Anticipation of Delinquencies Keeps CMBS on Hold
MBA (3/21/2008 ) Murray, Michael
Industry participants continue to express frustration as capital market panic and negative headlines overshadow relatively strong fundamentals in the commercial real estate and commercial mortgage-backed securities market.
In its March CBRE Viewpoint, Debt Market Panic Overstates Risk in Commercial Real Estate Market, CBRE/Torto Wheaton Research, Boston, said Wall Street credit markets are overreacting to a likely increase in commercial real estate mortgage losses, because investors could be overestimating future default rates by three times higher than the likely result.
“The anticipated increase in commercial mortgage losses has caused the credit markets to significantly overestimate the potential for future default rates,” said Jon Southard, director of debt management and valuation for CBRE/Torto Wheaton Research. “The reality is that commercial real estate markets remain sound, with low vacancy levels and construction moderate in all but a few markets. Despite the slowdown in the economy, all major property types are expected to have positive—if lower—rental growth rates this year, and buildings’ net operating income should continue to improve.”
However, the CMBS market’s frustration stems from a “disconnect” in pricing based on concerns about refinance risk of recent CMBS vintages that would connect these commercial mortgage loans to subprime loans, based on lax underwriting guidelines.
Industry analysts say commercial mortgage loans do not perform in the same manner as subprime mortgages, and recent questionable loans will not be a factor for at least seven years.
“Current CMBS valuation implies ‘doomsday’ loss rates in which the highest loss rates ever recorded—160 basis points in 1992 —continue for a number of years, and loss rates would need to jump unprecedentedly this year and be sustained at high levels for several years to justify current CMBS pricing,” the report said.
The report said A-rated or higher tranches in CMBX—a set of derivatives that provides insurance against defaults—are particularly undervalued from a credit performance perspective. “Based on real estate market fundamentals the widening of CMBX/CMBS spreads is unjustified,” Southard said.
“At current wide spread levels, the heightened volatility in the [CMBS] market makes buying protection all the more dangerous, particularly given that ever-widening spreads implies higher and higher anticipated losses, on top of what many already view as anticipated losses that exceed reasonable expectations,” said Lisa Pendergast, managing director of CMBS at RBS Greenwich Capital, Greenwich, Conn.
Jan Sternin, senior vice president of commercial/multifamily at MBA, said in a recent MBA Executive Podcast that MBA is on Capitol Hill with its members and government affairs team educating policymakers on the commercial real estate finance market.
“The restoration of investor confidence is the most important thing in bringing back the capital markets and bringing liquidity to the market. We’re aware of it—all of our members are aware of it,” Sternin said. “The fundamentals on the commercial side remain relatively solid and if we look at that, there should be, again, a rise in investor confidence that will bring liquidity back. We just have to focus on the fundamentals.”
In its weekly report, RBS Greenwich Capital said CMBS delinquencies rose to 0.51 percentin February from 0.47 percent the previous month, and CMBS delinquencies are “poised to continue to show modest monthly increases, with a strong likelihood that the rate will return to the October 2003 high of 2.5 percent over the next 18 to 24 months.”
“The increase will come from a rise in newly delinquent loans and the slower pace at which seriously delinquent loans are disposed,” Pendergast said. “In historical terms, 2.5 percent remains well below the all-time high in monthly delinquencies hit in June 1992 at 7.5 percent.”
CBRE/TWR’s March report said it expects the cumulative 10-year loss rate for the entire CMBS conduit market to hit 2.53 percent. While analysts expect vacancy rates across all major property types to inch upward for the next few years—with the peak vacancy level around 2009—they will still be lower than the peak in 2002/2003, the report said.
In its Research DataNote released yesterday, the Mortgage Bankers Association said the commercial and multifamily mortgage market faces limited exposure to refinance risks stemming from the credit crunch and relatively few commercial/multifamily mortgages will mature in the next two years.
