by Calculated Risk on 8/05/2009 08:09:00 PM

From Zachary A. Goldfarb and David Cho at the WaPo: Administration Considers Splitting Fannie Mae, Freddie Mac

The Obama administration launched a broad government effort this week to overhaul mortgage giants Fannie Mae and Freddie Mac and is considering splitting the companies and putting their troubled assets in a new federally backed corporation, administration officials said.
...
The companies' regulator ... confirmed that the administration is discussing the "good bank bad bank" model.

There are no details on a proposed structure.

by Calculated Risk on 8/05/2009 06:08:00 PM

Note: Corrected 2nd sentence: "Values were driven not by underlying demand ..."

Barry Gosin, CEO of Newmark Knight Frank: "The rise in rents were really never connected to real demand. Values were driven not by underlying demand, they were driven by liquidity, and cap rates, and the desire to invest in real estate. Then on the way down, our view is the rental market has relatively stabilized - how far do you go?"

CNBC: "Stabilized at what sort of levels?"

Gosin: "In some of the big cities where you had a tremendous runup, as much as 50% [off]. The rest of the countries where the rents are much lower, 15% to 20%."

CNBC: Oh my ...! (this section starts around 4:20)

by Calculated Risk on 8/05/2009 03:27:00 PM

Two separate reports ...

From Bloombeg: ‘Underwater’ U.S. Mortgages May Hit 48%, Deutsche Bank Reports

The percentage of properties “underwater” is forecast to rise to 48 percent, or 25 million homes, as property prices drop through the first quarter of 2011, according to [Deutsche Bank] analysts Karen Weaver and Ying Shen.

I guess Deutsche Bank didn't get the memo about house prices finding a bottom.

Note: Deutsche Bank estimates 26% of homeowners are currently underwater, matching the data below from Economy.com. And Deutsche Bank sees the next wave hitting prime borrowersm, from the report:

While subprime and Option ARMs are currently the worst cohorts with underwater borrowers, we project that the next phase of the housing decline will have a far greater impact on prime borrowers (conforming and jumbo) ... By Q1 2011, we estimate that 41% of prime conforming borrowers and 46% of prime jumbo borrowers will be underwater, a significant increase over the percentage of these borrowers in Q1 2009. The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding.

From the WSJ: More Homeowners ‘Upside Down’ on Mortgages

Some 24% of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes.

Overall, 16 million homeowners are “upside-down” on their mortgages, up from 10 million, or 15% of owner-occupied homes, one year ago.

Nearly 10% of owner-occupied homes now have mortgage debt with loan-to-value ratios of at least 125%, and roughly half of those homes have mortgage debt with loan-to-value ratios of 150% or more.

Mods won't help these homedebtowners. Most mods just capitalize missed payments and expenses, and either lower the interest rate for a few years or extend the term leaving the homeowner underwater (aka pretend and extend).

Although Deutsche Bank may be pessimistic on house prices, both reports suggests about 16 million homeowners are currently underwater, and probably another 5+ million have no equity.

by Calculated Risk on 8/05/2009 02:20:00 PM

WSJ Headline: Taylor Bean, 12th largest U.S. mortgage lender, to cease operations, won't fund mortgages in pipeline.

This is a significant story. Taylor Bean was the third largest FHA loan originator in May.

Update: Taylor Bean press release (ht Wayne)

TAYLOR BEAN MUST CEASE ALL ORIGINATION OPERATIONS EFFECTIVE IMMEDIATETLY

OCALA, FLORIDA – TAYLOR, BEAN & WHITAKER MORTGAGE CORP. (“TBW”) RECEIVED NOTIFICATION ON AUGUST 4, 2009 FROM THE U.S DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, FREDDIE MAC AND GINNIE MAE (THE “AGENCIES”) THAT IT WAS BEING TERMINATED AND/OR SUSPENDED AS AN APPROVED SELLER AND/OR SERVICER FOR EACH OF THOSE RESPECTIVE FEDERAL AGENCIES. TBW HAS UNSUCCESSFULLY SOUGHT TO HAVE THE TERMINATION/SUSPENSION DECISIONS OF EACH OF THOSE AGENCIES REVERSED. AS A RESULT OF THESE ACTIONS, TBW MUST CEASE ALL ORIGINATION OPERATIONS EFFECTIVE IMMEDIATELY. REGRETTABLY, TBW WILL NOT BE ABLE TO CLOSE OR FUND ANY MORTGAGE LOANS CURRENTLY PENDING IN ITS PIPELINE. TBW IS COOPERATING WITH EACH OF THE AGENCIES WITH RESPECT TO ITS SERVICING OPERATIONS AND EXPECTS TO CONTINUE TO SERVICE MORTGAGE LOANS AS IT RESTRUCTURES ITS BUSINESS IN THE WAKE OF THESE EVENTS. WE UNDERSTAND THAT THIS COULD HAVE A SIGNIFICANT IMPACT ON OUR VALUED EMPLOYEES, CUSTOMERS AND COUNTERPARTIES, AND ARE VERY DISAPPOINTED THAT A LESS DRASTIC OPTION IS UNAVAILABLE.

