how to solve the housing crisis, here’s another idea:
A federal provision that took effect Feb. 1 essentially helps state and local governments get into the real estate business, by offering $3.9 billion in grants to buy and resell empty foreclosed homes. Proponents of the measure, which was tucked into a housing bill passed last summer, say it will help stabilize uncertain markets as well as create affordable housing.
Joe Ohayon, a Wells Fargo & Co. executive who helps lead the default and retention team in Maryland, talked to the Observer recently about the new federal program, the bank’s efforts to solve the foreclosure problem, and why some ideas are working better than others.
The kicker As to the better Qs are here:
Q. What are the main reasons that people default on their mortgages? Is it because their interest rates are resetting?
The reasons for default are still the core traditional reasons. It’s unemployment, illness, marital problems. There’s been talk in the past around (interest rate) resets really contributing to default, but we didn’t really see that. The vast majority of loans that are in foreclosure were actually delinquent prior to the reset.
Q. Why haven’t any of the government’s big foreclosure-prevention plans worked?
There’s a lot of analysis that’s still being done as to why. Reasons range from (loan-to-value) caps to things such as junior lien holders having to approve the actions as well because they’ll be wiped out if modifications are completed. I don’t think any of the programs are the silver bullet, but when you take all those in aggregate is when you start to see a real impact.
From Nest Egg to Neg Eq
One in five–a number you can actually count on your fingers–homes bought with a mortgage are under water on the loan.
The Wall Street Journal this morning has a report based on data just released from First American CoreLogic.
That’s more than 8.3 million mortgages that were upside down at the end of the year, compared with 7.6 million three months earlier. It’s a problem that is expected to get worse as home prices continue to fall.
“The accelerating share of negative equity, combined with deteriorating economic conditions, means that mortgage risk will continue to increase until home prices and the economy begin to stabilize,” said Mark Fleming, chief economist of First American CoreLogic, in a news release. First American CoreLogic is a Santa Ana, Calif.-based provider of real estate data and mortgage analytics.
“The worrisome issue is not just the severity of negative equity in the ’sand’ states, but the geographic broadening of negative equity that is expected to occur throughout the year,” he added. “Sand” states include California, Nevada, Arizona and Florida.
What’s the line where correction crosses over to deflation? Will most adverse scenarios model for a contagion in home price declines unchecked?
Who seriously doubts that well-thought out policy needs to play a role in stopping the contagion?
HUD Secretary Donovan Gets an Earful
The new U.S. Secretary for Housing and Urban Development Shaun Donovan’s to-do list could daunt a Marvel comics superhero.
Inside his shop, the department suffers red tape malaise, chronic low morale, and scandal fallout. And fixing that is the easy part of his job.
In this six-minute video, U.S. Sen. Mel Martinez (R-FL) takes a C-Span grandstand moment to enumerate the ways that Secretary Dononvan will rise or fall based on his skills in navigating a fierce political minefield of issues and effecting positive change on some of housing’s more dire economic fronts: i.e. soaring foreclosures and plummeting home values.
Martinez reviews elements of President Barack Obama’s Housing Affordability and Stabilization Plan, takes a couple of potshots at the plan’s deficiencies, points out that his legal “safe harbor” proposal for private mortgage loan servicers would be a good fix, and wishes Donovan the best of luck in his new job. With friends like this…
Video Credit: SenMartinezdotgov
Roubini’s Crystal Ball
The New York Times asked economists it knows well to forecast when recovery will come in its “When Will the Recession Be Over” opinion piece today.
Importantly, though, New York University economist Nouriel Roubini got his own play in the Times. Here’s a bit of it.
Today, as we enter the 15th month, it’s obvious that we are already in a painful U-shaped recession that has become global and will last at least until the end of the year — 24 months, the longest since the Great Depression. Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with the unemployment rate rising toward 10 percent, we will still be substantially in a recession.
Even if appropriate aggressive policy actions were undertaken — monetary and fiscal stimulus, bank clean-up and credit restoration, mortgage debt reduction for insolvent households — the growth rate would not rise closer to 2 percent until 2011. So this recession may last 36 months.
Remember, though, this is Roubini we’re quoting. His next line is:
And things could get worse.
In his unblinking way, he’ll tell you why that is.
Cramdown Jam — Monday Critical
If weather doesn’t shut down the government on Monday, it’ll be an important day on Capitol Hill for housing. Debate over a measure that would give bankruptcy judges jurisdiction to modify the principal on home mortgages of home buyers who’ve hit a wall hit an impasse last week and Monday’s the moment for it to come to the fore for resolution.
The Huffington Post picked up this analysis of the issue on mortgage cramdowns from CNN.
The so-called cramdown provision could put pressure on loan servicers to modify mortgages before borrowers file for bankruptcy.
