Slower Office Construction Could Mean Higher Rents (Video)

A sector prone to booms and busts, office construction is at its lowest level in a half century, down more than 80% since peaks in the mid-1980s and in 2000. That could mean higher rents are a few years out, as the Journal reports today in the Outlook column and on the News Hub. Photo: Reuters

Regulator: Freddie Ceased Mortgage Transactions ‘On Its Own’

Bloomberg News
Edward DeMarco, acting director of the Federal Housing Finance Agency

By Alan Zibel and Nick Timiraos

Freddie Mac stopped investing in certain mortgage derivatives last spring amid a weak market for such transactions, the firm’s federal regulator said on Friday, as an uproar continued on Capitol Hill about the investments.

The obscure investments known as inverse floaters caused a flurry of angry statements from lawmakers this week after NPR News and nonprofit investigative news outlet ProPublica reported that the mortgage giant’s investments in certain mortgage derivatives created conflicts of interest that amounted to bets against homeowners’ ability to refinance.

The Federal Housing Finance Agency said in a statement that Freddie Mac made the initial decision to suspend the investment strategy in spring 2011.

“Freddie Mac, on its own, ceased structured financing that produced inverse floaters, as there was limited market demand for these structured products,” said Corinne Russell, a spokeswoman for the FHFA. She said there was “no connection” between Freddie Mac’s mortgage financing structures and its refinancing policies.

The “underlying premise” that Freddie had sought to bet against homeowners by holding the investments “is simply incorrect,” said the agency’s acting director, Edward DeMarco, in a letter on Tuesday.

The mortgage-related investments receive a certain piece of the cash flow from interest payments on mortgages. They would be worth less if borrowers refinanced their home loans and paid off loans that carry higher interest rates.

The NPR-ProPublica report said there was no specific evidence that Freddie’s decision to retain exposures to those investments was tied to its decisions to tighten credit policies that made refinancing more difficult.

Freddie Mac says that its portfolio management operations are “walled off” from other parts of the business. In an interview with NPR on Friday, Mr. DeMarco said he was “completely puzzled by the notion that there was something immoral that went on here.”

Mr. DeMarco said in a letter to Sen. Robert Casey (D., Pa.) that regulators had raised their own concerns about over the firm’s ability to manage the risks associated with the complex investments after Freddie Mac ceased retaining the mortgage investments.

“The risk associated with these transactions is inconsistent with FHFA’s goal of having Freddie Mac reduce its risk profile and avoid unnecessary complexity that requires specialized risk management practices,” wrote Mr. DeMarco. Mr. Casey pressed Mr. DeMarco for more detailed answers in a separate letter Friday. He asked Mr. DeMarco to explain Freddie’s rationale for retaining more of those investments in 2010 and 2011 and to clarify FHFA’s oversight of those investments.

Freddie Mac, which buys up mortgages and packages them into securities, has a $650 billion mortgage portfolio. It holds about $5 billion of the derivatives in question.

Housing Assistance 2012: Another Herculean Task for the FHA

Beginning the 37th month of his presidency, the Obama Administration today announced a laundry list of new programs to help struggling homeowners, crack down on abusive lending practices, make mortgage documents easier to read, convert REO to rental, and other assorted initiatives.  Some require Congressional approval; others are a work in progress, and a couple can begin quickly.
 
At the heart of the announcement is a broad new refinance program with the venerable FHA stepping in (once again) to help save the mortgage market by offering current but underwater non-FHA borrowers another lifeline.
 
Concurrently, the Administration appears to be on the verge of a broad-based “REO-to-Rental” initiative by announcing a pilot project to be led by FHFA, HUD, and Treasury.  I think the Administration is smart to move this initiative forward as they certainly have the political cover through last year’s RFI process.  They asked for comments and suggestions and reportedly received thousands of responses.  They can now say we are implementing what America said they wanted.   Of course, we do not yet know exactly how it will work.
 
Lawmakers and mortgage industry professionals have previously questioned whether or not FHA can handle yet another herculean task.  Recall in 2007 when the mortgage market sputtered and into 2008 when new higher loan limits were unveiled, FHA saw its share of the mortgage market jump exponentially in a matter of months. What was a $350 billion book of business in 2005 has today mushroomed to $1 trillion with more than 7.4 million homes with FHA insurance.
 
