Friday, January 29, 2010

Hard Reality: Overseas Jobs Erosion

January 27, 2010

TrendCzar Blog by Jonathan D. Miller

My recent “Government Retrenchment” post produced record feedback on and off line, both positive and negative and very representative of the highly partisan and charged political environment. Folks against government stimulus say enable the private sector to create jobs by cutting taxes and spending. They reject that stimulus has stanched even greater unemployment and financial market crisis and they would like to see reduced government programs leading to lower taxes and smaller deficits.

This supply-side Kool Aid still sounds awfully good—who doesn’t want to pay less taxes? But this elixir has failed miserably—the private sector hasn’t created enough new jobs despite the last decade of federal tax cuts, low interest rates, and increased spending. In fact, we’ve suffered a jobs creation deficit over the past decade. And wages and benefits have stagnated for most Americans who still have jobs.

The problem facing America and ultimately the health of real estate markets doesn’t have to do with the convenient red herrings of high taxes and government spending—albeit government deficits loom as an increasing threat. The intractable problem that no politician wants to talk about or face up to is America is the world’s highest cost labor market in an increasingly competitive global marketplace—people in other parts of the world produce what we do for less because they get paid a lot less than American workers. Bleeding of jobs overseas started decades ago in manufacturing, but now extends to various white collar service and technical jobs across virtually all industries. And the firms moving these jobs overseas are our largest employers—big multinational U.S. companies who can increase profits and raise their stock prices as a result of worker shifts to lower cost overseas labor markets. These employers include not only manufacturers, but also major financial institutions, accounting firms, and technology companies.

As just one example, a colleague at a major worldwide consulting firm mentioned to me last week that his company is shifting $2 billion in billable hours to new offices in South America, staffed by locals who get paid a lot less than comparable U.S. staff. “That’s a lot of hours,” he said. And you wonder why your son or daughter just out of college can’t find work today.

A host of other countries—not just the familiar names India and China—now educate millions of highly skilled employees who thanks to the internet and telecom take away jobs from U.S. workers.

This ominous global jobs transfer out of the U.S. threatens to weaken American living standards over the next generation, compromising the government’s ability to generate revenues to pay for all the things we have come to expect. And we still expect a lot--note President Obama keeps Social Security, Medicare, and defense off the spending freeze table with not much left to cut in the federal budget after that. Democrats and most Americans don’t want to touch the entitlements and Republicans and most Americans don’t want to touch defense. Despite the rhetoric, politicians know they cut spending at their own peril. At the same time the country is aging, putting greater strains on funding health care and retirements.

And in the mean time, demand for office, retail, and other commercial space will be painfully sluggish.

It’s just not a pretty picture that gets fixed simply by cutting government spending and lowering taxes. In fact, there’s no simple fix at all.

Jonathan Miller is a partner and co-owner of Miller Ryan LLC, a strategic marketing communications consulting firm to the financial services and real estate industries. Miller has more than 25 years of communications and marketing experience in the real estate industry, counseling many leading executives. For the past 15 years he has also authored Emerging Trends in Real Estate, the Urban Land Institute’s (ULI) premier annual industry forecast and speaks extensively on suburban and urban issues. He is also author of ULI's Infrastructure 2008: A Global Perspectives, a major analysis on the looming changes facing the U.S.

Thursday, January 28, 2010

Las Vegas: Most foreclosures of any city in 2009

Las Vegas - call it Foreclosure City.

By Les Christie, staff writerJanuary 28, 2010: 5:55 AM ET

NEW YORK ( -- Cities in the so-called Sand States dominated the foreclosure rankings in 2009, with the 20 worst-hit metro areas residing in Nevada, Florida, California and Arizona.

Las Vegas had the largest number of foreclosure filings of any city last year, with 12% of its households receiving at least one during the year, according to RealtyTrac, the online marketer of foreclosed homes. That was more than five times the national average. Cape Coral, Fla., was a close second with 11.9% of its households; Merced, Calif., was third with 10.1%.

The good news is that all top 20 cities recorded declines in foreclosure filings in the last three months of the year.

The bad news is that the foreclosure plague is spreading beyond these usual trouble spots, according to RealtyTrac's CEO, James Saccacio. And, nationwide, foreclosures grew 21.2% during the year.

3 million hit with foreclosure notices in 2009

"Areas like Provo, Utah, Fayetteville, Ark., Portland, Ore., and Rockford, Ill., all posted foreclosure rates above the U.S. average in 2009," he said. "And markets like Honolulu, Minneapolis and Seattle saw foreclosure activity increase at more than twice the national pace over the past 12 months."

He added that the new foreclosure wave seems more grounded in traditional foreclosure causes, such as job losses, than those recorded in the Sand States, where they were much more "bubble related."

In cities such as Las Vegas, Phoenix, Miami and Bakersfield, Calif., soaring home prices of the mid 2000s drove homebuyers to desperate measures, such as taking on hybrid adjustable rate mortgages, also called toxic ARMS. These products only remained affordable as long as home prices grew; once prices stopped rising, borrowers began to default.

New hotspots

Some cites that had escaped the worst of the default demon in prior years saw foreclosure filings -- default notices, auction sales and bank repossessions -- soar. The Gulfport area of Mississippi recorded a year-over-year spike of 784%. Houma, La., recorded a 379% gain, and Roanoke, Va., filings jumped 352%.

Wednesday, January 27, 2010

Housing Momentum Builds but Perils Persist


Low Inventories Spark Bidding Wars in Some Neighborhoods, but Job and Mortgage Woes Threaten New Foreclosure Wave

By JAMES R. HAGERTY, Wall Street Journal

There's new evidence the housing market is healing after a four-year slump, but the danger of further price drops remains amid persistent job-market weakness, according to The Wall Street Journal's quarterly housing survey.

Inventories of homes listed for sale are down sharply across the U.S. and have reached very low levels in some areas, including Boston and Sacramento, Calif. The decrease in supplies has sparked a return of bidding wars on lower-end properties in some neighborhoods, but the national picture is mixed.

Fundamental market drivers look relatively strong in the metropolitan areas of Minneapolis, Raleigh, N.C., Dallas, Houston and Washington, D.C., where mortgage-default rates are below the national average and job markets are likely to outperform the U.S. as a whole, according to Moody's

But other areas look decidedly less hopeful. Miami, Las Vegas, Phoenix, Orlando, Jacksonville and Tampa, Fla., had the highest rates of defaulting borrowers among the 28 markets surveyed. The weakest job-market prospects this year were found in Tampa, Jacksonville, Las Vegas, Atlanta, Detroit and Phoenix, according to Moody's

Jobs and mortgage woes will help shape the housing market this spring, the busiest time of year for home shoppers. Without a return to job growth, it will be hard to sustain demand and mortgage defaults will eventually lead to foreclosures, dumping more supply on the market.

In the Miami-Fort Lauderdale, Fla., area, about 28% of mortgage borrowers are behind on payments or in foreclosure, according to LPS Applied Analytics, compared with 8.6% in the Minneapolis-St. Paul area and 13.2% in the entire U.S.

Meanwhile, prices continue to stabilize in much of the nation. The S&P/Case-Shiller 20-city composite index in November edged up 0.2% from October on a seasonally adjusted basis. It was down 5.3% from a year earlier and was about 29% below the peak set in 2006. In Las Vegas, the index was up 0.1% from the previous month, but still down 56% from the peak in 2006.

"We'll probably be seeing a fairly strong spring selling season" in most of the nation, said Jody Kahn, a vice president at John Burns Real Estate Consulting. Her recent surveys of home builders across the U.S. showed shoppers have been out in greater numbers in recent weeks and seem more serious about buying. "Consumers are starting to feel a little more comfortable" that the worst of the job losses are past, Ms. Kahn said.

A four-bedroom home in Woodbridge, Va., about 27 miles southwest of Washington, recently attracted 12 offers and sold for $217,000, far above the $175,900 asking price set by the foreclosing lender, said James Nellis II, an agent at RE/MAX Allegiance. The home had sold for $350,000 just two years earlier.

One reason for such bidding wars is that many buyers can qualify for tax credits of as much as $8,000 if they agree on a home purchase by April 30. Meanwhile, economists say mortgage rates—currently around 5% for standard 30-year fixed-rate loans—are likely to be at least modestly higher later this year as the Federal Reserve withdraws support for the market.

Analysts at Credit Suisse in New York say that rate could end the year at 5.10% to 5.25%. Mark Zandi of Moody's predicts 5.75%.

The number of homes listed for sale is down sharply across the U.S., according to the survey. The supply would last four months or less at the current sales rate in the Boston, Sacramento, San Diego and San Francisco areas. A six-month supply is considered roughly balanced between buyers and sellers.

Some builders said they were putting up more houses before receiving orders to be prepared for buyers seeking the tax credit this spring. "Don't delay!" said a flier that KB Home, a national home builder, was handing out to prospective purchasers.

But foreclosures could soon put downward pressure on prices.

