Wednesday, August 31, 2011

FDIC Insured Institutions Q2 1-4 Family REO

For Q2 2011, the FDIC reported the value of 1-4 Family REO at insured institutions as $12.09 billion, down from $13.28 billion in Q1, and down from a high of $14.76 billion in Q3 2010.

The left scale is the dollars reported in the FDIC Quarterly Banking Profile, and the right scale is an estimate of REOs using an average of $150,000 per unit. Using this estimate for the average per REO, that gives 80.6 thousand REO at the end of Q2, down from 88.5 thousand at the end of Q1. This is about 5 times the carrying value in 2003.

As economist Tom Lawler noted: "This is NOT an estimate of total residential REO, as it excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts, and a few other lender categories." However this is the bulk of the REO - probably 90% or more. Rounding up the estimate (using 90%) suggests total REO is around 548,000 in Q2. This also does not include Construction & Development, Commercial, Farm Land REO.

REO inventories have declined over the last couple of quarters due to a combination of more sales and fewer acquisitions due to the slowdown in the foreclosure process. Many more foreclosures are likely coming.

Wednesday, August 17, 2011

CMBS Loss Forecast Raised as Property Lending ‘Reshaped’

From Bloomberg:

Losses on securities tied to commercial-property loans are poised to climb as lenders pull back, choking off funding to some borrowers with debt coming due, according to Deutsche Bank AG. Investors may face 9.36 percent in principal losses on commercial-mortgage bonds sold from 2005 through 2008, Deutsche Bank analysts said in a report yesterday, up from a forecast of 8.7 percent that the Frankfurt-based lender made in December.

“The environment for commercial real estate financing has been dramatically reshaped in the last few weeks,” said Harris Trifon, the head of commercial-mortgage debt strategy at Deutsche Bank in New York. “Capital is more scarce and acceptable leverage limits have decreased, which limits proceeds available to borrowers and restricts real estate values.”

Wall Street is ratcheting back originating new loans to package for sale as European debt crises and a slowing U.S. recovery roil markets, making it harder for banks to gauge how much cash they will recoup in bond sales and boosting rates for borrowers. When investors demand higher yields to buy the debt, lenders have to charge more to make deals profitable. Lenders have raised rates by about 100 basis points amid the turbulence, according to the Deutsche Bank report. While the increase has been offset by a rally in Treasuries for high- quality properties in large cities, financing spreads for lower- tier building are “significantly wider,” according to the report.

Bank of America Merrill Lynch cut its 2011 issuance forecast to between $25 billion and $30 billion, according to an Aug. 12 report. The bank had been predicting more than $40 billion in new sales. JPMorgan Chase & Co. reduced its forecast last month to between $30 billion and $35 billion from $45 billion.

‘Almost Non-Existent’
The pipeline for new deals in the fourth quarter appears to be “almost non-existent,” the Bank of America Merrill Lynch analysts led by Christopher Flanagan wrote. The safest commercial-mortgage backed securities are yielding 284 basis points, or 2.84 percentage points, more than Treasuries, according to a Barclays Plc index. The spread has jumped 75 basis points since the end of June, after sinking as low as 178 in April, the data show.

Prices on a Markit Group Ltd. CMBX index tied to junior AAA commercial-mortgage bonds plunged as much as 24.9 percent to 55.04 from the start of July through Aug. 8, implying losses of 15.3 percent on the underlying securities, according to Deutsche Bank. The index, which falls as the cost to protect against default rises, closed at 57.98 yesterday.

Loans originated in 2007 and coming due next year pose the greatest risk to investors in the near-term, according to Deutsche Bank. About 45 percent of those mortgages, taken out when property values peaked and underwriting standards bottomed, may struggle to refinance at maturity.

Wall Street has arranged more than $23 billion of commercial-mortgage bond sales in 2011, according to Bloomberg data. That compares with $11.5 billion in all of 2010. Sales plummeted in 2008 from a record $234 billion in 2007.

Wednesday, August 3, 2011

CMBS Loans Hit All-Time High Delinquency Rate

Trepp’s July delinquency report for CRE loans wrapped up in MBS reached an all-time high: 9.88%.

"Much of the positive momentum that had been surrounding the CMBS market recently has now all but vanished in the past few weeks. For the better part of the spring, the market was riding a wave of spread tightening, resulting in new issuance, greater velocity of troubled-loan resolution and falling delinquency levels. However, each of those positive reactions has taken a turn for the worse in the last two months.

In June, CMBS spreads widened noticeably. This trend continued for the better part of July, and in turn, CMBS issuers became tentative about new lending. This led some players in the industry to begin lowering their expectations for CMBS lending in the second half of 2011.

Next, the announcement was made that S&P was pulling its rating for a new issue underwritten by Goldman Sachs and Citibank late last week. This forced the new deal to be pulled from the market, introducing an entirely new level of risk to the new issue CMBS market. With the commercial real estate market already worried about how borrowers were going to find enough financing to handle the wave of loan maturities hitting the market over the next few years, this only added to current concerns.

Now we are presented with a monthly CMBS delinquency reading that surpasses the previous record. In July, the delinquency rate for U.S. commercial real estate loans in CMBS shot up 51 basis points to 9.88%. This is the highest delinquency rate in the history of the CMBS market. The spike comes after two consecutive drops in the rate for May and June, which was the first back-to-back monthly drop since the credit crisis began in 2008."

The Numbers:

  • Overall U.S.delinquency rate spikes to 9.88%, an increase of 51 basis points
  • Percentage of loans 30+ days delinquent or in foreclosure: July 11: 9.88% — June 11: 9.37% — May 11: 9.60%
  • If defeased loans were taken out of the equation, the overall delinquency rate would be 10.38%, up 53 basis points from June 2011
  • Percentage of loans seriously delinquent (60+ days delinquent, in foreclosure, REO or non-performing balloons) is at 9.14%, up 39 basis points from June 2011

Historical Perspective

  • One year ago, the overall U.S.delinquency rate was 8.71%
  • Six months ago, the overall U.S.delinquency rate was 9.39%
  • One year ago, the rate of seriously delinquent was 7.95%
  • Six months ago, the rate of seriously delinquent was 8.75%