Zell’s Archstone Purchase Blocked, Officially

Bloomberg News
Sam Zell, chairman of Equity Residential

Equity Residential’s purchase of a stake in competitor Archstone has been blocked by the estate of Lehman Brothers Holdings Inc., as Lehman has exercised an option to match the company’s $1.33 billion bid, Equity Residential said in a securities filing today.

But this latest step in the complex fight over apartment-company Archstone doesn’t put Equity Residential out of the picture. The Chicago company, whose chairman is investor Sam Zell, has another bite at the apple: It has an option to buy another 26.5% stake for at least the same price. It has 30 days to make a deal, at which point Lehman would, once again, have the right to match that offer.

Lehman’s purchase – which is half of the position in Archstone owned by Bank of America Corp. and Barclays PLC – ups its stake in Archstone to 73.5%. The failed investment bank’s advisers are expecting Equity Residential to put in an offer for the final 26.5% stake, and are preparing to block that too, according to people familiar with the matter.

Of course, it’s unclear what price Equity Residential would bid, and in theory it could be high enough that Lehman wouldn’t match it. Equity Residential is entitled to a breakup fee of up to $80 million if Lehman blocks its second purchase.

Lehman to Block Zell’s Archstone Deal

The estate of Lehman Brothers Holdings Inc. is planning this week to use $1.33 billion in cash to buy a 26.5% stake in apartment giant Archstone.

MBA: Investors Increase Commercial, Multifamily Mortgage Holdings

Three of the groups that most heavily
invest in commercial and multifamily mortgages increased their outstanding
balance of such debt in the first quarter of 2012 according to data released
this morning by the Mortgage Bankers Association (MBA).  The level of all commercial/multifamily debt increased
by $8.1 billion
or 0.3 percent to $2.373 trillion compared to a total in the
fourth quarter of 2011 of $2.365 trillion. 
The multifamily portion of that debt now totals $818 billion, up $6.9
billion or 0.8 percent from the previous quarter total of $811.4 billion.

Banks and thrifts saw the largest dollar
increase in commercial/multifamily holdings during the first quarter, $13.5
billion or 1.7 percent.  Agency and GSE portfolios
and MBS went up by $6.8 billion or 2 percent.  The third sector, life insurance companies,
increased $3.8 billion or 1.2 percent.  The largest drop was in the holdings of commercial mortgage-backed securities (CMBS), collateralized
debt obligations (CDO), and other asset-backed securities (ABS) which went down
$11.7 billion or 2 percent.  On a
percentage basis the largest increase was 5.3 percent by other insurance
companies and the largest percentage drop was in the household sector, down 11

amount of commercial and multifamily mortgage debt outstanding increased during
the first quarter, as lenders put out more in new loans than paid-off or paid
down,” said Jamie Woodwell, Vice President of Commercial Real Estate Research
at the Mortgage Bankers Association.  “Banks; Fannie Mae, Freddie Mac and
FHA; and life insurance companies all increased their holdings of commercial
and multifamily mortgages, more than offsetting declines among CMBS and other
investor groups.”

The $6.9 billion increase in multifamily
was accounted for by an increase in agency and GSE portfolios of 6.8
billion or 2 percent, commercial banks raised their holdings by $2.4 billion or
1.1 percent and life insurance companies increased by $595 million or 1.2
percent.  The largest decrease was $2.5
billion or 2.7 percent by CMBS, CDO, and other ABS issues.  On a percentage basis agency, GSE portfolio
and MBS increased 2 percent while finance companies had the largest percentage
decrease at 2.9 percent.

