What Is A Poor Boy To Do?

I was asked today at a luncheon about the current state of affairs in the residential lending market and the attitude of the lenders towards homeowners with 'troubled times' ahead. By coincidence, I ran across the following article from Marketwatch this evening about the lender's attitude towards forebearance:

Lenders have several workout options up their sleeves:

• Partial reinstatement. Under this plan, the borrower would agree to begin making regular payments and make up what is owed in, say, 12 monthly installments over the next year.

• Short-term forbearance. Here, the lender will suspend your payments for, say, three months or reduce your payment for six months, and then you'd make up the difference in some kind of repayment plan as described above.

• Long-term forbearance. Payments might be suspended for anywhere from four to 12 months, with a corresponding repay plan to follow.

• Loan modification. This would be a permanent change in one or more of your loan's original terms. The rate might be cut, the payment period extended or both so that the payment once again becomes affordable.

So my advice is to get on the horn right now with your lender. Make sure you talk to the workout department, though, not the collections folks. Though many lenders are training their repo staff to spot people who need a break and hand them off to the right people, most are bill collectors, short and simple. If the person you speak with has no idea what you are talking about, ask to be transferred to the chairman's or the president's office. You can bet they'll know whom to transfer you to.

You don't need anybody to speak for you, either. So stay away from the growing group of charlatans who are preying on financially distressed homeowners by offering -- for a fee, of course -- to act as a go-between between you and your lender. They don't have any more of an inside track than you do.

If you honestly feel you need to have someone holding your hand, contact a local credit or homeownership counseling agency. These nonprofits don't charge a thing. In fact, in some cases, lenders are paying them to go out into their communities to persuade troubled borrowers to contact their lenders.

The Department of Housing and Urban Development has a list of government-sanctioned counselors on its Web site, www.hud.gov. Also try the National Foundation of Credit Counselors, www.nfcc.org, or the Homeownership Preservation Foundation, www.995hope.org (888-995-HOPE).

If history is any guide?

One of the benefits of the CCIM network is the fact that commercial brokers actively pass on the most current and relevant information in the market amongst the group. Below is the most recent example of the information that is passed via the listserv of professionals across the country:

Below is a dial in number and password for a tape recorded conference call with the Head of Economics at The Wharton School of Business, Dr. Linneman. I’ve heard Dr. Linneman speak twice in person and he is extremely we versed on the global economies. It is certainly worth your time to spend 15-20 minutes of your day listening to this recording, which will surely enlighten you on where we are today, how we arrived here and how long it should take for the sub-prime debacle to correct itself before we can return to more of a normalized market.

To access the recording, please call at any time:

Playback Dial-in: (641) 715-3439
Passcode: 325596#


Key Highlights of the Call

Two Main Issues:

• Investors have matched short-term capital against long term assets;
• Markets face the perennial battle of fear vs. greed, and while greed wins in the long term, fear is winning today.

Sub-Prime Crisis:

• Poor underwriting, rating agencies failed;
• Only 30% of homebuyers have not locked in long. The losers are the lenders/investors, not the homebuyers;
• The losses are "only $90 billion" a big number but not in percentage terms;
• Margin calls have forced the exaggerated impact in the market.

Historical Perspective: This has happened five times in the past 20 years.

• 1987 - Tax law change - in a strong economy - 18-24 months to recover;
• 1991 - S&L crisis - in a recession - 12-18 months to recover (real estate took longer);
• 1998 - Russian Ruble - in a strong economy - 18-24 months to recover;
• 2001 - 9/11 - in a slowdown - 18-24 months to recover;
• 2007 - Sub-prime - in a strong economy - expect 18-24 months to normalize.

Dr. Linneman anticipates continued economic growth but wider debt spreads and tighter credit standards for 18-24 months. Expect London and NYC to be negatively impacted by rental demand as hedge funds and other financial services companies tighten.

The Fed:

• Keeping interest rates too low for too long in 2003-2004 added artificial fuel to the economy.
  
• Now rates have been kept too high for too long.
  
• With inflation at 2.0% - 2.25%, rates should be 4.0% - 4.5%;
• Open market activity is only a band-aid. The Fed needs to ease rates.

Housing:

• It will take 12-18 months to digest the 400,000-500,000 surplus of homes built.

