The Race is On: Regulators Race to Stave off Commercial Real Estate Downturn

Federal officials are struggling to manage an impending glut of commercial real-estate foreclosures that could quickly flip the recovering economy into another tailspin, the Wall Street Journal reported Monday.Regulators at the Treasury and the Federal Reserve are focusing on $700 billion in commercial mortgage-backed securities whose underlying loans are at risk for massive defaults. Delinquency levels on CMBS have already reached 3.14 percent – fully six times what they were last July, according to the credit ratings agency Realpoint LLC.

Worse still, even borrowers on commercial loans who can afford their interest and principal are finding it difficult to refinance or extend their credit as property values fall and oversight on the refinances increases. It’s a phenomenon that could trigger more losses in CMBS and the majorinvestors – banks, pensions, hedge funds – that buy them, the Journal said.

One problem regulators are mulling is how to permit loan servicers to contact lenders earlier in the process to discuss ideas for avoiding foreclosures and defaults. Developers in financial trouble have complained that they currently have no easy avenue of communications with the holders of their CMBS to review their options.

The result, in a Realpoint study commissioned by the Journal, is that 281 CMBS loans worth $6.3 billion couldn’t refinance when they matured this summer, even though 173 of the loans – worth $5.1 billion – had plenty of money on hand.

Those pressures, and the threat of more properties hitting the market, could force banks into a new round of write-downs, said Realpoint’s managing director, Frank Innaurato.

“What’s going on in the CMBS world is a precursor for what might be seen in banks’ books,” he said.

So far, regulators haven’t been able to come up with a comprehensive plan of attack for the commercial property market’s woes, the Journal said.

“What landlords need is occupancy and rents to rise, and that means employers have to start hiring and consumers need to shop more,” the Journal said. “So far, there are few signs this is happening.”

Western States Crowned "Riskiest" for Mortgage Fraud

Mortgage fraud risk over the last year seems to have migrated westward, with Nevada and California dominating the 10 riskiest metropolitan statistical areas (MSAs), according to a new study released by Interthinx this week. One of the study’s most telling findings – the states with the highest overall levels of mortgage fraud risk correspond to the states with the highest levels of foreclosure activity.

Here’s how the numbers stack up. Nevada – which claimed the highest state foreclosure rate in the latest RealtyTrac report – also has the highest mortgage fraud risk, with an Interthinx Fraud Index value of 245.

California, which contains eight of the 10 riskiest MSAs, has the next highest Interthinx Fraud Index value of 176. Guess where it ranked on RealtyTrac’s foreclosure report – No. 2.

As a reference point, Interthinx says the fraud index value for the whole United States is 130. Nationally, fraud risk in the second quarter declined 4 percent from the first quarter, but is up 7 percent over last year, due to the nature of mortgage fraud to flourish and capitalize on deteriorated economic conditions, Interthinx explained.

Mortgage fraud in the second quarter shifted to schemes that target distressed borrowers and the glut of bank-owned properties, Interthinx said.

“Federally funded economic stimulus and stabilization programs that target foreclosure prevention are also contributing to the current shift to schemes involving defaulted and foreclosed properties,” the company’s analysts said in their report.

The Property Valuation Fraud Index jumped 56 percent from the same period in 2008, reflecting fraudulent activity involving short sales, REO inventories, and refinancings. Valuation fraud is currently the most common type of fraud perpetrated against the industry.

The Occupancy Fraud Index, which is typically tied to schemes involving speculative investments, declined 25 percent. The decline was caused by the generally depressed market for residential investment and rental properties, Interthinx said.

So what makes Nevada and California such breeding grounds for fraudulent activity? Interthinx says fraud risk, particularly valuation fraud, occurs in any market with acute pricing volatility, whether home prices are rising or falling.

Even more foreboding for these two, the company says fraud risk is actually a leading indicator of foreclosure risk, which suggests that the nation’s hottest fraud spots today are likely to be the leading foreclosure MSAs within two years.