More than seven million households are behind on mortgage payments or in foreclosure, and lenders eventually will put many of those homes on the market. Unless the job market improves, it will be hard to find buyers for all those foreclosed homes and prices could again lurch lower.

There also remains a hard-to-measure "shadow" inventory of homes that will hit the market once more foreclosures are finalized.

Lenders haven't even started the foreclosure process—which often takes more than a year—for about 2.5 million households that are more than 90 days behind on payments, according to data from LPS Applied Analytics. It wasn't clear how many of those borrowers could be saved through loan modifications that cut payments.

Meanwhile, though the lower end of the housing market has generally gained strength over the past year, the market for higher-priced homes remains weak.

Write to James R. Hagerty at

Tuesday, January 26, 2010

An Insider's View of the Real Estate Train Wreck

Outside the box

Tue, Jan 26 2010, 06:00 GMT

by John Mauldin
Millennium Wave Investments

Interview with real estate entrepreneur Andy Miller:

No one has been more right on the housing market in recent years. So, what's coming next? Some of the housing numbers in the last few months look a little less ugly. Could housing be getting ready to get well?

MILLER: I don't think so.

For all intents and purposes, the United States home mortgage market has been nationalized without anybody noticing. Last September, reportedly over 95% of all new loans for single-family homes in the U.S. were made with federal assistance, either through Fannie Mae and the implied guarantee, or Freddie Mac, or through the FHA.

If it's true that most of the financing in the single-family home market is being facilitated by government guarantees, that should make everybody very, very concerned. If government support goes away, and it will go away, where will that leave the home market? It leaves you with a catastrophe, because private lenders for single-family homes are nervous. Lenders that are still lending are reverting to 75% to 80% loan to value. But that doesn't help a homeowner whose property is worth less than the mortgage. So when the supply of government-facilitated loans dries up, it's going to put the home market in a very, very bad place.

Why am I so certain that the federal government will have to cut back on its lending? Because most of the financing is done via the bond market, through Ginnie Mae or other government agencies. And the numbers are so big that eventually the bond market is going to gag on the government-sponsored paper.

The public doesn't have any idea of the scale of the guarantees the government is taking on through Fannie, Freddie, and FHA. It's huge. If people understood what the federal government has done and subjected the taxpayers to, there would be a public outrage. But you can't get people to focus on it, and it's very esoteric, it's very hard to understand. But it's not something the bond market won't notice. The government can't keep doing what it has been doing to support mortgage lending without pushing interest rates way up.

Refinancings of single-family homes are very interest-rate sensitive. Consumers have their backs against the wall. They have too much debt. Refinancing their maturing mortgages or their adjustable-rate mortgages is very problematic if rates go up, but that's exactly where they're headed. So anyone who's comforted by current statistics on single-family homes should look beyond the data and into the dynamics of the market. What they'll find is very alarming.

On that topic, recent data I saw was that something like 24% of the loans FHA backed in 2007 are now in default, and for those generated in 2008, 20% are in default, and the FHA is out of money.

MILLER: Fannie Mae had a $19 billion loss for the third quarter of 2009, and they are now drawing on their facility with the U.S. Treasury. We have all forgotten that Fannie and Freddie are still being operated under a federal conservatorship. On Christmas Eve, the agency announced that they were going to remove all the caps on the agencies.

So what about commercial real estate?

MILLER: When I saw what was happening in the housing market, I liquidated all my multifamily apartments, shopping centers, and office buildings. I liquidated all my loan portfolios, and I'm happy I did.

Then it occurred to me in 2005 and 2006 that the commercial world had to follow suit. Why? Because it's a normal progression. Obviously, when single-family homes decline in value, multifamily apartments decline in value. And when consumers hit the wall with spending and debt, that's going to have an impact on retailers that pay for commercial space.

Furthermore, the financing for retail properties had gotten ludicrous. The conduits were making loans that they advertised as 80% of property value when they originated them, but in reality the loan-to-value ratios were well over 100%. And I say that to you with absolute, categorical certainty, because I was a seller and nobody knew the value of the properties that I was selling better than I did. I had operated some of them for 20 years, so I knew exactly what they were bringing in. I knew what the operating expenses were, and I knew what the cap rates were. And, you know, the underwriting on the loan side and the purchasing side of these assets was completely insane. It was ludicrous. It did not reflect at all what the conduits thought they were doing. They were valuing the properties way too aggressively.

I became very bearish about the commercial business starting in late '05. In fact, I think I was in Argentina with Doug Casey, sitting on a veranda at one of the estancias, and he and I were lamenting what was going on in the real estate business, and I said there was going to be a huge adjustment in the commercial market.

Beyond the obvious, that the real estate market has taken pretty significant hits and some banks have been dragged under by their bad loans, what has really changed in real estate since the crash?

MILLER: I think the first thing that changed was that people learned that prices don't go up forever. Lenders also saw that underwriting guidelines for commercial real estate loans, especially in the securitization markets, were erroneous. They realized that some of their properties had been financed too aggressively, but still, I don't think even at the fall of Lehman, anybody was predicting a wholesale collapse in commercial real estate.

But they did see they should be more circumspect with loan underwritings. In fact, after the fall of Lehman, they completely stopped lending. I think they realized we had been living in fantasy land for 10 years. And that was the first change – a mental adjustment from Alice in Wonderland to reality.

Today it's clear that commercial properties are not performing and that values have gone down, although I've got to tell you, the denial is still widespread, particularly in the United States and on the part of lenders sitting on and servicing all these real estate portfolios. People still do not understand how grave this is.

Right now there are an awful lot of banks that do an awful lot of commercial real estate lending, and for about a year now you've been telling me that you saw the first and second quarter of 2010 as being particularly risky for commercial real estate. Why this year, and what do you see happening with these loans and the banks holding them?

MILLER: It's an educated guess, and it hasn't changed. I still think that it's second quarter 2010.

The current volume of defaults is already alarming. And the volume of commercial real estate defaults is growing every month. That can only keep going for so long, and then you hit a breaking point, which I believe will come sometime in 2010. When you hit that breaking point, unless there's some alternative in place, it's going to be a very hideous picture for the bond market and the banking system.

The reason I say second quarter 2010 is a guess is that the Treasury Department, the Federal Reserve, and the FDIC can influence how fast the crisis unfolds. I think they can have an impact on the severity of the crisis as well – not making it less severe but making it more severe. I will get to that in a minute. But they can influence the speed with which it all unfolds, and I'll give you an example.

In November, the FDIC circulated new guidelines for bank regulators to streamline and standardize the way banks are examined. One standout feature is that as long as a bank has evaluated the borrower and the asset behind a loan, if they are convinced the borrower can repay the loan, even if they go into a workout with the borrower, the bank does not have to reserve for the loan. The bank doesn't have to take any hit against its capital, so if the collateral all of a sudden sinks to 50% of the loan balance, the bank still does not have to take any sort of write-down. That obviously allows banks to just sit on weak assets instead of liquidating them or trying to raise more capital.

That's very significant. It means the FDIC and the Treasury Department have decided that rather than see 1,000 or 2,000 banks go under and then create another RTC to sift through all the bad assets, they'll let the banking system warehouse the bad assets. Their plan is to leave the assets in place, and then, when the market changes, let the banks deal with them. Now, that's horribly destructive.

Just to be clear on this, let's say I own an apartment building and I've been making my payments, but I'm having trouble and the value of the property has fallen by half. I go to the bank and say, "Look, I've got a problem," and the bank says, "Okay, let's work something out, and instead of you paying $10,000 a month, you pay us $5,000 a month and we'll shake hands and smile." Then, even though the property's value has dropped, as long as we keep smiling and I'm still making payments, then the bank won't have to reserve anything against the risk that I'll give the building back and it will be worth a whole lot less than the mortgage.

MILLER: I think what you just described is accurate. And it's exactly a Japanese-style solution. This is what Japan did in '89 and '90 because they didn't want their banking system to implode, so they made it easier for their banks to sit on bad assets without owning up to the losses.

And what's the result? Well, it leaves the status quo in place. The real problem with this is twofold. One is that it prolongs the problem – if a bank is allowed to sit on bad assets for three to five years, it's not going to sell them.

Why is that bad? Well, the money tied up in the loans the bank is sitting on is idle. It is not being used for anything productive.

Wouldn't banks know that ultimately the piper must be paid, and so they'd be trying to build cash – trying to build capital to deal with the problem when it comes home to roost?

MILLER: The more intelligent banks are doing exactly that, hoping they can weather the storm by building enough reserves, so when they do ultimately have to take the loss, it's digestible. But in commercial real estate generally, the longer you delay realizing a loss, the more severe it's going to be. I can tell you that because I'm out there servicing real estate all day long. Not facing the problems, and not writing down the values, and not allowing purchasers to come in and take these assets at discounted prices – all the foot-dragging allows the fundamental problem to get worse.

