Wednesday, September 30, 2009

Labor Markets Still Soft... Despite Positive Signs

Beacon Economics 9.30.09

The Inland Empire’s unemployment rate has fallen for two months in a row - from 14% in May to 13.1% in July. Unfortunately, a closer look at these statistics reveal that things are actually getting worse, not better.

Between March and July, over 31,000 people dropped out of the labor force in the Inland Empire. Because these "drop outs" are no longer actively looking for work, they are not included in the tabulation of the unemployment rate, mitigating its increase. When the economy turns, and people reenter the labor force in search of work, it will put upward pressure on the region’s unemployment rate. Beacon Economics is forecasting that unemployment in the Inland Empire will hit a peak of 14% in the 4th quarter of this year.

Total nonfarm employment won’t reach its lowest point until the 1st quarter of 2010. Expect employment in the Inland Empire to fall back to 2004 levels by the end of this recession—a loss of roughly 1.13 million workers or a decline of 10.8%.

Predicted employment declines in the region are much larger than what Beacon Economics is forecasting for Los Angeles (6.8%) and San Diego (5.9%). We have however revised our Inland Empire employment forecast upward from our May estimates based on increased building permits in the 2nd quarter of this year, and on a slowing in the decline in taxable sales. Declines in construction and trade employment were mitigated by these factors. However, Beacon Economics is decidedly more pessimistic on government and leisure/hospitality employment than previously forecast; in these sectors we see more job losses to come.

By the end of 2010, we expect employment to be on the rise and unemployment to be well into its decline. However, the subsequent growth phase will occur at a slower pace than many expect.

Rough sailing ahead for recovery

Recession may be ending, but repairing the damage could take years


By John W. Schoen

Senior producer msnbc.msn

updated 12:48 p.m. PT, Tues., Sept . 29, 2009

Confusion about the outlook for the economy abounds, and consumers, who are responsible for the bulk of economic activity, may be the most puzzled about it.

Despite all the talk of "green shoots" on Wall Street, consumers have good reason to be skeptical. With much of the economy still badly battered by the worst downturn since the Great Depression, it remains to be seen how strongly the economy will emerge from that slump.

On Tuesday the Conference Board, an industry group, reported that its index of consumer attitudes fell to 53.1 in September from a revised 54.5 in August. The news surprised Wall Street, which had been expecting the index to rise to 57.0.

Part of the surprise came from conflicting signals from last week's widely watched University of Michigan survey, which found consumer confidence rising in August.

Consumers who see the glass as half-full seem to be responding to recent positive reports about the recession coming to an end. The University of Michigan survey tracks changes in whether consumers are hearing “good news” or “bad news" about the economic outlook. In August, that index took a big jump.

No wonder. There's been plenty of good news lately about the economy, and some data due out later this week are expected to add to the evidence that the longest, deepest postwar recession is coming to an end.

"From a technical perspective, the recession is very likely over at this point," Federal Reserve chairman Ben Bernanke said earlier this month. "It's still going to feel like a very weak economy for some time because many people will still find that their job security and their employment status is not what they wish it was."

Many private economists expect that the official barometer of economic growth, the gross domestic product, will post gains in the second half of the year — thanks to a multitrillion-dollar pump-priming by the federal government over the past year. But there are widespread doubts about whether the engine will keep turning strongly enough to produce jobs after the government's stimulus spending is over.

Those fears showed up in the latest Conference Board survey: The index of people who described jobs as "hard to get" rose to 47.0 from 44.3. And the gauge of "jobs plentiful" fell to 3.4 from 4.3, the lowest since February 1983.

Even those who see the recession ending concede that it will be years before the job market brings employment levels back to anything close to a "normal" economy. That’s because each of the four major sectors that produce economic growth still face major headwinds.

Here’s a look at each sector:

Consumer spending

Because consumers account for about 70 cents of every dollar’s worth of U.S. economic growth, it’s hard to have a recovery unless households are spending. Some economists believe that, as the recession ends, consumers are getting more confident and will soon return to their traditional role as the main engine of economic growth.

The latest data on the housing market and retail sales seem to back that up. Existing home sales have risen in four of the past in six months, and new home sales have risen for four straight months. Retail sales bumped up 2.7 percent in August, the biggest gain in three years. Recent gains in the stock market have helped households rebuild battered investment savings, easing some of the financial gloom that cut into consumer spending.

But those gains are from basement-bottom levels; home sales are still off more than 25 percent from their 2005 peak. Car sales, which also picked up in August, are still well below levels seen for most of the decade.

September auto sales will be reported Thursday and are expected to show a 20 percent drop from levels in August, which were boosted by the federal "Cash for Clunkers" program. Housing sales also could drop after Nov. 30, when an $8,000 federal tax credit for new home buyers, is set to expire.

With or without government incentives, consumers can’t spend money they don’t have. Some 14 million workers are without a paycheck; many of those who relied on credit card debt or home equity loans during the past decade can no longer tap that spending power. And while job losses appear to be easing, most economists expect the unemployment rate to remain stubbornly high, and possibly climb more.

“We are digging out of a very deep hole,” said Julia Coronado, a senior economist at BNP Paribas. “Until we see (job gains) of 125,000 or 150,000 (a month), the unemployment rate is going to be drifting higher.”

After cutting payrolls to the bone, employers won’t be in a hiring mood until they’re convinced the recovery is solid and sustainable. That’s going to take more than a few quarters of positive GDP growth.

“(Employers) have pared down, they’ve cut back and they’re pretty lean right now and you’re going to see pretty big jumps in productivity,” said John Engler, president of the National Association of Manufacturers. “I think it’s going to be a very slow recovery, but as it comes back I think you’re going to see a lot of increased production without a lot of hires.“

A weak housing market could also slow the recovery in new hires as job seekers who want to relocate run into roadblocks trying to sell their homes.

“In the U.S. traditionally there’s a lot of labor mobility,” said David Blitzer, an economist with Standard & Poor's. “And as you begin to see a little improvement in the economy it’s not clear that the new jobs will be where the old jobs were. But it will be very difficult for people to move to take the new job because they’ll be stuck with the house where the old job was.”

Business investment

Notice how many items are back-ordered these days? As the recession deepened, businesses cut back inventories to the bone, afraid to get stuck with unsold goods if consumers stopped buying. Now that the economy seems to be finding a bottom, production is expected to ramp up smartly to restock those depleted inventories.

It may already be happening. Industrial production is up 1.8 percent in the past two months. Economists looking for a boost in business investment also note that companies deferred purchases of new computers and other equipment, so they eventually have to buy new ones. After peaking at 17 percent of GDP in 2006, business investment fell to just 11 percent in the first half of this year.

But strong business investment won’t be sustained until it’s clear there is strong consumer demand for more goods and services, according to David Roche, global strategist at Independent Strategy Limited.

And even if demand does come back, businesses still have lots of excess capacity to meet it after deep cuts in jobs and production during the recession. As of August, U.S. factories were running at just 67 percent of capacity, down from average levels of 80 percent for the past three decades.

“With all the excess capacity out there, I think it would be very difficult to see a big capital spending boom,” said Gary Shilling, a private economist and consultant.

Federal spending

As consumers closed their wallets, Uncle Sam opened his with one of the biggest spending programs in history, roughly $1.5 trillion in less than a year. Some $700 billion went to shore up shaky banks; another $787 billion paid for tax cuts and a surge in spending on new roads, green technology and a host of other projects designed to pump dollars into a shrinking economy.

A separate alphabet soup of money transfers from the Federal Reserve added another $1 trillion, much of it to guarantee loans and buy up bad investments from banks that couldn’t sell them, freeing up cash for them to lend.

The strategy seems to have worked, and much of the planned direct government spending is still in the pipeline. The hope is all that federal spending gets the gears of the economy turning again with enough momentum that as the federal spending spigot starts to slow down, other sectors of the economy will take up the slack.

But that plan comes with potential pitfalls. At some point, the Federal Reserve will have to unwind its trillion-dollar infusion of cash or risk igniting another asset bubble or nasty round of inflation. If it unwinds too quickly, it risks setting off another panic in the financial markets. If it leaves its policy in place too long, bankers will assume they can keep making risky loans and sell them to the Fed if they go bad.

“I believe they will continue to wind those (Fed backstops) down gradually,” said William Isaac, a former head of the FDIC. “We need to take sort of baby steps: take them down a little bit, see what happens, and take them down some more. Because we need to wean the markets off of these things. We can't keep them there forever.”

The government’s direct spending is being funded entirely with borrowed money, which is fine as long as investors keep buying U.S. Treasury debt. If they begin to lose their appetite, that could force interest rates higher, creating a big problem for businesses and consumers who need to borrow money.

