Peter Pays Paul

I’m taking a few things home to read this weekend. Here they are if you want to print them out and read them too.

• Marcus & Millichap 2009 Real Estate Investment Outlook – Marcus & Millichap provides 12 pages of data for you to chew on.
  
• Everything You Wanted to Know about Credit Default Swaps–but Were Never Told – More than a 5 minute read from RGE Monitor – Home of “Dr. Doom” Nouriel Roubini.
• Putting Office Rent Declines into Historical Perspective – Torto Wheaton Research gives there thoughts on the direction of office rents are headed.

See you on Monday!

Commercial mortage brokers get paid based on the value they bring to the client in a transaction. The truly successful brokers bring value to their clients consistently.

2009 forebodes to be a difficult year for certain commercial real estate sectors. Much in the residential real estate industry has changed since 2006, we can expect similar changes in the commercial real estate. They key is to be one of the survivors that come out on the other side.

Adding Value

Most borrowers would not pay a broker’s fee if they did not get something in return for it. A commercial mortgage broker must provide something  the client “needs”.

The client may “need” a smoother transaction, a greater selection of lenders, a higher LTV, a lower rate, or more flexible loan covenants. In exchange for this the broker receives their loan fee.

All of these were solutions to problems that a broker could provide that might not have come through direct contact with an institutional lender

In the current market brokers are having more difficulty providing these items of value. LTVs have decreased, rates have gone up, and many banks are only lending to existing customers.

How does a broker survive and add value in this market?

Bring Equity

A broker that was able to provide an equity injection to a property that needs refinancing will have no shortage of business. Borrowers that cannot qualify for a refinance with new, lower values may be open to a fresh equity injection to facilitate the refinance and ownership of their property.

Offering this as a solution to a borrower’s problems will make it more palatable. Many borrowers may balk at this idea at first.

However, if the only alternative is foreclosure, this idea is likely to become less offensive.

Finding Equity

This will require some work on your part as the broker. Finding reliable and reasonable sources of equity capital. The equity investor must have the funds available to respond quickly. They also must not be so greedy as to kill a deal and offend your borrower.

One way to do this is call your existing database to see if they know anyone that might be willing to invest in projects for an equity position. Some of your existing clients may have extra cash that they would be willing to invest in the right project.

The deal structure will need to be worked out between your equity investor and the borrower.

Commercial mortgage brokers need to continue to add value to their clients’ transactions in this difficult financing environment. How do you plan to do this for 2009?

Photo credit: somethingstartedcrazy

This month’s meeting for the Bay Area Mortgage Association was titled “What get’s financed in 2009?” The three panelists shared what each of their companies would be looking to finance in 2009.

Two life insurance companies and one national bank were represented on the panel. All three institutions expected higher cap rates, lower loan-to-value ratios, and stronger debt-service coverage ratios as requirements for new originations.

The bank is currently only planning to work with customers that have an existing banking relationship.

The life insurance companies face a difficulty because their global portfolio allocation have been skewed by the massive decline in the stock portion of their portfolios. For some of the life companies their portfolio is out of balance towards commercial real estate, as these assets have not lost value at the same rate the stocks have. This means that they will likely see a decrease in the amount of loans they can originate.

Survey Says

In a survey performed by Marcus & Millichap commercial financing ranked as the biggest concern for real estate investors in 2009 reported by Mortgage Bankers Association.

Financing availability, creditworthiness of tenants and rising vacancy rates top concerns for commercial real estate investors responding to a survey conducted by Marcus & Millichap Real Estate Investments, Encino, Calif.

…

Nearly 60 percent expected all-in mortgage rates to increase in the next year; nearly 75 percent believe financing will be as difficult or more difficult to obtain. While 60 percent of commercial real estate investors expected full recovery of the commercial mortgage-backed securities market, they said its return could take at least two years.

This provides a good opportunity for:

1. Commercial mortgage brokers and bankers that are able to find solutions for their clients,
2. Commercial real estate agents that are able to structure deals that get financed,
3. Real estate investors/lenders that have cash.

Creativity will be one of the keys to success in 2009 for those in commercial real estate. “Business as usual” is on vacation.