In the apartment business, people are under water, particularly if they got their loan through a conduit. When maintenance is required, a borrower with a property worth less than the loan is very reluctant to reach into his pocket. If you have a $10 million loan on a property now worth $5 million, you're clearly not making any cash flow. So what do you do when you need new roofs? Are you going to dig into your pocket and spend $600,000 on roofing? Not likely. Why would you do that?

Or a borrower who is sitting on a suburban office property – he's got two years left on the loan. He knows he has a loan-to-value problem. Well, a new tenant wants to lease from him, but it would cost $30 a square foot to put the tenant in. Is the borrower going to put the tenant in? I don't think so. So the problems get bigger.

Why would the owner bother going through a workout with the bank if he knows he's so deep underwater he's below snorkel depth?

MILLER: It's always in your interest to delay an inevitable default. For example, the minute you give the property back to the bank, you trigger a huge taxable gain. All of a sudden the forgiveness of debt on your loan becomes taxable income to you. Another reason is that many of these loans are either full recourse or part recourse. If you're a borrower who's guaranteed a loan, why would you want to hasten the call on your guarantee? You want to delay as long as possible because there's always a little hope that values will turn around. So there is no reason to hurry into a default. None.

So that's from the borrower's standpoint. But wouldn't the banks want to clear these loans off their balance sheets?

MILLER: No. The banks have a lot of incentive to delay the realization of the problem because if they liquidate the asset and the loss is realized, then they have to reserve the loss against their capital immediately. If they keep extending the loan under the rules present today, then they can delay a write-down and hope for better days. Remember, you suffer if the bank succumbs and turns around and liquidates that asset, then you really do have to take a write-down because then your capital is gone.

So here we are, we've got the federal government again, through its agencies and the FDIC, ready to support the commercial real estate market. They've taken one step, in allowing banks to use a very loose standard for loss reserves. What else can they do?

MILLER: Well, obviously nobody knows, but I can guess at what's coming by extrapolating from what the federal government has already done. I believe that the Treasury and the Federal Reserve now see that commercial real estate is a huge problem.

I think they're going to contrive something to help assist commercial real estate so that it doesn't hurt the banks that lent on commercial real estate. It'll resemble what they did with housing.

They created a nearly perfect political formula in dealing with housing, and they are going to follow that formula. The entire U.S. residential mortgage market has in effect been nationalized, but there wasn't any act of Congress, no screaming and shouting, no headlines in the Wall Street Journal or the New York Times about "Should we nationalize the home loan market in America." No. It happened right under our noses and with no hue and cry. That's a template for what they could do with the commercial loan market.

And how can they do that? By using federal guarantees much in the way they used federal guarantees for the FHA. FHA issues Ginnie Mae securities, which are sold to the public. Those proceeds are used to make the loans.

But it won't really be a solution. In fact, it will make the problems much more intense.

Don't these properties have to be allowed to go to their intrinsic value before the market can start working again?

MILLER: Yes. Of course, very few people agree with that, because if you let it all go today, there would be enormous losses and a tremendous amount of pain. We're going to have some really terrible, terrible years ahead of us because letting it all go is the only way to be done with the problem.

Do you think the U.S. will come out of this crisis? I mean, do you think the country, the institutions, the government, or the banking sector are going to look anything like they do today when this thing is over?

MILLER: I know this is going to make you laugh, but I'm actually an optimist about this. I'm not optimistic about the short run, and I'm not optimistic about the severity of the problem, but I'm totally optimistic as it relates to the United States of America.

This is a very resilient place. We have very resilient people. There is nothing like the American spirit. There is nothing like American ingenuity anywhere on Planet Earth, and while I certainly believe that we are headed for a catastrophe and a crisis, I also believe that ultimately we are going to come out better.

Written by

David Galland

Monday, January 25, 2010

FDIC May Securitize Assets of Failed Banks


On January 25, 2010 @ 12:48 pm |


The Federal Deposit Insurance Corp. (FDIC) is considering securitizing assets seized from failed banks and depository institutions, an FDIC source tells HousingWire.

Details are still being fleshed out as this story published, but an FDIC spokesperson said any discussions to securitize bank assets are “really still in the early stages of development.”

There is a large supply of failed bank assets on-hand, with the latest round of five failures on Friday leaving the FDIC with at least $20.1m in total assets for later disposition. The FDIC is said to be diversifying its options for offloading failed banks when no buyer can be found.

Entering asset-backed securitization (ABS), for example, would mark a break from the FDIC’s more common means of spinning off acquired assets. The FDIC often packages failed bank assets into limited liability companies (LLCs) and then sells the ownership interest. For example, the FDIC in early January sold a 40% equity stake in a LLC with $1bn of distressed commercial real estate loans seized from banks that failed in the past 18 months.

This practice is often a way for banks to increase their market share, similar to the way Spanish bank BBVA Compass became the 15th largest US commercial bank when it took over Austin, TX-based Guaranty Bank in August.

Another means for winding down failed banks, a “shelf charter” was used over the weekend for the first time . Regulators previously granted approval to a group of investors to form a national bank charter that remained inactive until the closure of Premier American Bank late last week. The charter received approval to form Premier American Bank, National Association and acquire the failed bank.

The FDIC’s entrance into securitization would follow chairman Sheila Bair’s invitation for the commercial real estate industry to submit feedback on market revival for commercial mortgage-backed securitization (CMBS). The more optimistic outlook for CMBS revival came after Bair recently warned against the securitization credit-rating alchemy that contributed to the current crisis.

Diana Golobay

Tishman Venture Gives Up Stuyvesant Project


JANUARY 25, 2010

High-Profile Purchase of Manhattan Complex Collapses Under Debt Mountain


A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom.

The decision comes after the venture between Tishman and BlackRock Inc. defaulted on the $4.4 billion debt used to help finance the deal. The venture acquired the 56-building, 11,000-unit property for $5.4 billion in 2006—the most ever paid for a single residential property in the U.S. The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments.

The property's owners signaled they would be unable to reach a deal with lenders and instead decided to allow creditors to proceed with what amounts to an orderly deed-in-lieu of foreclosure, which means a borrower voluntarily gives the property back to lenders to avoid a foreclosure proceeding.

"It has become clear to us through this process that the only viable alternative to bankruptcy would be to transfer control and operation of the property, in an orderly manner, to the lenders and their representatives," the venture said in a statement to The Wall Street Journal. "We make this decision as we feel a battle over the property or a contested bankruptcy proceeding is not in the long-term interest of the property, its residents, our partnership or the city."

The troubles at Stuyvesant Town reflect the dismal condition of the apartment market throughout the country as high unemployment hammers rents and occupancy levels. Hardest-hit are highly leveraged deals done by private companies that, unlike large public real-estate companies, have been closed out of the capital markets.

Stuyvesant Town creditors weren't immediately available for comment. But pressure on the Tishman group has mounted in recent weeks as some of the property's creditors have threatened to foreclose. In a letter sent to Tishman last week, a group including Concord Capital, an affiliate of Winthrop Realty Trust, said it intends to pursue "its rights and remedies," including possibly moving to foreclose on the property within 90 to 180 days.

By some accounts, Stuyvesant Town is only valued at $1.8 billion now, less than half the purchase price. By that measure, all the equity investors—including the California Public Employees' Retirement System, a Florida pension fund and the Church of England—and many of the debtholders, including Government of Singapore Investment Corp., or GIC, and Hartford Financial Services Group, are in danger of seeing most, if not all, of their investments wiped out.

The Tishman venture's decision to hand back the keys represents a defeat for a company that for years represented the gold standard of commercial real-estate deals, reaping high returns for investors.

Tishman Speyer has invested in such trophy assets as Rockefeller Center and the Chrysler Building, and its founder, Jerry Speyer, has been a major player in both real-estate and political circles for years. His son Rob Speyer is being groomed to take over the family real-estate empire.

The Stuyvesant Town deal is one of several Tishman Speyer did at the top of the market that the company is trying to save. But the company itself isn't threatened. It took advantage of easy credit and investors' eagerness to buy into real estate during the good times. As a result, it didn't put much of its own cash into deals.

Of the $5.4 billion price tag on the Stuyvesant property, Tishman invested only $112 million of its own money, with about $56 million from Jerry Speyer and Rob Speyer, co-chief executives of the New York-based company.

Tishman has earned more than $10 million in property-management fees since the Stuyvesant Town acquisition, according to analysts at Deutsche Bank AG. Tishman decided to waive certain fees last year and managed the property for a loss, according to a person familiar with the matter.

Tishman Speyer "would not consider a long-term management contract to continue operating the property that does not involve ownership," the partnership said in the statement. "Without a restructuring that would keep our ownership group as part of the equity, we felt it best that the new owners install a new management team."

The Tishman venture's acquisition of Stuyvesant Town was controversial in New York. The Stuyvesant Town complex was developed by MetLife for returning World War II veterans and remained a middle-class haven even as rents in other parts of the city soared. Tishman's plans were to raise the rents for hundreds of the units to market rates.