Much of the hundreds of billions in federal spending has also been siphoned into a hole that diluted its impact: the growing chasm in state and local government budgets.

State and local spending

About half of government spending comes from state and local governments, which can’t borrow money when they get in a bind. And today, state and local governments are in an historic bind.

All but two states face budget shortfalls; in all, the deficits amount to about $168 billion, or about 25 percent of total state budgets. That number is expected to rise to $350 billion by 2011, according to the Center on Budget and Policy Priorities. If the Obama administration’s health care plan relies on Medicaid to cover more uninsured households, states could face a bill for tens of billions more.

As a result, the impact of the federal stimulus spending has been blunted by the sharp drop in state spending.

“The falloff in local and state revenues for roads and bridges was so precipitous that the federal money really kind of got us back to about level,” said Engler of the manufacturers' group. “There was really no net significant gain there.”

Local governments, which rely heavily on property taxes, also face budget shortfalls over the next several years as falling home prices force them to lower property assessments.

That means cutting spending and laying off workers, a process that is already under way.

Net exports

The last component of GDP — net exports — has actually been a drain on growth because the U.S. imports more than it exports. But the gap has been narrowing, and a continued pickup in exports would ultimately add to the economy’s overall growth.

Much of the gains for U.S. exporters have come from the declining value of the dollar, which makes U.S. goods and services more competitive in overseas markets. U.S. exports jumped to roughly $1.8 trillion from $1 trillion in 2001, when the last recession ended.

But U.S. exporters may not be able to rely much longer on a weak dollar to expand their business.

The common refrain you hear is, ‘Well, if we cheapen up the dollar, it will make it better for the trade deficit,” said Stephen Stanley, chief economist at RBS Greenwich Capital. “That’s a mantra that I'm not sure is really borne out over time.”

A continued slide in the dollar could bring some nasty side effects. The most worrisome is a rise in interest rates as overseas investors demand a higher return on U.S. Treasury bonds to make up for the eroding value of any investment denominated in dollars.

“The U.S dollar is on the weak side, and that’s great for our exports for now,” said Todd Buchholz, former director of White House economic policy from 1989 to 1992. “But there’s a narrow gap between helping the economy and being so weak that it becomes a crisis.”

© 2009 Reprints

Tuesday, September 29, 2009

Pimco’s Clarida Says U.S. Savings Rate May Exceed 8%

By Thomas Keene and Susanne Walker, Bloomberg

Sept. 28 (Bloomberg) -- Pacific Investment Management Co. strategic adviser Richard Clarida said the U.S. savings rate may exceed 8 percent, hurting consumer spending and weighing on the economic recovery.

“I’m in the glass is half empty camp,” Clarida said during an interview in New York on Bloomberg radio. “Traditionally the consumer comes to the rescue of economic recoveries. We’ll see a more subdued consumer.”

Americans took on less debt to repair tattered balance sheets, pushing the savings rate up to 6 percent of disposable income in May, the highest level since 1998. It last exceeded 8 percent in December 1992. Consumer spending accounts for more than 70 percent of U.S. economic activity.

Only 8 percent of U.S. adults plan to increase household spending, almost one-third will spend less, and 58 percent expect to “stay the course,” a Bloomberg News poll showed Sept. 17. More than three in four adults said they reduced spending in the past year, the poll showed.

Officials at Newport Beach, California-based Pimco, the world’s largest bond fund manager, have forecast a “new normal” in the global economy that will include heightened government regulation, lower consumption and slower growth.

Slower Growth

“Economic growth will be choppy,” Clarida said. “We see the economy recovering. There will be some quarters above two percent, and others below.”

The world’s largest economy shrank at a 1.2 percent annual rate from April to June, more than the originally reported 1 percent contraction, according to a Bloomberg News survey before the Commerce Department’s Sept. 30 report. The jobless rate climbed to 9.8 percent this month, from 9.7 percent in August, according to a separate Bloomberg survey before the Labor Department reports figures on Oct. 2.

“At some point as unemployment declines, the Fed will need to renormalize rates,” Clarida said. “It’s too soon to tell the pace at which they will renormalize. I don’t think there will be a Fed hike until late 2010 or 2011.”

The Fed cut its target for overnight lending between banks to a record-low range of zero to 0.25 percent in December.

Traders bet there’s a 72 percent chance the central bank will raise its target rate by April, based on futures data compiled by Bloomberg.

To contact the reporter on this story: Susanne Walker in New York

Last Updated: September 28, 2009 12:16 EDT

Monday, September 28, 2009

‘Always an Optimist, Always a Fighter’

By DANIEL MILLER - 9/28/2009

Los Angeles Business Journal Staff

Developer Sonny Astani was feeling good about his Concerto project on Aug. 29 when he sold all 77 lofts in his 348-unit downtown L.A. condo project.

Despite the soft real estate market, the one-day, heavily advertised event resulted in $31 million in sales. Astani planned to use the money to pay off contractors and a construction loan.

He called his lender, Corus Bank in Chicago, two days later to tell them the good news.

“We thought they’d be so pleased to hear of the sales,” said Astani. “But there was no response.”

Corus, on the brink of failure, failed to respond to several more calls – “I knew something was up,” he said.

So began a whirlwind month for one of the last downtown developers still standing.

Because Corus holds liens on each individual condo unit, all of Astani’s condo sales have been in limbo since the bank was seized by regulators on Sept. 11.

And that’s forced Astani to take an unusual step: He put Concerto in bankruptcy despite its strong sales. He’s counting on a U.S. Bankruptcy Court judge to release the liens.

“A big chunk of my brain power has gone to strategic decision making – basically like a chess game,” said the 55-year-old chief of Astani Enterprises Inc. in Beverly Hills. “You do your best to anticipate a lot of what-ifs and suddenly something like this comes up. It wasn’t in your realm of possibilities.”

The summer

Astani’s summer started off relatively calm.

Construction at Concerto was humming along and he was in the midst of a $2 million marketing campaign. But all along Astani was well aware that troubles at Corus loomed.

Then in June, buzz was building that the bank would soon fail, so Astani spoke to his bankers at Corus and floated a proposal.

“I offered to buy the balance of my loan, which is $157 million,” said Astani, adding Corus never funded $33 million of his original loan. “I offered to purchase it at 60 cents on the dollar, about $100 million.”

However, the bank was unresponsive. So with his worry growing that the bank would fail, Astani started preparing for the possibility of his bankruptcy action, working with attorney David Kupetz.

“I think it’s especially unusual and frustrating in the context that you are dealing with something that we haven’t had to deal with since maybe the S&L crisis,” Kupetz said.

At the same time, in an effort to raise money to pay off the Corus loan and contractors, Astani held the sales event.

It attracted hundreds of people, and he was able to sell all 77 units in the project’s loft building in just eight hours. The project’s separate 271-unit, 30-story tower is scheduled to be completed by the end of the year.

And when Corus did not respond to the good news, he worked with attorneys at Parker Milliken Clark O’Hara Samuelian PC to file a breach of contract lawsuit in Los Angeles Superior Court. The Sept. 4 lawsuit contends Corus allowed its own financial state and “intransigence” to hurt Concerto by delaying financing and approvals. It also states that the bank refused to release the liens on the condos sold at the sales event.

But events moved fast when on Sept. 11 the regulators seized Corus, which had been done in by a slew of bad loans made on condo projects during the boom. Astani now he had a new partner to negotiate with: the Federal Deposit Insurance Corp. He contacted the agency with an offer.

“To make it more attractive to the FDIC, I said I would pay 10 percent more than the highest bidder,” he said.

His offer to buy the note was met with what he viewed as an unfavorable response. Astani said he’s been told that he could only buy the note at its full value, which he considers unfair since notes on other real estate projects often trade at “30 to 50 cents on the dollar” these days.

The FDIC did not return calls seeking comment.

Squeeze out?

Meanwhile, the FDIC set a Sept. 25 deadline on bids for $5 billion in Corus assets. The offering, which includes loans on more than 100 projects, was expected to attract several interested parties from the investment world. The FDIC is said to be interested only in selling off all the assets as a portfolio and Astani fears that a sophisticated investment group would likely take a hard-line approach to dealing with borrowers.

“If these guys get a prized asset at a discount they aren’t going to be nice to me and pass through the discount. They are going to look for every excuse to squeeze us out and make life difficult,” Astani said.

He said that the 600-page loan agreement with Corus could be “picked on” and his sale of units below prices originally outlined in the agreement could be cited by the new note-holder in an effort to throw the limited liability company that owns Concerto into default. Hence, he has thrown the ball into bankruptcy court.

Astani is nothing if not dogged. Despite the inaction by Corus, a lack of dialogue with the FDIC and the bankruptcy action, Astani has remained hopeful.

