January 1, 2010Kyle KazanComments 0
I must admit that I’m a data junkie and I enjoy getting my information raw so that I can extrapolate my own conclusions and predictions. In that spirit, let’s look at some statistics.
The current national average for single family homes saddled with mortgages amounts higher than their value is approximately 23%. In Figure 1, we see the top 5 states with negative equity loans. It should be noted that from October 2008 – October 2009, the interest rate on a 30 year fixed rate (amount within FHA guidelines) mortgage dropped about 1% (meaning a loan quoted in October 2008 at 6% would have been quoted at 5% in October 2009). The values might have fallen further without rates being pushed down.
In figure 2 we see the cities/counties which have suffered the biggest rent declines. Not surprisingly, most are in states which are having severe problems with their housing market.
My property management company has seen a large increase over the last six months of renters becoming first time home buyers. With the US Government’s monetized $8,000 tax credit, FHA’s 97% LTV program and the lowered real estate prices, more renters can afford to be homeowners. The rising unemployment coupled with the government subsidies for home buyers will continue to squeeze multi-family property owners.
Lenders of commercial paper have been looking to the federal government for guidance on how to deal with delinquent borrowers and properties with negative equity. The big question looming was whether the regulators were going to force the banks into insolvency if they couldn’t raise adequate reserve levels and sell the assets off like was done in the 1990’s through the Resolution Trust Corporation (the “take your medicine now” approach).
On October 30, 2009, the Federal Reserve answered that question by adopting a policy statement supporting “prudent commercial real estate workouts. The policy was adopted by “each of the financial regulators.” It is a bit of a long read but worth it if you have the time (www.federalreserve.gov/newsevents/press/bcreg/20091030a.htm). Essentially the approach will allow banks to forgo foreclosures in favor of loan modifications. In figure 3, it is clear that US banks do not currently have the capital to cover their commercial real estate exposure. Given the choice between the banks own insolvency or their attempting to work out troubled loans, what do you think most (or all) banks will do? The answer will surely be “amend and pretend” as they kick the can down the road.
While the stats underscore an ugly reality along with major difficulties for underwater borrowers and lenders, my outlook remains the same, investment opportunities will continue to become more attractive over time.