Meanwhile, delinquencies from life insurance companies were at their lowest during the fourth quarter of 2007, based on data from the American Council of Life Insurers. ACLI said retail delinquencies were at .02 percent; office properties were .01 percent delinquent; and all commercial properties were .01 percent delinquent, based on $303 billion of the life insurance industry’s 2006 mortgage portfolio.
Sternin said delinquencies will remain at record low levels as properties continue to perform. “It’s a record low by a lot,” she said. “It’s not just a little bit above what you would say is the lowest we’ve ever seen. It’s like next to nothing in delinquency and it continues to hold solid. We’ve been saying record low delinquency levels for awhile now.”
Volume of Maturing Commercial/Multifamily Mortgages Low in Coming Years
MBA (3/21/2008 ) Vasquez, Jason
In its latest Research DataNote, the Mortgage Bankers Association said the commercial and multifamily mortgage markets face limited exposure to refinance risks stemming from the current credit crunch. The report said relatively few commercial/multifamily mortgages will mature in the next two years.”There’s been a general impression that a large volume of commercial/multifamily mortgages are coming due this year and next,” said Jamie Woodwell, MBA’s senior director of commercial/multifamily research. “The reality is that 2008 and 2009 will see a relatively small volume of maturing mortgages, with the majority of commercial mortgage-backed securities loans not maturing until 2015 or later.”
Capturing data from JPMorgan and Wachovia Capital Markets, the DataNote reported more than $600 billion in outstanding loans from CMBS fixed-rate deals. Of this, only $16 billion is scheduled to mature in 2008 and another $19 billion in 2009. The surge in sales and financing volume during 2005, 2006 and 2007, coupled with CMBS loans tending to have a 10-year term, mean that the majority of CMBS loans will not mature until 2015 or later. This means $98 billion of loans are scheduled to mature in 2015; $128 billion in 2016; and $127 billion in 2017.
Of loans due in the coming years, the majority are well-seasoned and have been amortizing. JPMorgan reports that $14 billion of the $16 billion maturing in 2008 are fully amortizing, as are $14 billion of the $19 billion coming due in 2009. According to Wachovia Capital Markets, more than two-thirds of the volume of loans coming due prior to May 2009 was originated prior to 2000.
In addition to fixed-rate conduit deals described above, the DataNote reports that Wachovia Capital Markets identified $30 billion of large-loan floating rate deals that will come due prior to May 2009. The maturity dates of these loans are spread throughout the period, with relatively larger volumes—$3.5 billion and $3.3 billion respectively—coming due in August and October 2008.
The DataNote focuses on maturing mortgages in the CMBS market. Banks and thrifts will be more likely to have shorter-term and adjustable rate loans, while life companies will tend to have longer-term fixed rate loans. Each group’s maturity patterns will also be affected by the ups-and-downs of its originations experience.
Residential Briefs
MBA (3/21/2008 ) MBA Staff
Clinton Calls for ‘Second Stimulus Package’ on Housing
Sen. Hillary Clinton, D-N.Y., a candidate for the Democratic nomination for president, called for a “second economic stimulus” plan that would focus on assistance to at-risk communities and borrowers facing foreclosure.The proposed package would include a $30 billion emergency housing fund and extension of the Mortgage Revenue Bond program by $10 billion. She also called on Congress to consider temporary measures to help workers, such as extending unemployment insurance.
Interthinx Releases New Fraud Training Film
Interthinx Inc., Agoura Hills, Calif., a provider of risk mitigation, mortgage fraud prevention and regulatory compliance tools for the mortgage industry, announced availability of its latest a fraud-detection training film, Fraud Angels.
The film premiered this month at the Mortgage Bankers Association’s National Fraud Issues Conference in Chicago. The training film at no cost to mortgage industry professionals. The two-disc DVD set contains a 35-minute film that parodies a popular TV series and a disc containing 26 training chapters covering “red flags” in the story, emerging mortgage fraud schemes and the latest technology to combat the crimes.