“It’s been very difficult for him, but the great thing about Sonny is he’s always an optimist, he’s always a fighter,” said Paul Rohrer, a Manatt Phelps & Phillips LLP attorney who helped Astani secure the entitlements for Concerto. “There is never a point where he says, ‘Today’s the day I’ll just give up.’”

That’s part of what has emboldened Astani to continue his efforts to press on with his work. For a man with formal training in tai chi and karate, it is easy to compare the struggle at Concerto to combat. Though his training has taught him to avoid altercations, he’s realized this is one battle that can’t be ducked.

“Suddenly you become a gladiator because your life depends on it,” he said. “You have a warrior mentality. That’s how I feel.”
Los Angeles Business Journal, Copyright © 2009, All Rights Reserved.

Friday, September 25, 2009

Colony Financial IPO is hurt by glut of REIT vulture funds

The 'blind pool' structure of the deal also was a deterrent to investors because it would assure a profit for Tom Barrack and other fund managers while potentially shortchanging shareholders.

By Tom Petruno, The Los Angeles Times

September 25, 2009

Tom Barrack is considered one of the savviest commercial real estate investors of the last 20 years. But his bid to lure public investors to join with him fell far short this week.

Barrack, the 62-year-old founder of L.A.-based real estate and private-equity giant Colony Capital, wanted to raise $500 million via a new real estate investment trust that would buy troubled commercial property debt.

His Wall Street bankers could rustle up only half that sum from investors. The initial public stock offering of Colony Financial Inc. raised $250 million Wednesday by selling 12.5 million shares at $20 each, instead of the 25 million shares Barrack had wanted to issue.

The stock began trading Thursday in the red, closing at $19.50.

What went wrong? The deal tripped in large part because too many of Barrack's rivals -- including Barry Sternlicht of Starwood Capital and Leon Black of Apollo Group Management -- have raised or are trying to raise money for the same kind of vulture funds. The market is becoming at least temporarily glutted.

Beyond that, many investors just don't like the structure of the deals. Shareholders of these REITs will pony up hefty management and incentive fees -- out of trust assets -- to pay Barrack and the other fund managers, who will work under contract with the trusts to find and manage opportunities in distressed commercial mortgages.

But what the shareholders will reap is a big unknown. It will depend on the income generated by the loans and any capital gains the trusts earn by eventually selling the debt -- less any losses on troubled loans that go from bad to worse.

"There are going to be opportunities in commercial mortgages, and these guys are going to be able to take advantage of that," said Mike Kirby, a principal at real estate securities research firm Green Street Advisors in Newport Beach. But he believes the structure of the trusts is "universally bad," assuring a profit for the managers while potentially shortchanging investors.

Many investors buy REITs to earn a continuous stream of income, Kirby noted. Because vulture funds are by definition opportunistic, "the consistency [of income] definitely won't be there" for shareholders, he said.

Kirby asserts that it's smarter for investors who want to play for bargains in the depressed commercial real estate market to stick with conventional REITs such as Vornado Realty Trust and Simon Property Group, which own property rather than mortgages. Property REIT managers work directly for shareholders, as most corporate executives do, as opposed to the hired-gun management structure employed by the new vulture mortgage REITs.

An analyst at one brokerage that helped underwrite the Colony Financial deal said he had plenty of calls from interested investors but that many didn't like the unavoidable "blind pool" aspect of the deal.

What's more, he said, investors know that a key reason private equity shops are turning to the public market to raise funds is that many of their pension funds and other usual sources of money are tapped out. In other words, the public market is the fallback option, which also makes those investors suspicious.

Copyright © 2009, The Los Angeles Times

First Financial Offering Performing Loans

CRE Direct 9.25.09

First Financial Network will shortly start marketing a $40 million portfolio of performing commercial real estate and business loans on behalf of a finance company client.The Oklahoma City loan-sales specialist plans to take offers for the 37-loan portfolio on Oct. 21. And it will take offers on individual loans.

That’s contrary to its typical practice of grouping similar loans in pools.The loans have a weighted average coupon of 7.253 percent and are backed by properties scattered among 15 states, with concentrations in California, Florida, Utah and Oregon. Loans totaling 24 percent of the portfolio’s balance are backed by retail properties, another 23 percent are backed by warehouses and 13 percent by industrial properties. A total of 12 percent are secured by office buildings and 4 percent by apartment properties. Auto sales and repair shops account for 9 percent of the portfolio.

Separately, First Financial is offering a $250 million portfolio of agricultural loans on behalf of the FDIC, which assumed them through its seizure of New Frontier Bank of Greeley, Colo. It will take offers on Oct. 20. And it is offering a $12 million portfolio of business and consumer loans from the failed Bank of West Georgia in Villa Rica, Ga.

FDIC Unveils 2 Big Troubled-Loan Offerings

Commercial Mortgage Alert 9.25.09

Investors this week got their first detailed look at two large distressed-loan portfolios in which the FDIC is offering minority stakes.

The agency is shopping interests in a $1.1 billion package of commercial mortgages and land loans via Deutsche Bank and an $861.5 million portfolio of construction and land loans via the team of Midland Loan Services and Pentalpha Capital.

The agency distributed marketing materials for the expected offerings this week, enabling investors to begin due diligence. Each portfolio is divided into two pools, based on geography. So up to four winners could be named.

The stakes being offered have not yet been decided, but are expected to be either 20% or 40% for all-cash bids. But the level might rise to as high as 50% if a buyer uses debt financing to support its bid. That is aimed at ensuring a buyer puts up a minimum level of equity.

The winning bidders will work out the loans and share the proceeds with the FDIC. The loans came from some two dozen banks that failed over the past two years.

The Deutsche pool contains 1,232 loans. Loans representing about 70% of the total balance are backed by a mix of property types. The other 30% are land loans. The average balance is $887,000. Only 10 notes exceed $10 million. The loans are concentrated in Georgia (30.7% of total balance), California (14.7%), Nevada (14.4%) and Florida (13.5%). Two-thirds of the portfolio is delinquent, and two-thirds matures by the end of next year.

The 367-loan Midland/Pentalpha portfolio appears to carry higher risk. About 60% of the total balance is tied to projects that are either stalled or never got off the ground. Most of the loans defaulted at maturity. Some 43% of the pool balance is backed by properties in Nevada, one of the hardest-hit areas in the country. There are also large concentrations in Georgia (17.4%) and California (9.8%). The average loan size is $2.3 million.

Bids on the Deutsche portfolio are due in late October. Midland and Pentalpha will accept offers on Nov. 12. The FDIC this week also released marketing materials for a $2.6 billion portfolio of residential-construction and land loans. Bids for that portfolio, marketed via Keefe Bruyette, are due Nov. 12.

Six previous “structured sales” by the FDIC over the past two years generated an average winning bid of 21 cents on the dollar, with individual sales ranging from 9 to 38 cents. Overall, the FDIC sold $1 billion of participation interests for $209.8 million.

The offerings come as the FDIC is taking bids on $5 billion of assets from the failed Corus Bank of Chicago. That auction has drawn the attention of a number of opportunistic investors, including Colony Capital, Lubert-Adler and Starwood Capital. Some investors said the overlap might tamp down demand for the new offerings.

The structured sales are separate from whole-loan offerings, which the FDIC markets via First Financial Network of Oklahoma City and DebtX of Boston. The two firms combined are taking bids on roughly $1.5 billion in mortgages over the next six weeks.

Wednesday, September 23, 2009

Corus Auction Promises Property 'Mark'

SEPTEMBER 23, 2009


About 10 investors are expected to submit bids to the Federal Deposit Insurance Corp. by Friday for $5 billion in condominium loans and other property held by the failed Corus Bank, in a key test of U.S. commercial real-estate values.

The government-run auction, with loans backed by more than 100 real-estate developments, is the largest bulk sale of commercial-property assets since the financial crisis erupted. Bidders are looking at some of the highest-profile condo projects in the U.S., scattered from the waterfront Paramount Bay in Miami to Juhl in downtown Las Vegas.

Among the real-estate investors jockeying for what is left of Corus, which was seized Sept. 11, are a joint venture that includes Related Cos. and Lubert-Adler Partners LP; a team of Miami developer Crescent Heights and Dallas private-equity firm Lone Star Funds; Starwood Capital Group; and an investor group led by Colony Capital LLC and iStar Financial Inc., according to people familiar with the situation. Representatives for the investor groups declined to comment.

"We are offering specialized investors an opportunity to purchase an equity stake" in up to $5 billion of Corus's loans, an FDIC spokesman said. "The more that the FDIC can obtain for the overall portfolio, the more we can recoup on behalf of the creditors and our deposit insurance fund."