But the strategy backfired because of a slowing New York economy, a heavy debt load and a court ruling hindering the owners' ability to convert rent-controlled units to market rentals. In January, the property depleted what was left in reserve funds and defaulted on its first mortgage.

Nationwide, scores of other apartment deals also are tanking as landlords are being forced to cut rents and offer incentives like flat-screen TVs to attract and retain tenants. San Francisco's Lembi family, the biggest apartment owner in that city, has been forced to give up numerous apartment properties to its lenders because it couldn't repay debt.

Investors who purchased commercial-mortgage-backed securities, or CMBS, also are facing losses. In December, more multifamily CMBS loans moved into delinquency than for any other property type, with 113 new loans, totaling $1.1 billion, becoming delinquent, according to Moody's Investors Service.

The Stuyvesant Town collapse comes amid mounting woes in the market for retail stores, hotels, apartments and other commercial property. Mall-giant General Growth Properties and hotel-chain Extended Stay Inc. filed for bankruptcy-court protection last year, and more commercial-property projects could fail amid an inability to repay debt because of dwindling rent rolls and still-scarce financing for all but large real-estate investment trusts.

The troubles experienced by landlords nationwide are stoking fears among regulators and bankers that turmoil in commercial real-estate may derail the hoped-for economic recovery.

Research firm Foresight Analytics estimates delinquencies on commercial real-estate loans held by banks will rise to 9.47% in the fourth quarter, up from 5.49% a year earlier.

Meanwhile, the delinquency rate on CMBS stood at 4.9% in December, according to Moody's, up five-fold in just a year.

Write to Lingling Wei at and Mike Spector at

Friday, January 22, 2010

Regional and State Employment and Unemployment Summary

U.S. Bureau of Labor Statistics


Regional and state unemployment rates were generally higher in December. Forty-three states and the District of Columbia recorded over-the-month unemployment rate increases, four states registered rate decreases, and three states had no rate change, the U.S. Bureau of Labor Statistics reported today. Over the year, jobless rates increased in all 50 states and the District of Columbia. The national unemployment rate was unchanged in December at 10.0 percent but was 2.6 percentage points higher than a year earlier.

In December, nonfarm payroll employment increased in 11 states and the District of Columbia and decreased in 39 states. The largest over-the-month increase in employment occurred in Virginia (+9,500), followed by Oklahoma (+5,000), Oregon (+2,900), New Hampshire and Washington (+2,000 each). New Hampshire, Oklahoma, and Virginia experienced the largest over-the-month percentage increase in employment (+0.3 percent each), followed by the District of Columbia, Hawaii,and Oregon (+0.2 percent each). The largest over-the-month decrease in employment occurred in California (-38,800), followed by Texas (-23,900), Ohio (-16,700), Illinois (-16,300), Michigan (-15,700), Wisconsin (-15,200), and Georgia (-15,100). Montana (-1.5 percent) experienced the largest over-the-month percentage decrease in employment, followed by Nevada (-1.0 percent), Iowa and South Dakota (-0.9 percent each), and Vermont (-0.8 percent). Over the year, non-farm employment decreased in all 50 states but increased in the District of Columbia. The largest over-the-year percentage decreases occurred in Wyoming (-6.8 percent), Nevada (-6.6 percent), Michigan (-5.1 percent), and Arizona (-4.8 percent).

Regional Unemployment (Seasonally Adjusted)

The West had the highest regional jobless rate in December, 10.7 percent. The Northeast recorded the lowest rate, 9.2 percent. The North-east had a statistically significant rate increase over the month (+0.5 percentage point). The South had the only other significant regional rate change (+0.3 percentage point). Over the year, all four regions registered significant rate increases, the largest of which was in the West (+3.3 percentage points). (See table 1.)

Among the nine geographic divisions, the Pacific continued to report the highest jobless rate, 11.7 percent in December. The East North Central recorded the next highest rate, 11.3 percent. The West North Central registered the lowest December jobless rate, 7.3 percent, followed by the West South Central, 8.0 percent. The South Atlantic rate (10.3 percent) set a new series high. (All region, division, and state series begin in 1976.) Five divisions experienced statistically significant unemployment rate increases from a month earlier, the largest of which were in East South Central and New England (+0.5 percentage point each). No division had a rate decrease. All nine divisions reported significant over-the-year rate increases of at least 1.8 percentage points. The largest of these occurred in the East South Central (+3.8 percentage points)and East North Central (+3.7 points).

Wednesday, January 20, 2010

'Crystal Ball' on the Economy and Labor

Leo Hindery, Jr. Chairman of the Smart Globalization Initiative at the New America Foundation

Posted: January 19, 2010 09:07 AM

Huffington Post

The nation went through 'Back-to-School' shopping back in August and September with barely an uptick in the economy.

We went through the longer 2009 holiday shopping season with only a slight increase in purchases over the dismal 2008 level -- in December, retail sales actually fell 0.3%.

All the while on the jobs front, we remained and remain mired in a jobless recovery, with nearly 20% real unemployment and 30 million women and men either unemployed or chronically underemployed, of whom 10 million have been out of work more than half a year. These millions of effectively unemployed workers now know firsthand the sharp and painful difference between the real unemployment rate and the official rate (at 10% nearly as high as at any time since the Great Depression, but still only half the effective real rate).

And so, Virginia, there was no Santa Claus for the economy in 2009 and there probably won't be in 2010 either. In fact, Santa probably won't show up again until 2011 -- and then only if we start to get our reemployment act together.

So what specifically happens in the near term to the economy? To the labor force?

To start, I believe that despite all the recent job growth in the government sector because of stimulus spending and hiring related to the Census, the overall official unemployment rate will still rise even further, from 10% to around 10.8%. Of course, this means that the real unemployment rate -- the only rate that matters -- will increase from today's level of 19% to around 21%.

Even more foreboding for the economy, there is the very real prospect that we could soon start to see what's called "blowback".

Blowback (what some call "feedback") is what happens when you either don't really fix the conditions that led to the recession in the first place, or don't substantially mitigate the economic hardships that resulted from it.

In our case, we may soon be confronting both, because:

• the real unemployment rate will likely remain around 20% for months to come;

• we continue to have the greatest income inequality in the country since 1928, which portends very little uplift to the economy from the actions of the bottom 90% of Americans;

• the massive devastation in commercial real estate values, which is only just now becoming evident, will ripple through the economy in extremely negative ways that may even exceed the housing crisis; and

• even today's fully employed workers, who are working on average only 33 hours a week, need to see an effective economic "lift" of around 17% just to get back to their own pre-recession levels.

If the economy does indeed blow back on itself, then there will be a second housing market collapse, with as many as half of the nation's homes worth little more than their mortgages. There will be continued stagnation in all-important new home and auto sales. And there will be only moderate corporate investing and new spending, even though this is another very important impetus to fulsome economic recovery.

Some refer to blowback as a W-shaped economic recovery -- but it is not that at all, since in a W, you go down, then up and then down again. Blowback is more like the long right-hand side of an L -- first sharply down and then stagnation because there is no fundamental improvement in the critical underlying conditions.

As for the nation's labor force and its vitality, what will be most concerning is if, as I suspect, we have essentially embedded high real unemployment in the economy into the medium term. Thus, my employment forecast for the next five to ten years, assuming we don't take significant actions, is sadly pretty simple: more of the same large-scale unemployment and underemployment; meager wage gains and worsening working conditions for the employed; and little or no job security for anyone.

This ugly labor forecast is possible because this recession's almost unprecedented fury has already significantly accelerated the adverse labor force trends that we began to see all the way back in the '80s. In order to appreciate the breadth of the problems ahead, it helps to look at the relevant aspects of today's labor force:

The number of Americans working part-time-of-necessity -- that is, because full-time work is unavailable -- has doubled since the recession of 2007 began, to 9.2 million.

25% of America's workers now have jobs that are not fulltime and in one way or another are "non-standard", which includes independent contractors, temps, part-timers and freelancers. From their employers, 75% of these non-standard workers have no access to a retirement plan of any sort and 60% have no health insurance.

Pay for production and nonsupervisory workers -- now 80% or so of the private workforce -- is 9% lower than it was in 1973, adjusted for inflation.

Unions represent less than 8% of private-sector workers, compared to 36% in 1953.

And in just the last ten years, total manufacturing jobs have declined 33%, while jobs in health care have increased 30%, in leisure & hospitality 12%, and in government around 10%.

I've written at length about the several steps that the Executive and Congress need to take in order to jumpstart an all-of-economy jobs-based economic recovery that sustains. All of these steps deserve attention, but given where we are today in the economy -- or, better said, where we aren't in terms of fixing it -- we need to particularly focus on the four steps that could most immediately and meaningfully create lots of jobs.

First, we need a very large-scale infrastructure investment program that includes a new National Infrastructure Bank, incentives for private funding of public infrastructure, a multi-year green transportation program funded through an increase in gasoline taxes, and targeted federal government spending in improving energy efficiency, especially building retrofits.