Interthinx analysts expect fraud indices will continue to rise over the next three years as a large number of adjustable-rate mortgage (ARM) loans – especially option ARMs with negative amortization – reset between now and the first quarter of 2012.

Delinquencies Are Still Climbing and Threatening More Foreclosures on the Horizon, MBA Says!

More than nine percent of all mortgages in the United States are now delinquent, according to figures released Thursday by the Mortgage Bankers Association (MBA). The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to 9.24 percent of all loans outstanding at the end of the second quarter, MBA reported. The new number breaks the record set in the first quarter of this year, when 9.12 percent of the nation’s homeowners were behind on their mortgage payments.

Important to note is that the biggest jump in delinquencies last quarter came from prime fixed-rate mortgages. These seemingly low-risk loans also accounted for one in three of the nation’s foreclosure starts in Q2. A year ago they were only one in five.

Like prime, Federal Housing Administration loans are generally thought to be “safe,” but foreclosure starts among government-insured mortgages jumped to 9.1 percent last quarter – a record-high for the agency.

The states of California, Florida, Arizona, and Nevada continue to drag down the national numbers. These four had 44 percent of all the nation’s new foreclosures in Q2. Rhode Island, Georgia, and Michigan also posted foreclosure start rates above the national average.

All other states in the country fell below the national benchmark, and roughly half even saw their new foreclosure numbers decline.

But then, there’s the not-so-sunny Sunshine State. Florida has cemented itself as the worst state in the union for mortgage performance. Twelve percent of all mortgages there were somewhere in the process of foreclosure at the end of June, and another 5 percent were more than 90 days past due and about to cross that threshold. Based on MBA’s numbers, Florida has the highest foreclosure and delinquency rates in the country, and MBA’s chief economist, Jay Brinkmann, says he doesn’t expect to see a turnaround in Florida’s housing market for a long, long time.

Some fortunate regional markets are faring better and offsetting Florida’s bad numbers because the nation’s total foreclosure starts during the second quarter actually dropped slightly.

Foreclosure actions were initiated on 1.36 percent of the nation’s outstanding mortgages, compared to 1.35 percent during the first three months of the year, MBA reported.

Despite the leveling off of foreclosure starts, the fact that loans 90 or more days past due continues to climb in all categories suggests an overhang of foreclosure activity and engorged inventories of repossessed homes may be looming in the coming months.

So, when is the foreclosure problem going to crest? Brinkmann, points out that unemployment is currently the primary driver behind missed mortgage payments.

The number of jobless Americans is forecast to peak in mid-2010, and Brinkmann says he expects delinquencies to top out at about the same time. But because of the lag time associated with foreclosure proceedings, he doesn’t see a break in the upward trend of foreclosures until six months later, at the close of next year.

Commercial-Mortgage Downturn has Started, Standard & Poors Says!

The economy is about to experience its second mega-wave of loan defaults, potentially triggering massive losses in securities backed by commercial mortgages, Standard & Poor’s said in a new report Monday.

“With almost 29,000 loans… now in the riskiest period of their lives with respect to default… Standard & Poor’s expects default levels to rise,” the ratings firm concluded in its default study.

The report comes just as rays of hope have appeared on the broader financial horizon. Residential housing prices and sales volumes have risen recently in many markets, and investor interest in residential mortgage-backed securities has risen with them. These factors have led many economists to predict modest growth – meaning an end to the recession – by mid-2010.
Still, Standard & Poor’s said, a number of factors in commercial-property lending serve as a reminder of the U.S. economy’s still-fragile state.