While commercial banks hold the biggest share
of commercial/multifamily mortgages with $808 billion or 34 percent of the
total, agency and GSE portfolios and MBS are first in the percentage of multifamily
mortgage debt outstanding, 43 percent or $352 billion.  Banks and thrifts hold $221 billion or 27
percent, CMBS, CDO, and other ABS issues hold $88 billion or 11 percent, and
local governments have 8 percent or $69 billion.

analysis summarizes the holdings of loans or, if the loans are securitized, the
form of the security. For example, many life insurance companies invest both in
whole loans for which they hold the mortgage note (and which appear in this
data under Life Insurance Companies) and in CMBS, CDOs, and ABS for which the
security issuers and trustees hold the note (and which appear here under the
latter designation).

recently improved its reporting of commercial and multifamily mortgage debt
outstanding.  The new reporting excludes two categories of loans that had
formerly been included – loans for acquisition, development and construction
and loans collateralized by owner-occupied commercial properties.  By
excluding these loan types, the analysis here more accurately reflects the
balance of loans supported by office buildings, retail centers, apartment
buildings and other income-producing properties that rely on rents and leases
to make their payments.

…(read more)

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Paper Suggests Lower GSE Fees May Pay Off in Reduced Defaults

The Federal Reserve Bank of New York
recently released a paper that looked at the impact of HARP revisions on loan
defaults and pricing
.  The paper, Payment Changes and Default Risk: the Impact
of Refinancing on Expected Credit Losses
was written by Joseph Tracy and
Joshua Wright. 

When the Home Affordable Refinance Program
(HARP) was initiated, its goal to stimulate the economy and reducing defaults
by lowering mortgage payments in households with high loan-to-value mortgages. These
were borrowers who were otherwise unable to refinance.

HARP was implemented in 2009 but refinancing
activity was much lower than expected. 
Just over one million refinances have been done under HARP rather than
the 3 to 4 million expected.  This
confirms, the authors say, the original rationale for HARP, that in the wake of
the housing bust borrowers need help refinancing.

HARPS lackluster results have provoked discussion
about the impediments to refinancing including credit risk fees, limited lender
capacity, a costly and time consuming appraisal process, limitations on
marketing, and legal risks for lenders.  HARP
was recently revised to better address these impediments. .

Concerns about revising HARP included
doubts about its fairness and about macroeconomic efficiency.  The Federal Housing Finance Agency (FHFA) has
a responsibility to weigh the value of any proposed changes in terms of a possible
impact on the capital of the government sponsored enterprises (GSEs).  These could include a reduction in the income
generated through interest on the GSE’s Holdings of MBS, on the expected
revenues from the put-backs of guaranteed mortgages that default, and finally
on the impact of refinancing on expected credit losses to the GSE fees. 

One outcome of an improved program would
be more borrowers in a position to refinance. 
Estimates can be made of the average reduction in monthly mortgage
payments that would result from a refinance; the question is how this payment
reduction would affect future defaults. 
Ideally a study could determine the difference in expected credit losses
from two identical borrowers with identical mortgages where one borrower
refinances and the other does not.  However,
once the existing mortgage is refinanced it disappears so both
mortgage/borrower sets cannot be similarly tracked and the impact of the
payment change on a borrower’s performance must be inferred.

A recent congressional budget office
working paper estimates that reduced credit losses would produce an incremental
2.9 million refinances of agency and FHA mortgages and that such a program
would reduce expected foreclosures by 111,000 or 38 per 1000 refinances,
reducing credit losses by $3.9 billion.

Using data from Lender Processing
Services the authors selected eligible borrowers from among borrowers who had
been current on mortgage payments for at least 12 months and had estimated loan-to-value
ratios (LTV) over 80 percent. To measure motivation the authors selected loans
where the borrower could recover refinancing costs in two years.  Using these parameters it was determined that
refinancing would reduce the required monthly payment by 26 percent on average.

The authors found impacts on results
from various combinations of local factors such as house prices, employment
rates, the local legal methods of handling delinquencies, and contagion risk,
i.e. the exposure of the borrower to others who had defaulted.  There were also effects from FICO scores and
debt to income ratios and loan specific factors such as the purpose of the
loan, full documentation of the loan, and length of loan term.  Various methods were used to control for
these variables including excluding loans from the sample.