DocuLex Updates Archive Studio 4 Document Management Software
DocuLex, Winter Haven, Fla., creators of electronic document management software, announces its Archive Studio 4 update. Goby Capture Profiler and Monitor components provide automated, networked paper and electronic document capture (in any file format, including email with attachments), with organization, workflow-enabling and ongoing management capabilities.
The new Goby Query utility provides content export to Profiler from Oracle and SQL databases. XML to PDF conversion is also enabled.
Commonwealth Bank & Trust Co. Selects Optimal Blue
Optimal Blue, Plano, Texas, developer of a Web-based platform that couples decisioning technology with content management for the mortgage industry, announced that Louisville, Ky.-based Commonwealth Bank & Trust Co. implemented Optimal Blue’s product eligibility and pricing engine (PPE) technology.
Prior to Optimal Blue, Commonwealth was using a proprietary price modeling system generated by the bank’s internal IT staff. Optimal Blue’s technology gives lenders the ability to automate management and distribution of products and pricing, enabling originators to then source, manage, price and lock loans.
Investors See Cost Savings, Transparency Opportunities in Data
MBA (3/21/2008 ) Sorohan, Mike
DALLAS—For industry investors—the government-sponsored enterprises and Wall Street—technology represents an element that not only requires adoption, but leadership as well.“We’ve talked about the need to really improve data quality and efficiency,” said Ted Adams, director of technology standards at Freddie Mac, McLean, Va., speaking here at the Mortgage Bankers Association’s National Technology in Mortgage Banking Conference & Expo. “It has an impact on our bottom line—every improvement we can eke out is important.”
During 2007, Freddie Mac focused on three key areas: cost, transparency and missed opportunities. “We recognized that we had rising costs and missed opportunities associated with bad data,” Adams said. “We recognized that transparency is critical and we are working on programs that not only ensure that our data are accurate, but transparent.
In taking a renewed approach, Adams said Freddie Mac reached a recognition that data quality is not a technology issue, but a business issue. “We have all the technology support we need, yet we’re still having a data-quality issue—it’s a business issue, not a technology issue,” he said.
As a result, Freddie Mac developed an enterprise data quality program that identifies more than 800 critical data elements and metrics. “One of the things we realized was that to get a better hold of that data, we installed metrics that enabled us to measure the data elements,” Adams said. “As a result, we’ve seen a significant decrease in corrections of data elements, and it’s helped us to manage the entire data set much better.”
Second, Freddie Mac improved its relationship with its seller-delivered data analytics. “We had the same or similar data sets in different areas of the organization,” Adams said. “We expanded our dialogue with our sellers to improve communication.”
Third, in measurement, Freddie Mac kicked off a Six Sigma-like process re-engineering. “We expect that this will reduce and streamline our processes and improve efficiencies,” Adams said.
Additionally, Adams said Freddie Mac has reached out to other industry players, such as MBA, to examine larger-scale initiatives. “Right now, we’re focusing on what we already have and how we can improve those processes,” he said. Adams, a member of the MISMO Governance Committee, said Freddie Mac has had “significant successes” in implementing MISMO standards.
“It’s become a cornerstone of our current environment,” Adams said. “The use of MISMO data set helps us to solve problems and eliminate redundant and contradictory data so that we can use it appropriately and consistently. We’ve reaped benefits of adopting MISMO in Loan Prospector [Freddie Mac’s automated underwriting system]. It’s allowed us to aggregate data and perform functions in-house, which allows us to use data the way we want to use it. We can also change our businesses and terms without it impacting our partners.”
Adams said he expects the GSE to approve more eMortgages this year. “They’re starting to come on pretty strong,” he said. “The numbers are still pretty low, but the growth is pretty dramatic. It looks like we’re going to see a geometric progression. And we’re hearing from our trading partners that the see the cost-savings benefits. One of our customers reports a $75-$100 reduction in closing costs. And it’s being driven by our smaller partners, who are more nimble. And there are a variety of closing solutions out there now that are cost-effective.”