Second, we need youth employment programs of the sort FDR had in his New Deal, in our time, however, for the estimated 3 to 5 million out-of-school youth who already can't find work and for the 6.4 million young people who will graduate from high school or college in just five months time.

Third, we need a buy-domestic federal government procurement program that mirrors the programs of our major trading partners and lasts just as long. We should call our program the "U.S. Domestic Investment Act", for that's what it would be: domestic investment in job creation and retention.

And fourth, by whatever means available, we need to put a stop to China's currency manipulation -- which economist Peter Morici has determined creates a staggering 25% illegal subsidy on Chinese exports -- and to its other illegal subsidies and unfair trade practices.

Why these particular initiatives?

It was Franklin Roosevelt who showed us 80 years ago that monies thoughtfully spent on infrastructure and on youth employment create jobs almost instantly. He also showed us that these dollars then circulate widely throughout the general domestic economy, creating even more jobs -- in today's economy, probably on average two other jobs for each initial job we create.

The need to have our own buy-domestic program is quite simply because no other initiative would do more to quickly resuscitate U.S. employment, especially manufacturing employment. It would also materially reduce our nation's ongoing massive trade deficit. Even though federal government procurement makes up about 20% of the American economy, the U.S. is almost alone among the developed nations and China in not having a significant buy-domestic program.

And the reason for the China recommendation is simple: we can never get back even to pre-recession employment levels if we don't put a stop to China's illegal and unfair trade practices. China is consistently responsible for about 70% of America's trade deficit in manufactured goods, and this is quite literally crushing the life out of our nation's non-services employment.

President Obama and his administration, in an all-of-government manner, need to focus on new jobs on Main Street, millions of them, as they have this last year focused on resuscitating (and not even reforming) Wall Street and on health care reform. It's past time to argue which should have come first -- the time for jobs is now.

Leo Hindery, Jr. chairs the US Economy/Smart Globalization Initiative at the New America Foundation. He is the former chief executive of AT&T Broadband and other major media and telecom companies.

Tuesday, January 19, 2010

Homebuilder Confidence in U.S. Unexpectedly Decreases

Jan. 19 (Bloomberg) -- Confidence among U.S. homebuilders unexpectedly dropped in January to the lowest level since June, a sign the housing recovery may stall in coming months.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 15 from 16 the prior month, the Washington-based group said today. Readings below 50 mean most respondents view conditions as poor.

The report showed traffic slowed to a 10-month low, indicating the government’s extension and expansion of its first-time buyer program has, so far, not drawn in new demand after propelling total sales to an almost three-year high in November. A projected record 3 million foreclosures this year may also pressure prices, making it more difficult for homebuilders to turn a profit.

“The past strength in the housing market was inflated by the tax credit,” said David Sloan, chief U.S. economist at 4Cast Inc. in New York, who was the only economist surveyed to foresee a drop in the index. “We’re seeing a bit of payback from those over-inflated levels.”

Stocks held earlier gains following the report, while builder shares retreated from prior highs. The Standard & Poor’s 500 Index was up 1 percent to 1,147.18 at 1:16 p.m. in New York. The S&P Supercomposite Homebuilder Index gained 0.8 percent after having been up as much as 1.1 percent before the report.

Less Than Forecast

The builder confidence index was forecast to increase to 17 this month, according to the median forecast of 45 economists surveyed by Bloomberg News. Projections ranged from 14 to 18. The index, first published in January 1985, averaged 15 last year.

The builders group’s index of current single-family home sales fell to 15 in January from 16 in December.

The gauge of buyer traffic dropped to 12, the lowest level since March, from 13. A measure of sales expectations for the next six months held at 26.

“Factors beyond our control, including consumer concerns about job security and competition from foreclosed homes on the market, are still impeding demand for new homes at this time,” Joe Robson, the group’s chairman and a builder from Tulsa, Oklahoma, said in a statement.

Broad Decrease

All four regions showed a drop in sentiment, led by the West, which fell to 16 from 19. In the Northeast, confidence decreased to 22 from 23, in the Midwest it fell to 11 from 12 and dropped to 16 from 17 in the South.

The confidence survey asks builders to characterize current sales as “good,” “fair” or “poor” and to gauge prospective buyers’ traffic. It also asks participants to gauge the outlook for the next six months.

“Consumers are still waiting to see significant positive signs of improvement in employment and confidence, and this is slowing buyers’ return to the market,” David Crowe, the NAHB’s chief economist, said in a statement.

Rising foreclosures are adding to inventory and may discourage builders. A record 3 million U.S. homes will be repossessed by lenders this year as high unemployment and depressed home values leave borrowers unable to make their house payment or sell, according to a RealtyTrac Inc. forecast on Jan 14.

Last year there were 2.82 million foreclosures, the most since RealtyTrac began compiling data in 2005.

‘Borrowing Demand’

“A lot of inventory is still coming onto the market from distressed sales and that is borrowing demand from new homes,” Julia Coronado, a senior economist at BNP Paribas in New York, said before the report. “Improvement in construction will be gradual in the initial stages.”

President Barack Obama on Nov. 6 extended an $8,000 first- time buyer credit that was due to expire at the end of the month and expanded it to include current homeowners. The extension covers closings through June as long as contracts are signed by the end of April. Still, the measure may have pulled sales forward, depressing demand in coming months.

Sales of new houses dropped 11 percent in November, the month the government’s tax credit was due to expire. A jump in purchases of existing homes pushed total sales up to a 6.895 million annual pace, the most since March 2007.

Starts Forecast

Housing starts, which jumped 24 percent from April to July as builders rushed to satisfy buyers taking advantage of the credit, will probably cool in coming months as sales slow.

A report from the Commerce Department tomorrow may show builders broke ground on 575,000 houses at an annual pace in December, little changed from 574,000 a month earlier, according to the median forecast of economists surveyed by Bloomberg.

November starts were 75 percent below their peak of 2.27 million pace reached in January 2006.

KB Home, the Los Angeles-based homebuilder that sells to first-time buyers, is among those struggling. The company last week reported a pretax loss of $91 million on declining revenue for the fiscal fourth quarter that ended Nov. 30.

KB Home’s orders rose 12 percent to 1,446 from 1,296 in the year-earlier quarter, while completed sales dropped 22 percent to 3,042, according to the report. The average price declined 12 percent to $203,400.

KB Home is “not going to make money in the first quarter” and plans to “restore profitability” in the second half of 2010, Chief Executive Officer Jeffrey Mezger said Jan. 12 in a conference call with analysts and investors.

To contact the reporter on this story: Bob Willis in Washington

Monday, January 18, 2010

Community Institutions Deserve Break From Banking Backlash


Los Angeles Business Journal


Community bankers did not design or market subprime mortgages, nor did they devise or promote credit default swaps. Community bankers did make many loans to longtime customers whose businesses, employees and communities have been hurt by a historic economic downturn that few foresaw, resulting, in many cases, in dramatic losses in loan portfolio values. The ensuing examination and enforcement spiral seems to leave many community banks with few growth options and all too often a demoralizing message from their regulators: raise capital or face failure.

Through it all, community banks are being pressured by government officials to restart the economy through small business lending.

We fear a new type of Three Strikes Rule has emerged for many California banks that in the scheme of things should be given more time to right the ship and resume course.

• Strike One is the harsh examination so many have endured, resulting in a public enforcement action requiring changes throughout the bank, and capital increases to well above well-capitalized ratios.

• Strike Two is a regulatory rejection of capital plans as insufficient or rejection of private-equity joint-venture proposals designed to quickly infuse meaningful capital, all with an apparent “Just Say No” attitude emanating from Washington.

• Strike Three will be the upcoming round of follow-up examinations and audits with even more blunt public enforcement directives: immediately meet unattainable capital ratios, pursue a sale or merger, and consent to outsiders doing due diligence in anticipation of a Federal Deposit Insurance Corp. sale in receivership.

We also are now seeing the postfailure phase begin with litigation by the FDIC and creditors seeking to hold former bank executive officers and directors liable for gross negligence or reckless misconduct alleged to have led to unsafe and unsound conditions. Look for civil money penalties and debarment orders that will damage reputations and hinder future opportunities in banking.

Banks have scrambled to make the proper disclosures of their problems and their plans and emphasize the positive. In many cases, institutions took Troubled Asset Relief Program funds that they intended to use to make prudent loans when receiving TARP funds was considered a sign of stability and regulator support. Since then, additional deterioration in loans and increased loan loss reserves have vaporized earnings and eroded bank capital. For many, paying any dividends have been put on hold by the regulators until new capital is raised and earnings resume.

Self-fulfilling prophecy

It is in this climate that directors and management have also been directed to reconstruct and improve much that examiners often previously said was working and not broken before the economic downturn. The result has the ring of a self-fulfilling prophecy to it.