Since presumably these would be riskier borrowers (higher LTVs and underwater) it remains to be seen:

  1. If Congress will give FHA the authority to increase its current LTV caps.
  2. How OMB will “score” the proposal thus dictating the mortgage insurance pricing?
  3. Will proposed new bank fees and presumably higher premium revenue off-set the expected “cost” to FHA?

FHA is reportedly considering placing these loans in an insurance fund separate from its current Single Family books of business, but could ultimately require the FHA to invoke its “permanent indefinite” budget authority to keep it afloat (as opposed to the self-sustaining Mutual Mortgage Insurance fund).
 
That said, the Administration indicated the cost of these programs will “not add a dime to the deficit” and will be off-set by a fee on the “Largest Financial Institutions.”  (Note: Congress might have an opinion here.)
 
Since FHA has not in recent memory refinanced borrowers with LTVs in the 120-140 range (presumably one of the groups targeted by the Administration), I think it will be difficult to estimate the performance of these loans over time and thus their impact on FHA’s actuarial foundation regardless of which fund they place them in.  While the FHA “short re-finance” program announced in 2010 allowed a 115% CLTV, it has had very little participation thus making it difficult to gauge performance relative to what could be even higher LTV participants.
 
It should be noted that the Administration is targeting borrowers who have made 12 consecutive payments so one could argue that despite the fact they are underwater they have been able to afford their mortgage payments – presumably in some cases for several years.  So does that mitigate some of the potential risk meaning that they will certainly be able to afford reduced monthly payments?  But again, given FHA’s limited experience with borrowers outside their established guidelines and requirements predicting their performance with any degree of certainty is difficult at best.
 
And assuming those previously non-FHA borrowers default on their new FHA loan, who do you think will now be at-risk with an underwater property?  Again, the Administration stated these programs “will not add a dime to the deficit” – I hope they are right.
 
FHA’s actuarial soundness has been rocked by the on-going erosion of house prices nationwide which has led to three consecutive years of declines in their capital reserve ratio.  The best medicine for FHA is house price appreciation and the positive ripple effect of increased value to their housing portfolio.  But they have been waiting three years for that to happen.
 
Welcomed news as part of this new refinance program is they would be removed from an FHA lender’s compare ratio within Neighborhood Watch (FHA’s public database of lender’s default rates compared to its peers in a given geographic region).  That said, I suspect FHA will establish a separate category of compare ratios for this book of business, as it did for Negative Equity Refinances and the Hope For Homeowner (H4H) program.
 
So while this action will remove a potential barrier to participation, lenders should be cautioned that performance will still matter and they should stand ready for increased scrutiny especially by the HUD OIG.
 
I give the Administration credit for launching another round of housing assistance as too many homeowners continue to struggle.  Putting politics aside on the surface it appears to be the right and proper thing to do, however it remains to be seen the level of participation (and degree of Congressional acceptance) and ultimately what cost, if any, to the taxpayers – most of which have grown weary of the nagging housing crisis.
 
Note: We will continue to follow this initiative with keen interest as it makes its way through Congress and will offer periodic updates as developments warrant.

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New Player Enters for Grubb & Ellis

Bloomberg News
Howard Lutnick, chief executive of Cantor Fitzgerald

By Eliot Brown and Kris Hudson

In the race to control Grubb & Ellis Co., there’s a new big name circling over the commercial real estate services firm: Howard Lutnick.

BGC Partners LP, an affiliate of Mr. Lutnick’s Cantor Fitzgerald, on Monday signed a two-week exclusivity agreement with Grubb & Ellis to potentially purchase or recapitalize the struggling Los Angeles-based company, according to a Grubb & Ellis securities filing and a person familiar with the matter.

The agreement with the affiliate of Cantor, which has been growing its real estate investments and bought brokerage Newmark Knight Frank, comes as Grubb & Ellis saw a similar agreement with two other opportunistic investors fizzle.

An exclusivity agreement with C-III Investments LLC, which focuses on distressed real estate and is led by Andrew Farkas, and Colony Capital LLC, run by Tom Barrack, expired on Sunday without a deal.

No deal materialized, in part, because of the complexity of the deal and multiple layers of creditors, a person familiar with the deal said.

Of course, it couldn’t hurt Grubb to strike a deal sooner rather than later with any of its suitors. The company on Jan. 3 was de-listed from the New York Stock Exchange because its market capitalization had fallen below $15 million.

The housing recovery that wasn’t

FORTUNE — Over the past few months, a spate of good news about the U.S. housing market has led some to think a recovery is finally on the horizon.