Real Estate Pricing:

• The REIT market has re-priced; the private market has not;
• Cap rates are about 50 basis points too low. With new credit spreads, cap rates will need to move up about 80 basis points;
• Debt exists but lenders require higher coverage and lower loan-to-value (70-75%);
• Pricing is more reflective of asset "quality" than asset "classes." Regardless of property types, people will now pay more for quality.
• Expect credit to be overpriced for 12-18 months, then normalize.

Rumor: Is the City of Stockton looking to take advantage of the banks?

I spoke with a lender rep this morning (responsible for meeting with defaulted homeowners and trying to work-out a feasible solution with the lender and homeowner - instead of putting the home thru the foreclosure process) and he heard that the City of Stockton is looking to fine defaulted homeowners and bank-owned properties $500/day for the lack of attention to the appearance of blighted homes in city neighborhoods (remember that San Joaquin leads the nation in foreclosure activiy in the US).

This could potentially put the banks in a more tenuous situation (as if they don't need more bad news) that would find a superior lien placed on their assets prior to foreclosure and the potential for the city to take possession of the property.

On another note, this ad in craigslist in Dallas is worth passing along..

Why is Countrywide going after brokers?

A friend of mine in the mortgage business told me that Countrywide is aggressively going after brokers around the country. Why?.. to get some of their money back that they provided brokers with during the last few years in terms of rebates and broker kick-backs. In the event that the brokers can't come up with the funds, they are "requesting" that they sign over their companies to Countrywide or face litigation. It seems to be a cheap way to grow the company's footprint "under the radar" and in light of its "unprecented disruptions" in future profits, as reported from the Mortgage Insider blog at the OCRegister:

Countrywide Financial Corp. today said the market for debt it needs to fund itself is experiencing “unprecedented disruptions” that could impact its future profits and financial condition.

In its second-quarter filing with the SEC, the lender said there is less liquidity in the debt market and greater “risk premiums.” I imagine Countrywide means it may have to pay higher yields on its own debt or produce more collateral, or both. Anyway, the lender said it needs to maintain investment-grade ratings on its debt, and that is not a sure thing.

It also said the market to sell home loans on Wall Street is experiencing “unprecedented disruptions” caused by a drop in investor demand.

To be sure, official quarterly reports with the SEC often contain a lot of ominous-sounding boiler plate language. But using the term “unprecedented disruptions” twice in one filing stands out.

Here’s more from the company:

“While our capital and liquidity positions are currently strong and we believe we have sufficient capacity to hold additional mortgage loans and mortgage backed securities until investor demand improves and yield requirements moderate, our capacity to retain mortgage loans and mortgage backed securities is not unlimited. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have an adverse impact on our future earnings and financial condition.”

Writing a Compelling Executive Summary

By now (7/30/07), the word is out on the housing slump, but the verdict is still out as to its affect on the commercial markets (one side note - I received an email from a fellow CCIM in St. Louis that is advising for sale a local 184k SF shopping center for $3.9M or $21.14/SF with two large vacancies totally 72% of the property - I haven't seen these types of properties since the RTC days).

So, as the credit crunch grows from Wall Street to Main Street, the need for developers and brokers to artfully pitch their ventures will become tantamount as more projects chase tighter purse strings from private sources. It might be time to recall an article and website that I found effective in developing a "compelling executive summary". As the San Jose VC firm, Garage Technology Ventures, points out on their website, the job of the executive summary is to sell, not to describe (although designed for the submitting technology ventures to the fund, I still think this applies to real estate developers in this market).

Here's the short list (click 'website' link above for full article) in writing a compelling executive summary (adapted for the 'real estate' slant):

1. The Grab - Direct, specific and concise statement why you have a really big project;
2. The Problem - Make clear that this is a big problem (or need) in the market that you're going to solve with your project;
3. The Solution - Make clear that you fit into the market after the project is complete (and absorption is taken into account in your proforma);
   
4. The Opportunity - Basic market info why your project works in the local market and why there could exist further expansion after the initial phase and absorption is complete;
5. Your Competitive Advantage - Know your project's price points vs. the existing competition;
6. The Model - How specifically are you going to generate income (i.e.: lower rents than competition, taking advantage of pent-up demand, etc.) and when?
   
7. The Team - Why is your team uniquely qualified to use these funds for this project;
8. The Promise - Your fundamental objective is to show the financial viability of the project and how it will meet the lenders' needs (5 yr, 10 yr proforma and any levels of equity participation promised with the project); and,
   
9. The Ask - State the minimum amount that you will need to complete the project (assuming that you'll include a "fudge factor" for entitlement overruns that always occur in development).