It is acknowledged that LTV ratios have
a significant correlation with default and the authors did test and confirm
this relationship.   The next step was to estimate the impact of a
26 percent payment reduction on the average default rate.  The authors used estimated ARM default and
prepayment hazards to do a five-year cumulative default forecast holding the
local employment rate and home prices stable. 
At five years the models imply that the expected cumulative default rate
would be 17.3 percent. When the payments are reduced by 26 percent the expected
default rate is reduced to 13 percent a 24.8 percent reduction.   The same analysis was run for borrowers with
prime conforming fixed-rate mortgages obtaining a cumulative default rate of
15.2 percent which refinancing reduced to 11.4 percent, a decline of 3.8
percentage points. 

These figures were used to conduct a
simple pricing exercise to measure the difference between a refinancing fee
that maximizes fee income for a certain category of borrowers and a fee that
maximizes the combination of the fee income and the reduction in the expected
future credit losses using the GSE pricing categories for their loan level adjustments.  It was found that FICO score strongly impacted
both payment reductions and default rates ultimately resulting in reductions in
the default rate of 1.9 percentage points for a high FICO borrower and 9.1
points for a low one.  This implies that
incorporating the impact of expected credit losses into the pricing decision
should generate higher price discounts for weaker credit borrowers as measured
by FICO score and LTV.

The authors found that incorporating the
impact of expected credit losses after refinancing on average lowed the desired
pricing by 17 basis points.  Looking at
the averages by LTV intervals shows an impact of 15 basis points for mortgages
with a current LTV of 80 to 85 and increases to 14 basis points for mortgages
with a current LTV of 105 or higher. 
Basing fees on FICO scores involves a much more complicated set of

The authors conclude that the average
HARP refinance would result in an estimated 3.8 percent lower default
rate.  Assuming a conservative average
loss-given default of 35.2 this indicates an expected reduction in future
credit losses of 134 basis points of a refinanced loan’s balance.

The paper concludes that the impact
of refinancing on future default risk is important to the current debate of the
GSE fee structure for HARP loans.  “These
results suggest that refinancing can be fruitfully employed as a tool for loss
mitigation by investors and lenders.  The
optimal refinance fee will be lower if this reduction in credit losses is
recognized.”  Reducing fees, the authors
say, will increase incentives to refinance but at the cost of fee income to the
GSEs.  “Our analysis shows, however, that
there is an offset to this lower fee income today which is lower credit losses
in the future.”

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MBA: Commercial, Multi-Family Delinquencies Fell in First Quarter

The Mortgage Bankers Association said today that commercial
and multi-family delinquencies
for most of the investor groups it tracks
declined during the first quarter of 2012 compared to both the previous quarter
and the first quarter of 2011.  The one exception
was commercial mortgage backed securities (CMBS) which had a rate, including
mortgages 30+ days late and real estate owned (REO) of 8.85 percent.  The rate at the end of the previous quarter
was 8.56 percent.  It had been one basis
point higher, 8.86 percent, at the end of Q1 2011.

Banks and thrifts had a 90+ day rate of 3.22 percent
in the first quarter compared to 3.57 percent in the fourth quarter of 2012 and
4.21 percent in the first quarter of 2011. 
The rate for life insurance mortgage holdings (60+ days) was 0.14
percent, unchanged from a year earlier but down from 0.17 percent in the last
quarter of 2012.  Multi-family delinquencies
of more than 60+ days held by Fannie Mae dropped from 0.59 percent in the
fourth quarter to 0.37 percent.  One year
earlier the rate was 0.64 percent.  Freddie
Mac’s multi-family delinquency rate, also based on 60+ days was 0.23 percent,
one basis point higher than in the fourth quarter but substantially improved
from 0.36 percent one year earlier.

The five
largest investor-groups tracked by MBA together hold more than 80 percent of commercial/multifamily
mortgage debt currently outstanding.

…(read more)

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