Deborah Holmes, vice president and CIO at Ginnie Mae, Washington, D.C., said her agency has a mandate to expanding eGovernment as part of the President’s Management Agenda, aimed at reducing costs and improving services. Ginnie Mae recently announced an Enterprise Portal, a single-point access point to all of Ginnie Mae’s business applications. The initial phase provides secure, user sign-on and ability to access reporting and feedback services. The first phase expects to implement in November.
“In the future, any business being done by Ginnie Mae will come through the portal,” Holmes said. “We plan for it to be a very simple process.”
Additionally, on April 1 Ginnie Mae will implement unique loan identification numbers for each loan within a pool. “This will improve risk analysis associated with data disclosure,” Holmes said.
Luiz de Toledo, senior vice president and chief administrative officer of technology with Fannie Mae, Washington, D.C., said current market volatility has put pressure on IT initiatives, from both budget and reaction time.
“Lower earnings are causing capital scarcity,” de Toledo said. “At the same time, there is pressure to operate in real time with better analytics. We see three IT priorities: improving credit risk enhancement; providing productivity and infrastructure improvements; and enabling business growth. That requires higher allocations of IT resources.”
Fannie Mae is working on replacing archaic systems with new systems, de Toledo said. Later this year, Fannie Mae will implement a new 10-digit case file system, as well as a new version 7.0 of the GSE’s automated underwriting system, Desktop Underwriter. Other new systems target servicing operations and credit loss management enhancements.
eMortgages continue to be a key strategic initiative for Fannie Mae as well, de Toledo said. Fannie Mae and MBA recently contributed a new Smart Doc® validation method patent to MISMO for broad general use.
The SMART Doc® specification was originally licensed by Fannie Mae to MISMO in 2002, and then developed and released as an open industry standard for electronic documents. The new patent, which was granted to Fannie Mae this past November, defines processes for validating the VIEW and DATA sections of a SMART® document with automated systems. Additionally, the processes can enable “lights-out” post-closing and certification.
“We are committed to seeing eMortgages grow in volume,” he said.
Leading Indicator Index Signals Lackluster Growth in 1st Half
MBA (3/21/2008 ) Velz, Orawin
The Conference Board’s index of leading indicators—a gauge of future business activity three to six months ahead—fell by 0.3 percent in February, following a 0.4 drop in January (previously reported as a 0.2 percent drop). The index has fallen for five consecutive months. The last time the index declined for this long was in early 2001, as the economy entered a recession. The 0.3 percent decline puts the index at its lowest level since September 2005, when consumer confidence plummeted following the surge in energy prices as a result of Hurricane Katrina. According to The Conference Board, economic growth will be weak this spring and a small economic contraction is possible.
In a separate report, weekly initial unemployment claims—one of the 10 indicators making up the index of leading indicators—increased by 22,000 to 378,000 for the week ending March 15. This is the highest reading since early October. The Labor Department noted that the claims may have been affected by an auto industry strike that shut down several plants across the Midwest. The four-week moving average also continues to trend up to the highest reading since October 2005.
Continuing claims, which gauge the pace of hiring rather than layoffs, increased by 32,000 to 2.865 million for the week ending March 8. This is the highest level since August 2004. Recent trends in continuing claims suggest that businesses have been reluctant to hire retrenched further, suggesting that employment in March may be weak again.
A separate report from the Philadelphia Federal Reserve showed that the area’s manufacturing sector continued to struggle, as activity declined again in March but at a more moderate pace. The general business index was up 6.6 points to a minus 17.4 in March. (Readings below zero indicate contraction.) Manufacturing in the Philadelphia region contracted for the fourth consecutive month. The last time the index showed negative readings for that long was in 2003.
The Philly Fed survey is the second regional Fed manufacturing survey for March. On Monday, the New York Fed released the Empire State Manufacturing Survey showing the index declining to a record low, surpassing the previous record low reached in November 2001, when the economy was in a recession.
Long-term yields were little changed. The yield on 10-year Treasury note stayed around 3.33 percent on Thursday, about the same as the rate on Wednesday.