Such distressed real-estate sales were common in the wake of the real-estate collapse of the early 1990s, generating fortunes for savvy buyers as the market recovered and property values soared. Part of the problem today has been that few properties have been sold, making it difficult for lenders to value portfolios.

Experts following the Corus auction predict that bids will range from 30 cents on the dollar for nonperforming loans to 80 cents on the dollar for loans where the borrower is current on payments. The winning bid promises to be scrutinized by lenders across the U.S., many of which have been struggling with the valuations on thousands of condo projects and other commercial developments now in trouble.

The Corus auction "is going to create a new mark," says Norman Radow, chief executive of Radco Cos., an Atlanta developer specializing in distressed condo projects across the U.S.

The pace of distressed-asset auctions by the FDIC and other sellers is expected to accelerate. So far this year, 94 U.S. banks have failed, and others are in critical condition. Meanwhile, a record amount of than $800 billion in commercial mortgages are expected to come due in the next three years.

The winning bidder for Corus's loans is likely to try to foreclose on properties that are in default or cut deals with their developers. One potential strategy for squeezing profits from the loans is to buy them at 40 cents on the dollar, and then try to sell them back to developers for 80 cents on the dollar.

Some Corus borrowers have approached the FDIC for a chance to bid on their loans, according to people familiar with the process. The agency rebuffed those efforts, saying it is willing to sell only the whole portfolio.

That stance has sparked criticism by some borrowers who are worried the winning bidder could be a competing developer seeking to take over their projects. The winning bidder "may play hardball and put us in default," said Sonny Astani, who has a $190 million loan with Corus for a high-rise condominium development called Concerto in Los Angeles.

The Corus transaction is being structured as a partnership between the agency and winning bidder. The FDIC will hold a 60% stake and provide financing, according to people familiar with the matter. While seven other FDIC deals since 2008 have had similar partnership structures, the Corus deal is by far the largest. A similar arrangement was made in last week's sale of $1.3 billion in residential mortgages to a venture between the FDIC and Residential Credit Solutions Inc., these people said.

The public-private partnership structure is modeled on about 70 such deals pioneered by Resolution Trust Corp., a federal agency formed to clean up the savings-and-loan mess of the late 1980s and early 1990s. Rising property values in the mid- and late-1990s enabled the RTC to reduce taxpayer losses.

Still, the partnerships expose the U.S. to more financial risk than it might face by selling assets completely to private investors. The Corus auction also is complicated by an oversupply of condos in some of the same states where Corus concentrated its lending, such as Florida, California and Nevada.

In most of the FDIC deals involving failed banks during the current mess, the agency has lined up buyers to take over loans, deposits, branches and most other assets. For some failed banks like Corus, the FDIC decided to separately sell some hard-to-value assets. When Corus was seized, another Chicago bank, MB Financial Inc., agreed to assume 11 branches and about $6.6 billion in deposits from Corus. The FDIC has estimated that the Corus failure will cost its insurance fund about $1.7 billion.

—Nick Timiraos contributed to this article.

Write to Lingling Wei at and Anton Troianovski at

Tuesday, September 22, 2009

A Financier Peels Back the Curtain



“We all had too much money. It was just too easy.”

That’s the unvarnished appraisal of the private equity business by Guy Hands, perhaps best known for his unfortunate $4.73 billion purchase of the record company EMI in March 2007, the peak of the buyout boom — a bet that will almost certainly lose his investors and his firm, Terra Firma, a fortune.

That ill-timed acquisition aside, Mr. Hands’s surprisingly candid assessment of the private equity industry is worth sharing. He was in the midst of the industry’s growth to dizzying heights during the debt-fueled boom, and he is now having to deal with the aftermath of its shopping spree. Like others, he is desperately trying to keep businesses afloat and pay off the equivalent of huge monthly mortgage payments to the banks that financed them.

Mr. Hands, a large man with unruly hair who is a name-brand financier in his hometown, London, was in New York last week to meet with investors and speak at a conference. A longtime investor who started his career at Goldman Sachs, he made his reputation investing for Nomura. His net worth is estimated at more than $400 million.

Over afternoon tea at the Jumeirah Essex House hotel by Central Park, Mr. Hands, who now lives on the island of Guernsey to escape British taxes, offered the most frank assessment of the private equity world — including his mistakes — I had ever heard from anyone still gainfully employed in the business.

He had prepared remarks for a conference that morning, but didn’t get to air many of them. Some of his most provocative thoughts were in his notes, which he shared with me. Most strikingly, he grabbed the third rail of the private equity world: the fee structure that gave the firms 2 percent of assets under management, plus 20 percent of profits.

The problem, he said, was that the funds had grown so big that the 2 percent became just as important as the 20 percent.

“Clearly a large number of P.E. firms were totally overpaid at the peak of the market,” he said. “The fees were an entirely unwarranted windfall, as the managers did not use the excess fees to invest in resources to grow the skill base of their funds.”

He estimated that the private equity firms’ “net earnings will decline a minimum of 80 percent from the peak in 2007.”

Success had less to do with performance or risk management, he said, and more to do with bulking up. “It is time for investors to see through the elaborate marketing machines created by the industry,” he said.

Between sips of his mint tea, he said that during the boom, investors had thrown so much money at so many private equity firms — some of which formed consortiums to buy businesses from one another — that they were “really investing in the same thing so their capital was competing against itself, driving up prices.”

He also argued that private equity firms formed consortiums not to spread risk, but because, ultimately, it was easier than going “through the pain of gaining internal consensus to do something contrarian.” The big firms would counter that consortiums allowed them to buy bigger companies and to spread the risk.

With banks still holding back on loans, some on Wall Street have suggested that the private equity industry is dead. Others argue that the biggest firms — the Blackstone Group, Fortress Investments, Kohlberg Kravis Roberts & Company, which is planning to go public — will survive, albeit in a different form. Last year, Stephen A. Schwarzman, the co-founder of Blackstone, said, “The people rooting for the collapse of private equity are going to be disappointed.”

Mr. Hands is not rooting for the industry’s demise, but he is predicting it will wither. The firms still have funds big enough to last them at least a decade, as they provide steady fees. “Right now, the big firms have a tower of fees,” he said. “But the tower starts to collapse over time.”

As the funds dry up, Mr. Hands expects the firms will struggle to raise enough new money to support the hundreds of employees they now employ. His prediction has a precedent — that’s what happened to venture capital after the late 1990s. The industry shrank sharply after it became clear that too much money was chasing too few deals.

But the pattern may play out in slower motion for private equity. “Neither the banks nor P.E. want to come clean about mistakes,” he wrote in his notes. “Hence companies will live as zombies unable to grow their businesses or make long-term commitments. Meanwhile banks will try to suck out as much money as they can in fees and postpone recognizing the full extent of the losses of their underwriting decisions.”

In the end, he said, “Many P.E. firms are hoping that daylight doesn’t shine on the corpses of their companies, so they are reluctant to restructure too quickly.”

Of course, it’s possible that some firms will make terrific bets now, in the depressed economy, and will come out even stronger when things improve.

Mr. Hands is quite open that he made an awful mistake with EMI, which desperately needs to be restructured or sold (most likely to Warner Music, eventually).

His timing was off, he says, but not by much. If, by chance, he had waited several weeks, the deal probably wouldn’t have happened. The securitization market was about to seize up, which would have pushed him into a higher interest rate, making it impossible to sell some of the business to co-investors.

“If the EMI auction started two weeks later, it wouldn’t have occurred,” he said. “We wouldn’t have bought it. We’d have 90 percent of our funds still to invest and we’d look like geniuses.”

The good news for Mr. Hands is that most analysts, and even his own investors, give him high marks for operating the business very well, squeezing out every last efficiency.

The bad news is that he has been unable to invest in the company’s future and any additional cash goes only to one place: Citigroup, which provided the financing for the deal.

The bank has become Mr. Hands’s de facto boss now that there is more debt on the books than equity. “Negotiations with one’s bankers, when the debt is so large in relation to the earnings, are always difficult,” he said.

Legacy Loans Program – Winning Bidder Announced in Pilot Sale

September 16, 2009

The FDIC has signed a bid confirmation letter with Residential Credit Solutions (RCS), the winning bidder in a pilot sale of receivership assets that the FDIC is conducting to test the funding mechanism for the Legacy Loans Program (LLP). The pilot sale was conducted on a competitive bid basis, and final bids were received on Monday, August 31, 2009. A total of 12 consortiums bid to purchase an ownership interest in a limited liability company (LLC), to which the FDIC will convey a portfolio of residential mortgage loans with an unpaid principal balance of approximately $1.3 billion owned by the FDIC as Receiver of Franklin Bank, SSB, Houston, Texas. The pilot sale involves financing offered by the receivership to the LLC using an amortizing note guaranteed by the FDIC. Bidders for the pilot sale were given the chance to bid two different leverage options, 6-to-1 or 4-1, or to submit a cash bid for a 20 percent ownership interest.