Photo Credit: The Pack

Mike Shedlock from Mish’s Global Economic Trend Analysis has a great article about the potential for municipalities across the nation to file Chapter 9 bankruptcy.

Mish’s Global Economic Trend Analysis: Massive Surge In Municipal Bankruptcies Coming.

John Moorlach, the accountant who predicted the 1994 Orange County bankruptcy sees Up to 10 Municipal Bankruptcies in Coming Year

Even more infuriating than the policy makers inability to demonstrate fiscal responsibility is their willing to stick both of their hands in the dole. Mike quotes the St. Petersburg Times article Double dipping rises despite outrage.

This year some of Florida’s public officials are giving a whole new meaning to the phrase “home for the holidays.”

It’s a new crop of double dippers, taking advantage of a loophole in state law that allows them to “retire” by taking 30 days off and return to work in their old jobs with a salary and a pension. Many also collect a lump-sum “retirement” payment that can reach hundreds of thousands of dollars.

It is sad that we live in an entitlement culture. Everyone thinks that society owes them something.

As Margaret Thatcher said of “society”,

There is no such thing! There are individual men and women and there are families and no government can do anything except through people…”

Politicians and people that demand something for nothing are holding back the more productive members of our society.

Straight Talk About Mortgages and Real Estate Investor Sues to Block Mortgage Modifications.

Yesterday I posted about the SF Chronicle article that argued in favor of gaming the system to get lower payments on your mortgage.

I realized as I was at home and with friends that from the title of the post, it may have seemed that I was advocating not paying your mortgage.

This was not my intention at all.

Viewing Money and Wealth as a Tool

I believe that there are many things in life more important than money.

My love for Jesus helps me to view money not as and end in itself. Money is a tool that allows me to eat, stay warm, and accomplish bigger goals in life.

Wealth is not an end in itself. Wealth (an abundance) makes eating, staying warm, and accomplishing bigger goals easier. It can often provide an easier solution to the problems that we may face.

A Good Reputation is More Valuable Than Gold

A good name is to be chosen rather than great riches,
and favor is better than silver or gold. – King Solomon

Thousands of years ago King Solomon wisely wrote that a good reputation is more valuable than great riches. Riches and wealth may come and go, but a person’s reputation can outlast their life.

A good reputation is an inheritance that even a poor man can pass along to future generations.

Keeping Our Word

Keeping promises is something more important than money.

A mortgage is a contract or promise between two people. The lender promises to lend money to the borrower in return for an interest payment. The borrower promises to repay and compensate the lender with interest for the use of the money.

Should a borrower purposely stop paying their mortgage or lower their income in an effort to get “better terms” or a “more affordable” monthly payment they are going back on their promise to repay their debt.

Doing it Right

Most of the time I am a stickler for doing things “the right way”. This has a tendency to frustrate those closest to me who may just want to get the task accomplished.

Accomplishing tasks with excellence breeds a sense of personal accomplishment over a job well done. No corners were cut, no task was left undone, this project is fully completed.

Getting a better mortgage payment may be financially better now. People might think you are crazy to not take advantage of the situation.

It can be done right, or it can be cut short.

If “shortcuts” are taken, we truly only short change ourselves.

Blinded By Nearsightedness

Too often it is easy to look at the near term benefits and forget the long term consequences when thinking about our money and finances. I too often fall into this trap. I look for the easy fix now, rather than the long term benefit.

The current government loan modification may cause us to be blinded to the long term consequences on our character and the character of future generations.

Subtly, we may be teaching those that respect us the lesson that doing whatever it takes to make more money and acquire more stuff is the highest and best goal and anything should be done to accomplish it.

Wealth in the Journey not the Destination

The pursuit of wealth and all that is shiny can be so very attractive for what it offers. However, the journey to achieving wealth is probably just as important as the wealth itself.

Wealth alone cannot produce character, while the journey to wealth can.

Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars. – Warren Buffett

In the journey we develop character, perseverance, and humility. So let’s enjoy the journey, keep our promises, and do it right.

The Wall Street Journal is reporting that Calpers, the California Public Employees’ Retirement System, has lost 35% of the value in its land and residential real estate investments.

As of August 31, 2008 the fund had a total of $233.4 Billion under management. Only 10.1% of that amount is allocated to real estate assets. The fund as of June 30, 2008 had lost only 2.4% overall.