by Calculated Risk on 8/05/2009 01:14:00 PM

"I think it is shaping up there is another leg down in terms of market rents and effective rents and that will be somewhere late this year or early [next] year where I think all the operators will move their rents down to basically handle the late stage of this recession."
BRE CEO, Aug 5, 2009

BRE is an apartment REIT in the West. Here are some comments from their conference call (hat tip Brian):

“In our market footprint non farm jobs have decreased almost 800,000 or 5% year-over-year. We feel we are at the midpoint of the market cycle. Operating fundamentals will continue to be challenged until jobs stabilize. Past recession patterns and current forecast [suggest this will be] 15 to 18 months after GDP stabilizes, currently expected in the third or fourth quarter this year.

... our current views have not changed from the start of the year, specifically the rent curve should continue to decline well into 2010. Cumulative rent loss may be double digits and pricing power will not return until jobs turn positive which may be late 2010.

On the disposition front, we were successful in selling the two Sacramento assets that were classified as held for sale. One community sale occurred in June and the second in July generating growth proceeds of 65 million. The cap rate was 8.5%. ...

This environment calls to mind the Churchhill comment,”if you are going through hell, keep going.”

... we believe we are halfway through a tough two-year period for rents and operations.

Occupancy at the end of the second quarter was 95%, we are slightly north of that today. We have two positive variables available to us, higher traffic and favorable renewal rates.

... market rent in our communities is down 4% year-over-year and down 6% since September. Essentially all the market decline was realized during the end of the year in the first quarter. Rents have been flat since the end of March. Effective rents are down almost 9% from peak levels in '08.
..
Concessions and/or discount pricing are prevalent in all operating markets, available from private and public operators. Whether you call it a concession or effective rent, discounts are available. In this environment the customer is focused on the check writing experience so the concession is taking the form of the recurring discount off the monthly rent. ...

Historically we haven't used concessions. In most of our markets, they weren't necessary. They are proving useful [today] on two fronts. One, we needed to recover the occupancy line [in Q2] and wanted some immediate velocity. This proved successful. The concessions are also helping where we go from here. There is another leg down from people with job losses. Our view is to pick the appropriate time in each market to adjust rents and at that time begin to reduce concessions. The objective is to reduce concessions and discount at some point by the second half in 2010.
...
Renewals are running 55%. We don't lose many tenants to other properties, about 3%. Move outs to home purchases are running 8.5% down from 16% a year ago. Jobs are the drivers for move outs. If we combine job transfer, job loss, relocation, personal reasons and financial problems, these five factors total 30% of move out activity. Unscheduled move outs, evictions and skips are another 9%.

There remains a fairly healthy rent to own gap in our Orange County, Seattle and San Diego markets, in LA where there is virtually no and the Inland Empire is negative 15 to 20%. Phoenix is negative 5% and Denver has a positive rent to own gap.
...
Analyst: I'm trying to specifically narrow down what is going to cause another 5% [decline in rents] in an environment where job losses are decreasing?

BRE: We expect there to be continued sequential declines in job growth in all of our markets through at least the midpoint of 2010. Right now the economy.com forecast is showing that you go from negative sequential declines to a point of stabilization to a beginning of modest job growth through 2010 and into ' 11. We are using that forecast and erring on the side of conservatism. We are still [expecting] another leg down in rents. In February when we gave our comments we said we thought '09-'10 would be a two-year decline in a range of 10 to 15%. I think that's still where we are today. If it is not there, we will be thrilled and happy not to cut the rents all the way down. Right now I think it is shaping up there is another leg down in terms of market rents and effective rents and that will be somewhere late this year or early [next] year where I think all the operators will move their rents down to basically handle the late stage of this recession.
emphasis added

This matches the data from the NMHC apartment market tightness survey released yesterday.