The bid received from RCS for the financed sale of assets to the LLC using 6-to-1 leverage was determined to be the offer that would result in the greatest return for the receivership of all competing bids. RCS will pay a total of $64,215,000 in cash for a 50 percent equity stake in the LLC, and the LLC will issue a note of $727,770,000 to the FDIC as Receiver. The note will be guaranteed by FDIC in its corporate capacity. Based on the FDIC's analysis and assumptions, the present value of this bid equals 70.63 percent of the outstanding principal balance of this portfolio. The FDIC received various other bids that were very competitive. The FDIC anticipates selling the note at a future date. After the closing, which is expected to occur later this month, RCS will manage the portfolio and service the loans under the Home Affordable Modification Program (HAMP) guidelines.

The LLP is part of the Public-Private Investment Program announced in March by the Secretary of the Treasury, the Federal Reserve, and the FDIC, and is being developed to help banks remove troubled loans and other assets from their balance sheets so that banks can raise new capital and be better positioned to provide lending to further the recovery of the U.S. economy. FDIC conducted the pilot sale to test this funding mechanism as part of the development of the LLP. The FDIC will analyze the results of this test sale to determine whether the LLP can be used to remove troubled assets from the balance sheets of open banks, and in turn spur lending to further support the credit needs of the economy.

Friday, September 11, 2009

MB Financial to take over Corus Bank branches

By Steve Daniels, Crain Communications, Inc.

Sept. 11, 2009

(Crain’s) — MB Financial Inc. will assume the branches and deposits of Corus Bank, the long-troubled Chicago-based condominium development lender that will be seized at the end of business Friday by federal regulators, according to a person familiar with the matter.

Most of the assets of Corus, made up primarily of delinquent condo loans spread throughout the U.S., will be sold by the Federal Deposit Insurance Corp. in the next few weeks, according to this person. Several private-equity firms and real estate outfits are lined up to bid for those assets, according to numerous published reports.

Chicago-based MB Financial, with more than $8 billion in assets and over 70 branches in the city and suburbs, will add Corus’ 11 branches to its network. It’s also expected to assume less than $1 billion of Corus’ $7 billion in deposits, most of which are high-interest-rate certificates of deposits sold over the Internet.

An MB Financial spokeswoman didn’t immediately return a call seeking comment.

The deal for Corus is a coup for MB Financial CEO Mitchell Feiger, who has been the most aggressive Chicago banker in bidding for the branches, deposits and assets of failed lenders.

While the quality of Corus’ overall deposit base isn’t strong, many of its branch locations are in choice neighborhoods like Lincoln Park, Lakeview and Lincoln Square.

Only a week ago, MB Financial assumed the deposits, branches and assets of failed InBank of Oak Forest, but that lender is a fraction of Corus’ size.

While the writing has been on the wall for Corus for months, its failure marks the end finally for the Glickman family, which until recently owned about half the bank’s stock and effectively controlled the bank and its predecessors since the 1960s.

Robert Glickman, who resigned as CEO earlier this year and has been liquidating his ample stock holdings at well below $1 per share ever since, put the bank on its current course by aggressively lending to developers of splashy, high-end condo projects in some of the country’s hottest real estate markets.

Mr. Glickman gambled that a substantial cash and securities cushion would protect his bank from any real estate downturn, but the current meltdown far exceeded his expectations and made Corus a national poster child for reckless risk-taking in banking.

Thursday, September 10, 2009

In Florida, Vestiges of the Boom

September 10, 2009

Market Place

By ERIC DASH, New York Times

On the corner of Flamingo Road and Pink Flamingo Lane, beyond the putting green, the crystalline lagoon and the Sawgrass Mills mall, a soaring monument to the great condominium bust bakes under the Florida sun.

The Tao Sawgrass, as the twin-towered complex is known, was built on the western fringes of Fort Lauderdale with easy money from the now tottering condo king of American finance: Corus Bancshares of Chicago. Only about 50 of the 396 units have been sold.

The 26-story Tao — begun in 2006, just as the Florida real estate market imploded — is one of the many troubled condominium projects that have mired Corus in red ink and now threaten its survival. Federal authorities are racing to broker a sale of Corus to avert yet another costly banking collapse.

After failing to find a buyer for the entire company, regulators are moving to cleave the bank in two and sell its banking operations and condominium loans separately. The hope is to clinch a deal by the end of the month.

Some big-time real estate investors are circling, among them Thomas J. Barrack, who first made his fortune in the aftermath of the savings and loan crisis; Barry S. Sternlicht, the man behind the Starwood empire; Jay Sugarman of iStar Financial, the public real estate giant; and New York developer Stephen M. Ross, sometimes called the King of Columbus Circle, in league with Lubert-Adler, a big property investor in Philadelphia.

Whatever the outcome, Corus will go down as the great enabler of condo madness, and its travails are a harbinger of the pain yet to come in the troubled world of commercial real estate. More than any other condo lender, Corus epitomized the easy lending and lax oversight of the go-go years — and the pain of the ensuing bust. Its share price, which was nearly $13 in February of 2008, has plummeted into the land of penny stocks, closing at 25 cents Wednesday.

Corus barreled into hot markets like California, Florida and Nevada and then kept lending as those markets boiled over. Rather than diversify, it concentrated its lending bets by financing only a handful of big, risky projects. And it poured its idle cash into a small group of other banks and financial companies that were upended when the crisis struck.

The primary regulator of Corus, the Office of the Comptroller of the Currency, failed to sound the alarm until Corus was deeply troubled.

“They are the perfect analogy of a boom-bust bank,” said Jack McCabe, the head of a real estate research and consulting firm in South Florida. Corus executives, he said, behaved more like property speculators than bankers.

The failure of Corus would cost an already strained Federal Deposit Insurance Corporation billions. It would also underscore the wave of troubled commercial real estate loans now threatening to crash down on much of the American banking industry. Construction and land loans are now the biggest problem for hundreds of deeply troubled lenders and pose far greater dangers than commercial loans or home mortgages, according to Foresight Analytics, a banking industry research firm.

Many analysts see trouble ahead.

“The first big wave of losses for the banks were on loans to home builders and condo developers in once hot markets,” said Andrew McGee, a consultant at Oliver Wyman in New York. “Banks now are worried that office buildings, hotels and malls in areas hardest hit by the downturn are going bad too.”

Corus was not always so condo crazy. It used to be a sleepy family-run affair known as River Forest Bancorp. Then, in 1984, Robert J. Glickman took over from his father, Joseph C. Glickman, and began transforming the bank into a powerhouse in construction loans. Corus shut its student lending business, its trust operations and all but a handful of its Chicago area branches. It began catering to condo developers across the nation, offering developers quick loan approvals and attractive interest rates. Corus soon fanned out into hot markets like Atlanta, Las Vegas, Los Angeles and Miami. As the property market exploded, so did Corus. Its assets reached nearly $10 billion in 2006. But almost all the loans were tied to the condo market, and nearly 40 percent were for more than $100 million.

Robert Glickman kept reaching for more. Just off the Las Vegas Strip, Corus single-handedly financed a $108.2 million luxury development called Streamline Tower.

In Sunrise, Fla., locals shook their heads as Corus provided $126.3 million for the construction of the Tao, doubting that a luxury condo development on the edge of the Everglades could lure wealthy tenants.

And in downtown Miami, Corus financed the Ivy and the Mint, adjacent properties that were competing for the same buyers.

“It was like building two Wal-Marts next door to each other and thinking you would double sales,” Mr. McCabe said of the Miami projects.

Then, of course, the bottom fell out. By late 2007, the share price of Corus was under attack on Wall Street. But Robert Glickman, whose family then controlled nearly half of Corus, rebuffed offers to sell the bank. Instead, Corus paid a special dividend that netted the Glickman family about $25 million, even though the payout ate into the bank’s reserves. By mid-2008, Corus was losing money and stopped making loans altogether.

Finally, in early 2009, federal regulators ordered Corus to raise capital or put itself up for sale. It was unable to do either. In late June, the bank reported that its entire capital base had been wiped out. Since then, its auditors, Ernst & Young, have walked away, and Nasdaq has warned that it may delist Corus shares.

Mr. Glickman and his father, the chairman of Corus, left the company in April and recently sold their remaining shares for pennies on the dollar.

Corus officials did not return phone calls seeking comment.