Optimistic investment bankers turn pessimistic in the face of market demands; potential private equity investors find the regulatory environment to be highly unwelcome; and the board and management, in effect, are told to raise new capital and remake the bank in a matter of months and, at the same time, to profitably manage the bank and make new loans.

With so many banks now formally in a “troubled condition” with orders to raise capital and take extensive corrective action, is it fair to wonder if there is another agenda? The chairwoman of the FDIC has spoken openly about a “culling process” that will reduce the number of banks in the United States. If that is now a policy objective of the regulators, the banking industry and bank customers deserve to know.

Those of us who represent banks at our law firm have too often seen detailed bank proposals rejected by regulators as inadequate; requests for short extensions summarily denied; and reasonable actions scolded as unsafe, unsound and subject to civil money penalties. It may be hyperbolic to suggest that some banks’ futures have already been determined and scheduled by unidentified FDIC planners.

Still, there are banks that would appear to have a reasonable chance to recover with franchises worth saving, thereby lessening the losses for the FDIC’s deposit insurance fund. Why the rush to receivership? Why the denigrating and punitive attitude after the bank is in the penalty box? Why the regulatory disinterest in new and available sources of capital?

L.A.’s community banks will not be immune to this trend and they are likely to feel the effect of heightened regulatory demands throughout 2010.

The voices of those in the industry have not been heard on these and similar issues. Perhaps the time for speaking out is at hand.

Harold P. Reichwald is co-chairman and T.J. Mick Grasmick is partner in the banking and specialty finance practice group at law firm Manatt Phelps & Phillips in Los Angeles.

Thursday, January 14, 2010

Data Point To Weakness In Jobs, Retail, Housing

The Associated Press
AP - January 14, 2010

New reports Thursday showed that the economy continues to struggle, as new jobless claims rose more than expected, retail sales fell and more people faced foreclosures.

The number of newly laid-off workers requesting unemployment benefits rose more than expected last week as jobs remain scarce amid a sluggish economic recovery.

The Labor Department said new claims for unemployment insurance rose by 11,000 to a seasonally adjusted 444,000. Wall Street economists polled by Thomson Reuters expected an increase of only 3,000.

The rise was partly a result of large seasonal layoffs in the retail, manufacturing and construction industries, a Labor Department analyst said. The second week of January usually sees the largest increase in claims, unadjusted for seasonal trends, during the year, the analyst said.

Still, the increase didn't disrupt the longer-term downward trend in claims. The four-week average dropped to 440,750, its 19th straight drop and lowest level since August 2008.

Initial claims are considered a gauge of the pace of layoffs and an indication of companies' willingness to hire new workers.

Claims have dropped steadily since last fall, as companies cut fewer jobs, raising hopes that hiring may increase soon. Initial claims have dropped by nearly 90,000, or 17 percent, since late October. Two weeks ago, new claims dropped to their lowest level since July 2008.

Despite the recent drop, the economy is not yet consistently generating net increases in jobs. The Labor Department said last week that employers cut 85,000 jobs in December, after adding only 4,000 in November. The unemployment rate was unchanged at 10 percent.

Meanwhile, the number of people continuing to claim benefits dropped sharply to 4.6 million from 4.8 million the previous week. The continuing claims data lags initial claims by a week.

Retail Sales Post Record Drop For Year

The weakness in consumer demand highlighted the formidable hurdles facing the economy as it struggles to recover from the deepest recession in seven decades.

The 0.3 percent drop was greater than the 0.5 percent rise that private economists had been expecting. Excluding autos, sales dropped by 0.2 percent, also weaker than the 0.3 percent rise analyst had forecast.

For the year, sales were down 6.2 percent, the biggest decline on records that go back to 1992. The only other year that sales had fallen was 2008, when they slipped by 0.5 percent.

Economists said the drop in retail sales in December underscored how tentative the economic remains given all the headwinds facing consumers.

"We cannot expect a true turnaround in consumption until the jobs numbers improve significantly and consistently," Jennifer Lee, a senior economist at BMO Capital Markets, said in a research note.

A separate report showed that business inventories rose by 0.4 percent in November. It marked the second straight month that stockpiles have increased after a stretch of 13 monthly declines in inventories. The hope is that future sales gains will convince businesses to keep restocking, a development that will boost production and provide support for the recovery.

Foreclosures Continue To Climb

Also In December, more than 349,000 households, or one in 366 homes, were hit with a foreclosure-related notice, RealtyTrac Inc. reported Thursday. That represents a 14 percent spike from November and a 15 percent jump from December 2008.

A record 2.8 million households were threatened with foreclosure in 2009, and that number is expected to rise this year as more unemployed and cash-strapped homeowners fall behind on their mortgages.

The number of households that received a foreclosure-related notice rose 21 percent from 2008. One in 45 homes were sent a filing, which includes default notices, scheduled foreclosure auctions and bank repossessions.

Banks repossessed more than 92,000 homes, up 19 percent from November. That increase was likely due to lenders working to clear their books at the end of the year, RealtyTrac said.

The foreclosure crisis isn't letting up. Between 3 and 3.5 million homes are expected to enter some phase of foreclosure this year, said Rick Sharga, senior vice president of Irvine, Calif.-based RealtyTrac, which began tracking the data five years ago. Copyright 2010 The Associated Press

Tuesday, January 12, 2010

Loss Sharing

Decoding FDIC Loss Sharing

In 2009 the US had 140 bank failures and the agency in charge, the FDIC, with little fanfare entered into 94 loss sharing agreements ("LSA"s) negotiating loss sharing deals with "healthy" banks totaling $122 Billion as a means to deal with the expanding number of failed bank problem loans. The cumulative dollar volume of LSA transactions could easily double or triple in the next few years as the rate of bank failures continues to escalate. We believe it is worthwhile to understand this expanding but opaque space of our financial system.

In this brief overview we shed light on the initial part of the process of FDIC loss sharing,  a tool being used by the agency to deal with failed banks.

It all begins with the banks identified by the FDIC as problem banks, a list unofficially approaching 600 banks and totaling over $300 Billion in total assets. The banks are quietly given notice that they have a problem or are out of compliance by way of an enforcement action from the regulatory authority, in most cases the FDIC.

Time passes (quickly if you are under the regulatory gun) and if the bank cannot correct the situation (by shoring up their capitalization by raising equity or improving loan portfolio quality via loan workouts and payoffs) the bank is headed down the path to failure. Ahead of the imminent failure, the FDIC discreetly lines up qualified banking institutions from a FDIC “healthy bank” list, soliciting competitive bids for failing banks. The above steps are the most opaque parts of the process, for obvious reasons, since advance warning of a bank failure could cause public panic and a classic run on the bank.

The bidding institutions have access to bank financial and operating data including information about the failing bank’s troubled loan portfolio. The bid forms are surprisingly short, with spaces in the form for what the acquiring bank is prepared to pay for each of the Consumer Loans, Non-Consumer Loans and Deposits.

Using the Colonial Bank of Alabama Failure as a case study, as of mid-2009, Colonial assets totaled $25.5 Billion and liabilities, including $20.1 Billion of deposits, totaled $24.3 Billion. BB&T won the bidding in August of 2009 by offering a 14% discount on the Consumer Loan Pool, a discount of $1.462 Billion on the Non-consumers loan assets and a premium of 2.77% for the Deposits. By August the value of Colonial Bank’s assets had dropped to $16.8 Billion while liabilities had not changed substantially. Had the FDIC simply taken over the bank, the insurance fund as insurer would have had to fund the $7.5 Billion deficit immediately. Instead, via the loss sharing deal, the FDIC paid only $3.5 Billion to BB&T at the closing of the Colonial acquisition and issued a receivable or "IOU" to BB&T totaling $4 Billion for the balance of the $7.5 Billion deficiency the FDIC was required to insure.

BB&T's loss share "threshold" number per their loss share agreement entered into with the FDIC is $5 Billion. This is the number BB&T manages to. As BB&T resolves the commercial and residential loans in the Colonial portfolio it bought, the FDIC will reimburse the bank for 80% any of the next $5 Billion of losses or a reimbursement of $4 Billion. Once this threshold is busted, the FDIC reimbursement rate increases to 95% of losses. Since BB&T wrote the acquired loans down on 9/30/09, there is no near term threat to BB&T’s balance sheet or income statement. As BB&T documents losses occurring from working out the loans (via loan restructures, principal reductions, foreclosures, deeds in lieu, short sales etc.) the FDIC will cut checks on either a monthly or quarterly basis to BB&T for documented residential or CRE losses (called "shared loss payments"), respectively.

Even though the FDIC is on the hook for the entire $7.5 Billion deficit, their inspired strategy preserves precious FDIC cash, short term, with the hope that the ultimate payout to BB&T will be less than the initial $7.5 Billion deficit by the end of the 8 year term of the loss sharing agreement.

2009 saw 94 loss sharing agreements adding up to $122 Billion in loss sharing volume. In our opinion the dollar volume of LSA transactions could easily double or triple in the next few years as bank failures continue to mount. If we add up the potential for FDIC cash preservation on loss sharing agreements totaling $200 to $300 Billion, the insurance fund does not have the money to fund failures currently. Loss sharing is financial innovation born of necessity.