The nation’s largest public pension fund, known as Calpers, is paying dearly for its ill-fated decision to become one of the most aggressive real-estate investors among public pensions.

Amid the rapid decline in the housing market, the value of Calpers’s investments in land and housing projects across the country had fallen 35%, to about $6 billion, as of June 30, according to recent performance results released Wednesday by the California Public Employees’; Retirement System.

The losses are likely to be larger now because the values were based on appraisals completed at the end of March. Since then, land values have cratered nationwide, as evidenced by the bankruptcy-protection filing of one high-profile Calpers undertaking, the LandSource land venture in California. An investment vehicle funded by Calpers sank $970 million in that venture, which holds 15,000 acres outside Los Angeles.

Calpers Confronts Huge Housing Losses – WSJ.com.

During my morning reading two articles in the Wall Street Journal stood out to me and indicated that credit is not flowing the way that it had in the recent past.

I believe that this is a sign that the economy is deleveraging itself. We are likely in for a period of economic deflation followed by a period of inflation due to the governments massive printing of money.

First, this article regarding asset backed bond woes. These asset backed bonds are car loans, credit card loans, student loans, etc. wrapped up into bundles and sold to investors as a rated bond.

In October, only one deal of $500 million was sold, compared with $50.7 billion done the year before. That is a huge decline and means that far fewer consumer loans are being made. We should see a drop in consumer discretionary spending in the coming months.

Second, this article highlighting the rise in requests for trade financing to boutique firms. These boutique firms are thriving with the slow down in lending from banks.

One of the difficulties is that “They have no guarantee that the buyer’s bank will accept the seller bank’s credit because of solvency issues…”

Currently, banks don’t trust one another and do not want to lend to one another.

Government Intervention’s Role

I believe that the government’s intervention has added to the problems.

The Fed began the term auction facility in December of 2007. This allowed banks to borrow from the Fed without other banks knowing who was borrowing. Borrowing from the Fed in the past had been seen as a last resort and a cause for concern to other banks. With transparency removed, banks become distrustful of one another and slowed interbank lending.

I mentioned here that banks are lining up to get TARP funds because they don’t want to have a negative public opinion, and not necessarily because they need or want the funds.

Until the government takes a “hands off” role to the current financial system, there will be fear, mistrust, and hesitancy that will prolong the economic downturn rather aid it.

Reuters is reporting that GMAC’s mortgage unit, ResCap, has reported its 8th straight quarterly loss of $1.91 billion. GMAC, LLC, the financing arm of GM, reported its 5th straight quarterly loss.

The unit speculates that GMAC may convert to a bank holding company in order to receive funds from the TARP.

This as well as the previous post do not bode well for the residential real estate recovering soon. Fewer lenders equals less competition. Less competition means higher interest rates. Fewer borrowers will qualify for loans at higher rates and fewer houses will be sold.

Long-term this is a good sign because it is the removal of inefficient competitors from the marketplace. It will also be beneficial because it will help with the deleveraging of the economy and it will force those of us in the market for a house to save or build equity the old fashioned way.

GMAC has $2.52 bln loss; ResCap unit may fail | Reuters.

(HT: Agent Genius News)

When governments intervene into private contracts it has long-term unintended consequences, and usually they are negative.

Read a blurb regarding the research from the St. Louis Fed on the downside of a moratorium on foreclosures.

Governments cause both immediate and long-term effects when they rewrite the terms of contracts between private parties, Wheelock argueded. “Although the economic and societal benefits of lower foreclosure rates are difficult to measure,” he said, “research shows that the foreclosure moratoria of the Great Depression imposed costs on future borrowers.”

Future borrowers were faced, according to the analysis and cited studies, with a restricted supply of loans and sky-high interest rates, because lenders needed to compensate for the possibility that their right to foreclose on delinquent loans would be constrained. Under the nation’s current turmoil, policymakers are scrambling to enact similar regulations as were made during the great depression, in order to limit the highest foreclosure rates since (what else?) the Great Depression.

Here is the link to the HousingWire.com article.
History Warns Against Foreclosure Moratoria: Study : HousingWire.

Here is a link to the St. Louis Fed report.

Update (HT: Tom Vanderwell)