Buyers of Huge Manhattan Complex Face Default Risk

September 10, 2009

By CHARLES V. BAGLI, New York Times

Three years ago, the sale of the 110 red-brick apartment buildings at Stuyvesant Town and Peter Cooper Village in Manhattan represented the most expensive American real estate deal in history.

Now the buyers are running out of time and money. Jerry I. and Rob Speyer and their partner, BlackRock Realty, who paid $5.4 billion for the quiet middle-class redoubt near the East River, have seen the property lose more than half of its value, and the income from rent — down 25 percent from its peak — covers less than half of their debt payments.

Real estate analysts say they expect that by December, the partnership will run out of an additional $890 million set aside for apartment renovations, landscaping and interest payments, and that the owners are at “high risk” of default on $4.4 billion in loans. Two real estate executives who have been briefed on the finances insist the owners can hold out, but only until February.

On Thursday, the partnership will go before the Court of Appeals in Albany to try to overturn a lower court decision that could force them to pay hundreds of millions of dollars in rent rebates to thousands of tenants.

Regardless of that outcome, Stuyvesant Town and Peter Cooper Village are in trouble. City officials have been monitoring the looming crisis and how it might affect a complex that has served as an oasis of affordability in Manhattan for middle-class New Yorkers. Some 6,875 of the 11,227 apartments at the complexes are rent regulated.

“We are absolutely keeping an eye on it,” said Rafael E. Cestero, the city’s housing commissioner. “It’s an iconic complex.”

Referring to the people who were part of the original real estate transaction, he went on, “Those folks are going to take their lumps. We are looking at how we can ensure that the rent-stabilized units and the families that live there and families that could live there in the future could be insulated from the unwinding of this deal.”

Even with the partnership’s financial problems pointing to a possible default, tenants would not be likely to face high rent increases or eviction, but they may face a period of deferred maintenance and disinvestment.

Rob Speyer, who is co-chief executive of Tishman Speyer Properties with his father, Jerry, acknowledged the problems went beyond the need for a cash infusion from the partners and their investors, which include Calpers, the giant California pension fund that is the nation’s largest.

“The asset is going to require a restructuring,” he said. “Once the court case is resolved, we’ll speak to our debt holders as well as our fellow equity investors.”

Tishman Speyer and BlackRock spent $6.3 billion — the $5.4 billion purchase price and the creation of four reserve funds totaling $890 million — to buy Stuyvesant Town and Peter Cooper Village from the original owner, Metropolitan Life.

The deal has become a “poster child” for all that was wrong with that era of easy credit, highly speculative deals and greed, said Ben Thypin, an analyst at Real Capital Analytics, a research firm.

It remains to be seen if its recent troubles will affect the Tishman Speyer image and the willingness of investors to risk their money with the company.

A recent report from Realpoint, a credit rating agency, estimates the property has a value today of $2.13 billion — less than half of what the partnership borrowed to buy it.

“The lender has to determine its own interests, as does the equity,” Rob Speyer said. “When the time comes we will be fair and reasonable and hope to get a new deal done.”

Like other developers, Tishman Speyer has been hurt by the collapse of the real estate and credit markets. A partnership led by the Speyers defaulted recently on debt payments for its $2.8 billion acquisition of CarrAmerica, a collection of 28 prime office buildings in Washington.

That partnership’s $22 billion purchase of Archstone-Smith Trust, a collection of 400 apartment complexes, has also fared poorly. Earlier this year, the banks that financed the deal were asked to pour in an additional $500 million to give Archstone more time to sell properties and reduce its debt. Tishman Speyer, whose investment fund invested $250 million in the deal expecting to get 13 percent of the profits, declined to participate in further financing. Its 1 percent stake was reduced substantially.

Rob Speyer said that in both cases the properties have “a lot of long-term value.” But the bad deals represent only a fraction of the $35 billion in real estate assets that it owns or manages around the world. At the market’s height, he said the company sold $10 billion worth of property over six months in 2007, including the former New York Times Building in Manhattan, which went for $525 million, three times what it paid less than three years earlier.

The Speyers insist their company is still providing investors with “20 percent returns” and has $2 billion to invest in new deals. “You show me anybody who measured up to that standard,” Jerry Speyer said.

Still, the purchase of Stuyvesant Town and Peter Cooper Village was one of the more scrutinized of its deals in recent years. The winning bid presumed the partnership could increase profits by renovating and deregulating apartments, but the owners have been unable to quickly convert apartments to market rates.

Daniel R. Garodnick, a city councilman who lives in Peter Cooper Village, said Tishman Speyer had problems of “its own making.”

“Residents are increasingly concerned that the maintenance of the buildings is slipping, even as they are getting hit with a flurry of potential charges for major capital improvements,” he said.

In March, the Appellate Division of the State Supreme Court ruled unanimously that the Tishman Speyer partnership and the prior owner, Met Life, had wrongfully deregulated about 4,350 apartments and raised rents beyond certain set levels, while receiving tax breaks from the city.

Tishman Speyer, Met Life and much of the real estate industry in New York appealed to the state’s highest court If the Appellate Court is upheld, the market-rate tenants could seek treble damages, which could cost the partnership more than $200 million. Even if it the ruling is overturned, the partnership still must renegotiate its loans or face foreclosure.

At Stuyvesant Town, there is a $3 billion first mortgage, or commercial mortgage-backed security, and a $1.4 billion second loan held by SL Green and others.

Finally, there is $1.9 billion in equity put up by Tishman Speyer, BlackRock and their investors. Tishman Speyer, which generally earns development and management fees from the properties, has about $56 million of its money in the deal.

“I’d say their equity has been wiped out,” said Craig Leupold, president of Green Street Advisors, “given the decline in apartment values.”

Wednesday, September 9, 2009

Defaults on Banks’ Commercial Mortgages Seen Rising Above 5%

By Hui-yong Yu, Bloomberg

Sept. 9 (Bloomberg) -- The default rate on commercial mortgages held by U.S. banks will rise to 5.4 percent in 2011, the highest since at least 1992, as banks anticipate more losses amid falling rents, according to Real Estate Econometrics LLC.

The property research firm increased its projected default rates for 2009 to 2011 amid declining occupancies and incomes at hotels, shopping malls and office buildings.

Defaults will rise to 4.2 percent this year and 5.3 percent next year before peaking at 5.4 percent in 2011, the New York- based firm said. Previously, it estimated rates of 4.1 percent this year, 5.2 percent next year and 5.3 percent in 2011.

“The higher default rate reflects a larger number of loans moving from delinquency to non-accrual status,” said Sam Chandan, president and chief economist of Real Estate Econometrics, in a statement. Loans moved to non-accrual status signify the bank doesn’t expect to be paid back in full.

The default rate more than doubled in the second quarter. Loans that were 90 days or more past due climbed to 2.88 percent of outstanding balances from 1.18 percent a year earlier, according to the firm.

Commercial mortgages labeled as “non-accrual” more than doubled last quarter to $27.76 billion, according to Real Estate Econometrics. Balances for delinquent loans, those that were 30 to 89 days past due, fell.

“This shift corresponds with banks working to identify and mitigate losses associated with problem loans earlier in the delinquency period and an increase in the share of delinquent loans that will require modification or foreclosure,” Chandan said.

Residential Defaults

Defaults in residential loans also rose in the second quarter, according to Real Estate Econometrics. Defaults for bank-held home loans, excluding apartments, climbed to 5.52 percent last quarter, the highest since the firm began tracking the data in 1992, an increase from 3.85 percent at the end of 2008, according to the firm’s analysis of Federal Deposit Insurance Corp. data.

Overdue commercial property loans reached 4.6 percent in 1992 during the savings and loan crisis, when the U.S. created the Resolution Trust Corp. to sell off real estate and non- performing mortgages held by insolvent lenders.

Bank holdings of commercial property loans rose to $1.087 trillion of in the second quarter from $1.077 trillion in the previous three months. That’s almost 15 percent of all loans and leases held by banks, Real Estate Econometrics said. Defaults are rising both for lenders that hold commercial mortgages and for bondholders in the $700 billion U.S. market for securities backed by commercial mortgages.

The CMBS market accounts for about one-fifth of the nation’s $3.4 trillion in commercial real estate debt, according to the Real Estate Roundtable. Defaults and late payments on loans bundled into CMBS could surpass 7 percent by the end of this year, research firm Reis Inc. said on July 30.

To contact the reporter on this story: Hui-yong Yu in Seattle at
Last Updated: September 8, 2009 23:30 EDT

Monday, September 7, 2009

Construction Loans Falter, a Bad Omen for Banks

September 5, 2009

Off the Charts

By FLOYD NORRIS, New York Times

EVEN as the economy may be starting to recover, banks across the country are confronting a worsening outlook for their construction loans, an area that boomed for much of the decade.