The FDIC is happy also that BB&T has no need to “fire sale” the marked down assets, further depressing the loan market the way outright sales of FDIC assets has. We believe, however, that in the BB&T example there is an economic incentive (of $4 Billion in FDIC cash reimbursement!) for BB&T to document for the FDIC up to $5 Billion in real losses as they occur in the first five years of the agreement.

In the current Darwinian financial environment, strong financial institutions get stronger by devouring the weaker ones, governed by the FDIC or applicable agency rules and regulations and supported by agency financial backing. This does not necessarily mean that the stronger banks are in reality that much stronger than their weaker counterparts or that the weak institutions are necessarily that much weaker. Widespread loan portfolio problems, in whatever form, are pulling the values of hundreds of weak institutions down. The ability to raise private capital by the winners, whether justified by due diligence or simply investor speculation, reinforces the perception of strength. The FDIC too can be viewed as one among many potential “capital sources” and an extremely powerful one at that.

The successful "psychology" of this system, to be considered among the strong, acquiring banks is a definitely a club all banks want to be a members of. In fact, in many cases, extremely small, "healthy" banks have expanded dramatically by acquiring ailing, failed institutions. These small or even newly formed banking institutions have leveraged up their size through the backing of the FDIC via loss sharing guarantees that support not only the acquired failed banks portfolio but, because of the FDIC blessing, a government stamp of approval is conferred on the acquiring bank’s original loan portfolio whether justified or not.

Finally, the administration of LSA's is still in its infancy and of this not much is yet known. What we do know is that as the FDIC continues to expand in 2010, they are hiring staff to monitor loss sharing agreements. The agency has also lined up third party compliance firms who are creating systems to track the proper execution of the agreements. The FDIC will require detailed documentation from banks of accounting losses, a process that may be more complicated and contentious if values do not start to rebound soon but instead head further south as we expect they will.

Saturday, January 9, 2010

Horizon Bank is the first to fail in 2010

Information provided by FDIC on Failure of Horizon Bank, Bellingham, WA

Horizon Bank, Bellingham, Washington, was closed today by the Washington State Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

The 18 branches of Horizon Bank will reopen as branches of Washington Federal Savings and Loan Association.

As of September 30, 2009, Horizon Bank had approximately $1.3 billion in total assets and $1.1 billion in total deposits. Washington Federal Savings and Loan Association did not pay the FDIC a premium to assume all the deposits the Horizon Bank. In addition to assuming all of the deposits of the failed bank, Washington Federal Savings and Loan Association agreed to purchase essentially all of the assets of the failed bank.

The FDIC and Washington Federal Savings and Loan Association entered into a loss-share transaction on approximately $1.0 billion of Horizon Bank's assets. Washington Federal Savings and Loan Association will share in the losses on the asset pools covered under the loss-share agreement.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $539.1 million. Washington Federal Savings and Loan Association's acquisition of all the deposits was the "least costly" resolution for the FDIC's DIF compared to all alternatives. Horizon Bank is the first FDIC-insured institution to fail in the nation this year, and the first in Washington. The last FDIC-insured institution closed in the state was Venture Bank, Lacey, on September 11, 2009.

Friday, January 8, 2010

FDIC Announces Winning Bidder of $1 Billion in Loans

January 8, 2010
Media Contact:
David Barr (202) 898-6992

The Federal Deposit Insurance Corporation (FDIC) has closed on a sale of an equity interest in a limited liability company (LLC) created to hold certain assets out of 22 failed bank receiverships. The winning bidder of the Multibank Structured Transaction was Colony Capital Acquisitions, LLC, Los Angeles, CA.

The sale was conducted on a competitive basis with bids received on December 17, 2009. A total of 21 groups submitted bids to purchase a 40 percent ownership interest in the newly formed LLC. The participating FDIC receiverships will hold the remaining 60 percent equity interest in the LLC.

The FDIC as Receiver for the failed banks conveyed to the LLC a portfolio of approximately 1200 distressed commercial real estate loans, of which seventy percent were delinquent. Collectively, the loans have an unpaid principal balance of $1.02 billion. Seventy-five percent of the collateral of the portfolio is located in Georgia, California, Nevada and Florida. The participating FDIC receiverships provided financing to the LLC by issuing approximately $233 million of corporate guaranteed notes. Colony Capital paid a total of approximately $90.5 million (net of working capital) in cash for its 40 percent equity stake in the LLC, which equals approximately 44 percent of the unpaid principal balance of the assets. As the LLC's managing equity owner, Colony Capital will provide for the management, servicing and ultimate disposition of the LLC's assets.

The bid received from Colony Capital Acquisition, LLC, was determined to be the offer that resulted in the greatest return to the participating receiverships. All of the loans were from banks that have failed during the past 18 months. The sale closed on January 7, 2010.

Thursday, January 7, 2010

U.S. Now a Renters' Market

JANUARY 7, 2010

With Apartment-Vacancy Rate at 30-Year High, Landlords Cut Prices 3% in 2009

By NICK TIMIRAOS, Wall Street Journal

Apartment vacancies hit a 30-year high in the fourth quarter, and rents fell as landlords scrambled to retain existing tenants and attract new ones.

The vacancy rate ended the year at 8%, the highest level since Reis Inc., a New York research firm that tracks vacancies and rents in the top 79 U.S. markets, began its tally in 1980.

Rents fell 3% last year, according to Reis, led by declines in San Jose, Calif., Seattle, San Francisco and other cities that had brisk growth until the recession.

In New York City, the vacancy rate improved by 0.1 percentage point for the second straight quarter, but around 60% of rental buildings dropped their rents in the fourth quarter from the previous quarter. Effective rents -- which include concessions such as one month of free rent -- fell 5.6% in New York last year, the worst since Reis began tracking the data in 1990.

Landlords now must entice tenants to renew leases. "We'll shampoo their carpets. We'll paint accent walls. We'll add Starbucks cards," said Richard Campo, chief executive of Camden Property Trust, a Houston-based real-estate investment trust that owns 63,000 units. He said the first half of 2010 should be "pretty ugly," but was optimistic the sector would pick up later in the year.

Few markets have been spared. During the fourth quarter, vacancies increased in 52 markets, while they improved in 17 and stayed flat in 10. Vacancies increased most sharply for the year in Tucson, Ariz.; Charlotte, N.C.; and Lexington, Ky.

Vacancies are tied to unemployment, because many would-be renters move in with family members or double up during a downturn. Apartments have been squeezed because younger workers, who are more likely to rent, have experienced the brunt of job losses during the downturn.

Landlords were also hit last year by competition from a wave of new supply that hit the market. The 120,000 units that came onto the market last year, including some busted condo projects that had to be converted to rentals, represented the most new construction since 2003, according to Reis.

Many of those developments had secured financing before credit markets seized up. The credit crunch has frozen most new development, which means that new apartment completions should fall by half in 2011. That's one potential silver lining for apartment owners: The limited new supply should give them the ability to boost rents quickly whenever job growth returns.

"If you are renting a place, now might be a good time to renegotiate that lease," said Victor Calanog, director of research for Reis, who added that the sector could see a recovery in the second half of the year, buoyed by either job growth or at least the perception that the economy was turning around.

Such oversupplied markets as Florida, Phoenix and Las Vegas are hurting, even though housing sales have picked up. "Landlords aren't benefiting because jobs aren't recovering," said Hessam Nadji, managing director at Marcus & Millichap, a real-estate firm.

Marcus & Millichap is to release a separate report on Friday that forecasts a further 2% to 3% drop in apartment rents over the next year, most of which will be concentrated over the next six months. The report forecasts Washington, D.C., will be the healthiest rental market in 2010 for the second straight year.

Government efforts to prop up the housing market also threaten the apartment sector by making it easier for some renters to buy homes. Some landlords have reported a slight uptick in renters moving out to buy homes. Around 13% of Camden Property's move-outs last summer left to buy homes, up from 11% at the beginning of the year. But that is still roughly half of the rate seen during the housing boom, when mortgage standards were much looser. "During the housing boom days, you had people who weren't qualified to rent but could buy a half-million-dollar home," said Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.

Thanks to falling home prices and record low mortgage rates, it now costs less to own than it has in the past decade on a mortgage-payment-to-rent basis. But falling rents are expected to offset some of the recent improvement in affordability, making renting more attractive than owning in some markets.

Write to Nick Timiraos at

Wednesday, January 6, 2010

Commercial Property Is Biggest Risk, U.S. Bank Examiners Find

Jan. 6 (Bloomberg) -- Losses on commercial real estate loans pose the biggest risk to U.S. banks this year, troubling smaller lenders while unlikely to threaten the entire financial system, U.S. bank examiners concluded during a review.