A major critique of the voluntary modification programs is that servicers aren’t doing enough to help struggling borrowers. But servicers will likely be more aggressive in working with homeowners if they know that the borrowers can turn to judges for relief.
“Reforming mortgage bankruptcy laws is the only remedy available that will provide the stick to go with the carrots that we have offered lenders to modify mortgages voluntarily,” said Rep. Brad Miller, D-N.C., who worked on the legislation.
But congressional Democrats, who first introduced a bill broadening judges’ power two years ago, are running into trouble gathering the support needed to pass the legislation. The House postponed a vote on the measure until early this week after a group of centrist Democrats voiced concerns. And its future in the Senate remains in doubt with many powerful Republicans strongly opposed to the legislation.
The House bill would allow judges to modify loans originated before the legislation’s enactment. It would let the courts change mortgage terms to make a loan more affordable, permitting judges to reduce the principal to the property’s market value, a step servicers loathe.
If it snows 12 inches in DC Sunday night, the deadline may get pushed back and more deliberation could illuminate the complexities of the issue for members of Congress.
Mortgage Interest Deduction on the Ropes
Once upon a time, it was common to aspire to being healthy, wealthy, and wise.
Welcome to the Trillions Economy, where now it seems the best anyone can hope for is two out of three, which we guess is not bad in light of the moment that it is.
President Obama’s priority is health [care]. It’s what he believes he was voted into office to do, to figure out, and to transform, and he’s putting big, big money where his mouth is, parlaying heaps of his political currency in exchange for making the wealthy less so so that the less healthy can be more so.
Consequently, the income tax benefit homeowners and home buyers have been getting vs. their mortgage interest and real estate taxes is about as vulnerable right now as an ingenue at a casting call.
The Orange County Register’s real estate columnist Jon Lansner vents:
In what would be another blow to the California housing market, the Obama administration’s new fiscal year 2010 budget proposes to cap the mortgage deductions on “higher income” households — well, if you consider making $208,850 extremely high income!
Here’s what the budget — it’s HERE — says, in part: “The Administration’s Budget includes a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent — and the initial reserve fund would be funded in part through this provision This provision would raise $318 billion over 10 years.” (more)
The National Association of Home Builders and the National Association of Realtors both object. Here’s part of the NAHB statement.
“With the housing market still reeling from its worst downturn since the Great Depression, this is not the time to talk about raising taxes on home buyers and home owners. This proposal will increase the cost of housing for many middle-class families, particularly in high-cost areas such as California and the Northeast, which will only further undercut the housing market, exert more downward pressure on home values and work against the President’s efforts to stabilize housing and turn this economy around.
“The proposed budget would also tax a ‘carried interest’ as ordinary income, which could significantly impact the multifamily and commercial real estate sectors at a time when they are already experiencing a severe downswing. At this critical point in the recession, we should be doing everything we can to stimulate demand in housing and avoid proposals that would reduce housing affordability and further destabilize prices….
The trade-offs get rougher by the moment. As Calculated Risk points out, “the mortgage interests deduction is capped to $1 million in mortgage debt.”
Trade association rhetoric aside, it’s clear that the President’s plan is to put health care above wealth care on the national agenda. Stay tuned for a rocking battle on this part of the President’s proposed budget.
Our own Bill Gloede, who writes a Big Builder online blog called Wall Street and Maine, has a typically strong opinion about this:
The Obama budget proposal, as well as much of the Administration’s action during the month that it has been in office, reveals that one of its guiding principles is a false notion of equality that exists neither in nature nor in the U.S. Constitution. There is no right, specified or even intimated, to economic equality, or even the gauzy concept of “fairness” invoked by those bent leftward.
The NAHB and its allies ought to express themselves through their PACs by withholding contributions from any politico who supports this package (and others like it sure to come from this Administration). Builders should quietly “educate” the employees they still have that a vote for anyone who supports this budget is a vote for future joblessness.
And all the rest of us would best be reminded that what happened in November was an election, not a coup d’etat.
We’d guess that a fair majority of HousingCrisis.com’s audiences might share this opinion. No?
No Options, No Choice–Choice Homes Slams the Wall
From BIG BUILDER, by Lynn Norusis: In 2003, Arlington, TX-based Choice Homes was going so well that its ownership considered taking the company public. In 2005, the company regrouped and transformed its management after long time chief executive officer Steve Wall split to start his own company (now bankrupt).
Former Masco finance whiz Bob Ladd set a new course for Choice that appeared to fit the company’s DNA down to the last gene, but alas.
Choice is no longer.
Big Builder senior editor Lynn Norusis reports today:
“Choice was focused on the affordable first-time buyer, and they had land positions that reflected that,” said Lisa Jackson, vice president at John Burns Real Estate Consulting. “Today, those are the areas that are hardest hit with foreclosures. Getting their target buyer qualified for sales would be very challenging given the mortgage environment.”