Reports filed by banks with the Federal Deposit Insurance Corporation indicate that at the end of June about one-sixth of all construction loans were in trouble. With more than half a trillion dollars in such loans outstanding, that represents a source of major losses for banks.

Construction loans were highly attractive in recent years for many banks, particularly smaller ones without a national presence. One reason was that other types of loans were not easy to make. A handful of big banks came to dominate credit card loans, for example, and corporate loans were often turned into securities.

Construction loans, however, needed local expertise and were not easy to standardize. In a booming real estate market, there were few losses on such loans.

The problems now extend well beyond loans for the construction of single-family homes, where banks have been taking losses and cutting back their commitments for a couple of years. At the end of June, $173 billion in construction loans related to single-family homes was outstanding, barely more than half the peak level reached in the fall of 2006, when the housing market was booming.

It is in commercial real estate construction — be it stores or office buildings — that the pain seems likely to rise. At the end of June, $291 billion in such loans was outstanding, down only a few billion from the peak reached earlier this year.

“On the commercial side,” said Matthew Anderson, a partner in Foresight Analytics, a research firm based in Oakland, Calif., “I think we are fairly early in the down cycle.”

Foresight estimates that 10.4 percent of commercial construction loans are troubled, but expects that to increase as the year goes on.

The definition of troubled loans used in the accompanying charts includes loans that are at least 30 days past due, as well as those on which the bank identified problems that led it to stop assuming that interest on the loans would be paid.

It is possible that some of the rapid rise in problem loans represents pressure from regulators to admit problems, rather than new problems. The number of newly delinquent loans seems to have declined in the second quarter, although it is hard to know if that is a trend that can continue. But the number of loans that the banks do not expect will be fully repaid has soared.

The reports that banks file with the F.D.I.C. do not include details on all types of construction loans, nor on where the construction is. That information is estimated by Foresight, based in part on where each bank operates and on disclosures in other company reports.

Foresight estimates the biggest problems are in loans for condominium construction, with 38 percent of all construction loans troubled. Mr. Anderson says even that might be an understatement. He pointed to Corus Bank, a Chicago institution that specialized in condo loans. Its latest report shows that its capital is gone and that it expects losses on two-thirds of its construction loans.

Foresight’s estimates of the proportion of problem construction loans in the 20 largest metropolitan areas has one surprise: the one with the largest proportion of troubled loans is Seattle, where the recession has started to pinch. But it is also notable that just one of the 20 areas has less than 10 percent of construction loans in trouble. A year earlier, most of them were below that level.

Floyd Norris comments on finance and economics in his blog at

Friday, September 4, 2009

Governments Cut Back on Hiring



State and local governments stood out as safe havens for workers during the recession's early stages. Now even they are laying off employees as officials rush to cut costs and balance budgets.

August marked the third straight month that state and local governments shed jobs, reflecting cutbacks prompted by declining income and property taxes. They accounted for the bulk of the 18,000 government jobs lost in August -- the U.S. Postal Service cut about 8,500 jobs as well -- and analysts expect the reductions to continue through much of the year.

The widening unemployment rate has a gender gap and men are feeling the brunt of it. WSJ's Jon Hilsenrath says thanks to the struggling manufacturing, finance and construction industries, unemployment for men is the highest its been in 27 years.

Despite billions of dollars in aid from federal stimulus programs, budget cuts across the nation are forcing employers that depend on those funds, such as local nonprofits, to scale back as well. The reductions are forcing more Americans into the ranks of the jobless at a time when private employers are doing little to absorb the 14.9 million people searching for work.

Government employment at the federal level is holding up better because the U.S. can borrow more easily while states and municipalities are often required to balance their budgets. Some of the cost-cutting at the state level is due to temporary shortfalls as receipts from income taxes and sales taxes dip. But a longer-lasting shift is also underway given severe declines in property values.

John Kelly, a Michigan state trooper, was laid off in June as the nation's highest-unemployment state grapples with a freefall in tax revenue. Budget troubles have been a constant during Mr. Kelly's five years on the state police force, which is the primary form of law enforcement in the state's many rural regions.

About two-and-a-half years ago Mr. Kelly's post -- based in Hart, Mich., on the western side of the state -- saved money by moving from a building to a trailer across the street. Officers were asked to save gas by driving no more than 60 or 70 miles in a day.

"You always hear rumors there could be layoffs, and then it happens," says Mr. Kelly, 42. "You would think that any law enforcement job is fairly secure."

As he looks for work, Mr. Kelly is living off unemployment and his wife's salary. The family saves by limiting grocery shopping to once a week. They didn't sign their two boys up for baseball; all the games and practices mean more money spent on gas.

Budget cuts by state and local governments are being felt far beyond public offices. WakeMed Health & Hospitals, a non-profit health care system in Raleigh, N.C., cut about 200 positions this week because federal and state reimbursements are expected to drop $35 million in the coming year. "We have taken extraordinary steps to cut out anything else we possibly could," chief executive William Atkinson said. "I don't think we have any choice but to do some reductions."

About a third of the cuts were managers, and none were nurses. And the system is adding jobs in other areas so the net reduction in jobs should end up below 50, he said.

Health care is one of the few sectors consistently growing nationwide, adding almost 28,000 jobs in August, though hospital employment dipped slightly. Health care-related employment is still expected to rise over the longer term across North Carolina despite hospitals' latest cuts, Mr. Atkinson said. Workers across the spectrum are seeing their income stagnate or decline. Friday's Labor Department report showed that workers' average workweek remained flat in August, while total hours worked fell 0.3%. Economists attributed a 0.3% increase in average hourly earnings to this summer's increase in the minimum wage. The jobless rate for men rose to 10.1%, well above the 7.6% rate for women, as male-dominated fields such as construction and manufacturing continued to bleed jobs. A broader measure of joblessness, which counts people who have stopped seeking work and those working part-time but who want full-time jobs, rose half a percentage point to 16.8%.

The hit to jobs within state and local governments, in part due to lower property-tax revenues, is a final blow from the housing decline weighing down the economy in recent years. Many of those workers are watching the latest leg of the job market fall, with little hope for a recovery before next year.

"I'd literally go dig ditches if I could, but the housing market is in such bad shape that I couldn't," said Todd Hawkins, a former mortgage banker near Charlottesville, Va.

Mr. Hawkins, 43, has been searching for a job since May, when he was cut from a sales position at a local small business after a year. Business is painfully slow for his wife, a real estate agent, and now the family's savings are running low after liquidating a retirement account last year.

The next step: Cashing out a life-insurance policy to support his kids, ages 2, 4 and 6. Still hunting for work, Mr. Hawkins said he doesn't expect significant improvement in the labor market until 2011. "I'm usually a glass-half-full guy, but I don't think jobs are just going to spring back."

Write to Sudeep Reddy at and Conor Dougherty at

Thursday, September 3, 2009

No Uniform Recovery for Housing

By JOHN JANNARONE, Wall Street Journal

The U.S. housing market was unified by the bust. After peaking in 2006, home prices across the country joined the march downward. Are investors prepared for a return to more normal times?

It wasn't long ago that a nationwide price decline was considered almost impossible by many, not having been observed since the Great Depression. Supply and demand have usually dictated prices on a local level.

And yet, now that there are signs of stabilization, some investors appear to be hoping for prices to recover across the board. Better housing data, such as a rise in the S&P/Case-Shiller index have helped stocks extend a heady rally. A one-time government tax deduction for first time buyers and seasonal demand for homes have added a timely boost.

But a look on a regional level shows a different story. The likes of overbuilt Las Vegas and Miami have yet to see prices turn. There, distressed sales now make up around two-thirds of transactions, according to the National Association of Realtors.

Such distressed sales, mainly foreclosures, are discounted on average 15% to 20%, dragging overall prices lower. Granted, that may set the stage for higher prices when foreclosures slow, but there still is little sign that inventory is near equilibrium.

On the face of it, other parts of the country appear to have better traction. Take the Midwest. Cleveland saw prices rise 10% in the three months through June, the fastest of any location in S&P/Case Shiller's 20-city index.

Midwestern states will likely face some hiccups in any recovery. The NAR reckons the Midwest still has 8.0 months' supply of single-family homes on the market between $100,000 and $250,000, compared with 8.9 months a year ago. During the 1990s, the average nationwide was 6.6 months.

That supply could be tough to clear. The many buyers underwater on existing homes will struggle to move, even to a cheaper home. In Ohio, for instance, some 39% of mortgages have negative equity, or are attached to properties worth less than outstanding debt, according to research firm First American CoreLogic. The national average is 32%.

Demand may stay especially weak for homes in high price categories. The NAR says just 2.5% of the 460,000 homes sold in July cost $500,000 or more. In the fourth quarter of 2004, such homes accounted for 11.2% of the total.