“Losses from commercial real estate will be quite high by historic standards,” said Eugene Ludwig, former Comptroller of the Currency who is now chairman of Promontory Financial Group, a Washington-based consulting firm to financial institutions. “Hundreds of banks will fail or will be resolved over the course of the cycle.”

Federal Reserve Governor Elizabeth Duke said in a Jan. 4 speech that credit conditions in commercial real estate “are particularly strained.” Fed Governor Daniel Tarullo cited commercial real estate as one of the “key trouble spots” in congressional testimony in October after the Fed stepped up a review of banks’ exposure to such loans.

The failure of loans backing malls, hotels and apartments may impede the U.S. recovery as small- and medium-sized banks reduce lending and conserve capital to absorb losses, analysts said. Tight credit could slow the cycle of investment and hiring that is critical for sustained growth, they said.

Fed Chairman Ben S. Bernanke, in a Dec. 7 speech, cited tight credit among “formidable headwinds” likely to hinder growth. Total loans and leases by banks in the U.S. fell to $6.79 trillion in November from $7.23 trillion in the same month a year earlier, according to Fed data.

More Than Doubled

The default rate on commercial mortgages held by U.S. banks more than doubled to 3.4 percent in the third quarter, according to Real Estate Econometrics LLC, a property research firm in New York. Default rates in the first three quarters of 2009 have been the highest since 1993, according to the firm.

Losses on the debt will “place continued pressure on banks’ earnings” because collateral values have fallen, Jon Greenlee, associate director of the Fed’s bank supervision division, said in Nov. 2 testimony to the domestic policy subcommittee of the House Committee on Oversight and Government Reform.

Banks and investors held about $3.5 trillion of commercial real estate debt in June 2009, with about $1.7 trillion of that total on the books of banks and thrifts, according to Fed data. About $500 billion of the loans will mature each year over the next few years, Fed officials say.

Regional banks are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, according to data compiled by Bloomberg on bailout recipients.

Vulnerability of Banks

Investors have recognized the comparative vulnerability of smaller banks. The KBW Regional Banking Index, which includes shares of Old National Bancorp of Evansville, Indiana and Glacier Bancorp Inc. of Kalispell, Montana, fell 24 percent last year compared with a 3.6 percent decline for the KBW Bank Index, which includes shares of JPMorgan Chase & Co. and Citigroup Inc.

“The strong get stronger and the weak get weaker,” said Joel Conn, president of Lakeshore Capital LLC in Birmingham, Alabama, which specializes in financial stocks. “It is very difficult to come up with a scenario where earnings get anywhere back to normal for small banks with large commercial real estate exposures.”

Fed officials stepped up reviews of commercial real estate loans at banks last year. The Fed is focusing on banks smaller than the 19 largest lenders examined in May. Those institutions held assets exceeding $100 billion.

Defaults among prime borrowers for residential mortgages will probably accelerate this year, according to Robert Shiller and Karl Case, the economists who created the S&P/Case-Shiller Home Price Index.

Hold to Plans

Still, the Fed will probably hold to its plans to finish the purchase of $1.43 trillion in mortgage-backed securities and housing-finance debt by March 31, barring a reversal in the economy or big rise in mortgage rates, Fed watchers said.

“Clearly, the market would react quite negatively if the Fed said, ‘We are changing our mind,’” said Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut, and a former Richmond Fed researcher.

Bernanke has said the purchases have helped lower mortgage rates and stabilize the economy. The Fed, which began in September to slow down the purchases, still has about $139 billion of mortgage-backed securities left to buy out of $1.25 trillion, and $15 billion of federal agency debt out of $175 billion.

Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ, Ltd. in New York, said Fed officials will monitor mortgage rates and the difference in yields between mortgage-backed securities and Treasuries.

‘Opposite Direction’

“They will not extend it without seeing a bad outcome,” Rupkey said. “Everything seems to be moving in the opposite direction” of increasing purchases of the securities, he said.

St. Louis Fed President James Bullard said in November that the central bank should retain the flexibility to respond to any weakening in the economy by extending beyond March its authority to buy mortgage-backed securities and agency bonds.

Mortgage rates in the U.S. rose last week to 5.14 percent, the highest since August, Freddie Mac said Dec. 31. That’s still close to the record low of 4.71 percent reached in the week ended Dec. 3 and the average 5.04 percent for 2009. Rates averaged 6.05 percent in 2008 and 6.34 percent in 2007.

An increase in rates to 6 percent may prompt the Fed to reconsider ending purchases of mortgage-backed securities, Rupkey said.

To contact the reporter on this story: Craig Torres in Washington at

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Monday, January 4, 2010

Real Estate Faces Tough Recovery Slog

JANUARY 4, 2010, 2:00 P.M. ET


Real estate, which sparked the global economic downturn in 2008, struggled to recover in 2009. But the path to a full return to health is littered with land mines that could send the sector spiraling downward again, possibly upending the nascent economic revival.

The past year's progress in the housing market has relied on government programs that are scheduled to be phased out. The commercial real-estate market is faced with huge amounts of unoccupied space and a deluge of defaults and foreclosures that are putting new stresses on banks and other financial institutions that already are on life support.

The outlook for 2010 is uncertain, at best.

On the bright side, housing markets stabilized in 2009 as the Federal Reserve's policies drove mortgage rates to 50-year lows for much of the spring and fall. Home prices posted six consecutive months of modest gains through October. The supply of foreclosed homes for sale has declined, in part the result of an ambitious program the Obama administration launched in February designed to keep at-risk borrowers in their homes.

But the underpinnings of the positive trends are fragile. The Fed brought down mortgage rates by committing to purchase up to $1.25 trillion in mortgage-backed securities. That program, already extended once, is set to expire in March.

Rates could rise by a full percentage point after those purchases end, sapping any housing recovery, says Ronald Temple, portfolio manager at Lazard Asset Management. He predicts that prices could fall by 15% to 20% if the program ends as planned in March.

Home sales also have been supported by an $8,000 tax credit for first-time buyers. It, too, was set to expire in 2009 but was extended by Congress through the first half of 2010.

On the foreclosure front, the government's battle is far from won. Loan servicers signed up 728,000 borrowers through November for trial loan modifications under the Obama program. Just 31,000 have received a permanent fix so far, or fewer than 5% of those eligible.

Adding to the problem, the number of struggling homeowners is steadily mounting. One in seven households with mortgages was either in foreclosure or delinquent on payments at the end of September, the most recent data available from the Mortgage Bankers Association. Some owners are defaulting because they have lost their jobs.

Some are giving up their homes because the value has fallen below what they owe. Prices have fallen 29% from their July 2006 peak to October 2009, based on the S&P/Case-Shiller Home Price Index, which tracks home values in 20 cities. Nearly one in four mortgage holders owe more than their homes are worth, according to First American CoreLogic, leaving many potential "move up" buyers trapped in homes they can't sell.

"You don't see the normal food chain working," says Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm.

More foreclosures are expected next year as loan delinquencies climb. "It's really hard to envision a positive scenario of home prices going up when you've got this huge overhang," Lazard's Mr. Temple says.

Meanwhile, the pain is just beginning for commercial-property markets. Deal makers who took out huge loans to buy property during the boom often justified the sky-high prices they paid by assuming that rents and occupancy rates would keep rising. Instead, both have plummeted.

Take Midtown Manhattan, the most expensive office market in the U.S. The amount of available space has increased by 16 million square feet since the beginning of 2008, according to brokerage CB Richard Ellis Group Inc. That is roughly equivalent to 16 empty 40-story office towers. Midtown building owners have dropped their asking rents by more than 30% since November 2008.

As rents and property values fell and the extent to which banks are exposed to commercial-real-estate losses became increasingly clear, the government scrambled to contain the damage. The Federal Deposit Insurance Corp., which has been seizing banks hurt by bad property loans, is offering private investors lucrative financing to buy and work out those loans.

In the biggest such deal, Barry Sternlicht's Starwood Capital Group last fall led a group of investors who paid $2.8 billion for a portfolio of 112 construction loans made by Chicago's Corus Bank with a face value of $5 billion. Small and midsize banks are particularly vulnerable to being dragged down by their real-estate portfolios.

"There are going to be huge losses and a huge number of banks failing," says Deutsche Bank commercial-real-estate analyst Richard Parkus. "This is just the tip of the iceberg."

More than $1.4 trillion in commercial mortgages will come due by 2013, and as much as 65% of those will have trouble getting refinanced, Mr. Parkus says.

One major wild card in 2010: When will big investors get back into the market?

For now, institutions that control more than $100 billion in unspent capital earmarked for real-estate deals have been gun-shy, waiting for prices to drop and more distress to come.

Research firm Real Capital Analytics recorded only $42 billion in U.S. commercial-real-estate transactions through November 2009, compared with $136 billion in the same period in 2008 and $489 billion in 2007. But optimists believe that all that money on the sidelines will make for a quick rebound when investor sentiment improves.

"When confidence returns to the markets," says Dan Fasulo, Real Capital's head of research, "I think things are going to spiral upwards again very quickly."