That presents potential for higher average sales prices if more high-end sales are completed. But, with "jumbo" mortgages harder to come by, demand is likely to remain concentrated at lower price levels.

Of course, stability in some housing markets is refreshing. But after the summer house-hunting season ends, the sum of a fragmented market is unlikely to be a unified rise.

Write to John Jannarone at

Wednesday, September 2, 2009

Maui Prince Hotel Faces Foreclosure



Maui Prince Hotel is the target of foreclosure proceedings and the cancellation of a management contract just two years after a Morgan Stanley real-estate fund and local developers bought it for $575 million.

Mortgage-holders led by Wells Fargo Bank sued last week to foreclose on the 310-room resort, following the owners' failure to pay the resort's $192.5 million mortgage when it came due in July. The foreclosure threatens to wipe out the $227.5 million in mezzanine debt held by a UBS fund and the $250 million in equity that Morgan Stanley and its partners put into the property.

This week, Prince Resorts Hawaii, which stayed on as the resort's manager after selling it to the Morgan Stanley group in 2007, disclosed it will stop managing the resort Sept. 16 due to a shortage of funds from the resort's owners and lenders. "We do not have funding for payroll, but we are getting some funding for our accounts payable and basic operating expenses," said Donn Takahashi, president of Prince Resorts Hawaii, which manages three other resorts on the islands. "We cannot operate a top-notch resort in this fashion."

With Prince Resorts leaving the Maui property, Wells Fargo and other lenders have asked a Hawaii state judge to appoint a receiver, who will then hire a new management company and administer an escrow account for covering the hotel's costs. "If they're valid debts, the receiver will pay them," attorney Barry Sullivan said.

In addition to its hotel, the resort includes two golf courses and additional land for residential development.

Morgan Stanley's real-estate arm has taken a beating this year -- as have other groups that make property investments on behalf of pension funds and other big investors. Morgan Stanley Real Estate Fund V, which bought the Maui Prince Hotel, also made a big bet on Crescent Resources LLC -- a Charlotte, N.C., developer that filed for bankruptcy-court protection in June.

Write to Kris Hudson at and Anton Troianovski at

For Commercial Real Estate, Hard Times Have Just Begun

September 2, 2009

By TERRY PRISTIN, New York Times

As the commercial real estate market heated up earlier in the decade and lenders competed feverishly to issue ever-riskier mortgages, hundreds of bankers, investors, lawyers, brokers, appraisers, accountants and analysts flocked to an investors’ conference in Florida each January to celebrate their good fortune with lavish beach parties featuring bikini-clad models and popular entertainers.

But in what a Prudential Real Estate Investors report described as “a move of near-perfect symbolism,” the conference sponsor, the Commercial Mortgage Securities Association, recently announced that next year’s event would be relocated from South Beach to Washington, where the industry has been lobbying strenuously for federal assistance.

These days, the people who buy and sell office buildings, shopping centers, warehouses, apartment buildings and hotels are hardly in a festive mood, despite some recent encouraging signs relating to the job and housing markets and a recent increase in sales of small office buildings.

Even though industry lobbyists were able to persuade Congress to extend a loan program aimed at prodding the stalled securitization market back to life, several analysts said it was unlikely to head off a spate of defaults, foreclosures and bankruptcies that could surpass the devastating real estate crash of the early 1990s. “It will prop up a few deals, but you can’t stop the wave that’s coming,” said Peter Hauspurg, the chief executive of Eastern Consolidated, a New York brokerage firm.

The distress is still in its early stages, analysts said. “We are between the first and second inning,” said Richard Parkus, who directs research on commercial mortgage-backed securities for Deutsche Bank. “We’re going to have to get through a very difficult period.”

Mr. Parkus said that vacancy increases and rent declines already mirrored what happened in the 1990s, and until new jobs were created, generating an increase in demand for commercial space and more retail spending, this was not likely to be reversed.

Building values have declined by as much as 50 percent around the country, and even more in Manhattan, where prices soared the highest. As many as 65 percent of commercial mortgages maturing over the next few years are unlikely to qualify for refinancing because of the drop in values and new stricter underwriting standards, he said.

Fitch Ratings recently reported that $36.1 billion in securitized loans — mortgages pooled, sliced into different categories of risk and sold to investors — have been transferred so far this year to a “special servicer,” an agency that handles troubled loans. Such a transfer is prompted by a bankruptcy, a 60-day delinquency or the prospect of an imminent default. In all, some 3,100 loans representing $49.1 billion, or 6.1 percent of the total, are currently in special servicing, an amount that could grow to nearly $100 billion by the end of the year, Fitch said.

But the damage is expected to be even greater for banks, which are holding $1.3 trillion in commercial mortgages (including apartment buildings) and $535.8 billion in construction and development loans, said Sam Chandan, the president of Real Estate Economics, a New York research company. About $393 billion worth of mortgages are scheduled to mature by the end of next year alone, and an estimated $39 billion more were due to expire this year but have been extended, he said.

By midyear, Real Capital Analytics, a New York research company, had identified $124 billion worth of distressed property. Less than 10 percent of the distress had been resolved through loan modifications or sales.

The downturn in commercial real estate is already having repercussions for local governments. New York City’s general fund, to cite an example, collected $2.1 billion from transfer and mortgage recording taxes at the peak of the market in the 2007 fiscal year, according to Frank Braconi, chief economist for the comptroller’s office. This fiscal year, it is expected to receive only $767 million, he said.

In New York, with its concentration of tall office towers, commercial mortgage-backed securities play a bigger role than they do elsewhere. The brokerage firm CB Richard Ellis estimates that about half the transactions in recent years involved securitized financing.

The mechanism set up to manage problems with the underlying mortgages is being put to the test for the first time. Some longtime real estate investors who profited from the ready access to mortgages made possible by securitization now complain that the system is impersonal and rigid. Instead of negotiating directly with a lender sitting across a table, Norman Sturner, a partner at Murray Hill Properties, a New York real estate company, said he had been forced to deal by telephone with “a third party sitting out in the Midwest” who seemed indifferent to his problems.

Since the master servicer, which handles the routine servicing of the loan, has no authority to restructure it, the landlord has no way to tackle anticipated problems before it comes into the hands of a special servicer and is already in trouble. “What’s going to happen when billions of dollars can’t be repaid?” said Mr. Sturner, who owns and operates five million square feet of office and apartment buildings.

Mr. Sturner, a 39-year industry veteran who bought aggressively during the real estate boom, would not comment on any specific loans. But a Manhattan real estate executive, who declined to be identified commenting on another’s business dealings, said that Mr. Sturner recently stopped paying his mortgage on One Park Avenue, a 20-story Art Deco building between 32nd and 33rd Streets, which he bought for $550 million in 2007, so that he could have the loan transferred to a special servicer.

Last year, one tenant, the Segal Company, a company specializing in employee benefits, said it would move at the end of this year to West 34th Street, leaving three floors at One Park Avenue vacant when new tenants are hard to come by and rents have fallen significantly. Fitch downgraded the securities backed by this loan in August.

The rising incidence of delinquencies and defaults has cast a spotlight on the special servicers, who are chosen by the investors who hold the riskiest bonds, and, in most cases, are part of the same firm. Six companies control 85 percent of the business, according to Fitch.

One source of conflict is that pension funds, endowments and other institutional investors with the most protected securities are often eager to liquidate their positions as quickly as possible, and those with the riskier portions resist taking an immediate loss.

Patrick C. Sargent, the president of the Commercial Mortgage Securities Association, said that despite an apparent conflict of interest, the servicers are accountable to all classes of bondholders and are required to maximize the proceeds for the investment as a whole. Falling short can lead to a lawsuit or a ratings downgrade. “They are in a fishbowl,” he said. “They are going to be watched.”

Critics say the special servicers are overwhelmed by the current workload. “The people we are dealing with are swamped beyond any measure,” said Paul M. Fried, a managing director of Traxi, a New York consulting company, who is advising borrowers with securitized loans.

But one executive at a special servicer whose employer would not allow his or his company’s name to be used said that his firm had tripled its staff in the last two years, and that other companies were also hiring asset managers.

Despite the criticism, Stephanie Petosa, a managing director at Fitch, which rates special servicers, said they were equipped to handle the workload. “I think they are moving at a reasonable pace, given the current environment,” she said.

An earlier version of this article misstated a statement of Richard Parkus about office rents and vacancies. Mr. Parkus stated that vacancies are increasing and rents decreasing, not the other way around. Also, $393 billion worth of mortgages are set to mature by the end of next year, not $393 million, and $39 billion more that were to expire have been extended, not $39 million.