In particular, they forecast serious problems with rental properties that were at peak capacity near the height of the boom. Significant recent drops in the cost of buying and renting residential property, the firm said, means “three- and five-year leases coming due for lease rollover in 2009 could cause significant rental declines.”“We believe that the borrowers faced with possible property operating cash flow shortfalls and declining market values will be less likely to fund debt service shortfalls,”

New Foreclosure Numbers Eclipse Recent Optimism

RealtyTrac released its July Foreclosure Market Report Thursday, and the findings are a stark contrast to recent news of healthier markets and price bottoms. More than 360,000 homes received a foreclosure filing last month – a new record. Despite hints that housing markets are beginning to stabilize, foreclosure activity rose 7 percent for the month and is up 32 percent from last year. To put things into perspective, RealtyTrac reported that one in every 355 homeowners in the United States faced losing their home in July.

“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” noted James J. Saccacio, chief executive officer of RealtyTrac. “Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”

Nevada, California, Arizona Post Highest Rates

For the 31st consecutive month Nevada documented the nation’s highest state foreclosure rate, with one in every 56 homes receiving a foreclosure filing in July — that’s more than six times the national average. Initial default notices in Nevada decreased 18 percent from the previous month, likely the result of a new state law requiring lenders to offer mediation to homeowners facing foreclosure. But scheduled auctions and bank repossessions in Nevada both increased more than 20 percent from the previous month, boosting overall foreclosure activity in the state by 4 percent.

Initial defaults in California spiked 15 percent from the previous month, pushing the Golden State into the No. 2 spot on RealtyTrac’s list for the third month in a row. One in every 123 California homes received a foreclosure filing in July. Scheduled auctions were down 1 percent from the previous month, but bank repossessions were up 4 percent.

In Arizona, one in every 135 housing units received a foreclosure filing in July, the nation’s third highest state foreclosure rate. Scheduled auctions, the first public record in the Arizona foreclosure process, jumped 25 percent from the previous month, while bank repossessions stayed flat.

Other states with foreclosure rates ranking among the nation’s 10 highest were Florida, Utah, Idaho, Georgia, Illinois, Colorado, and Oregon.

Usual Suspects Account for Half of Activity

Four states accounted for nearly 57 percent of the nation’s total foreclosure activity, according to RealtyTrac’s market data. California had 108,104 properties with foreclosure filings in July, Florida had 56,486, Arizona had 19,694, and Nevada 19,535.

Other states with total foreclosure filings ranking among the 10 highest in the country were Illinois (14,524); Texas (12,077); Georgia (11,136); Ohio (11,021); Michigan (8,257); and New Jersey (6,467).

Notably, foreclosure activity in Michigan dropped 39 percent from the previous month, mostly due to a 66 percent decrease in scheduled auctions. A state law that took effect July 6 requires lenders to provide delinquent borrowers with contact information for approved housing counselors before scheduling a foreclosure auction. The law freezes foreclosure proceedings an extra 90 days for homeowners who commit to work on a loan modification plan.

Report: California Foreclosure Prevention Act Fails To Slow Filings

Despite state lawmakers’ efforts to curtail home losses, a record number of California foreclosures are now scheduled for sale – that’s according to a report released Tuesday by ForeclosureRadar, a local company that tracks every foreclosure in the Golden State and provides daily auction updates.

High-level findings of ForeclosureRadar’s July California Foreclosure Report include:

· Filings of new Notices of Default were little changed from June. A total of 44,996 default notices were filed during July, a 1.5 percent decrease. However, year-over-year filings rose by 11.9 percent from July 2008.

· Notice of Trustee Sale filings bounced back to 39,294 in July after dropping the previous month. The California Foreclosure Prevention Act, which adds 90 days prior to the filing of the Notice of Trustee Sale for lenders that do not have a loan modification plan in place, had only a fleeting impact last month. Notice of Trustee Sale filings hit their second highest level on record in July, just two weeks after the law took effect.

· After increasing for three consecutive months, foreclosure auction sales dropped by 22.7 percent to a total of 17,239, with a combined loan value of $8.08 billion dollars. Opening bids set by lenders were an average of 39.1 percent lower than the loan balance, with nearly half of sales discounted by 50 percent or more.

· Sales to third-party bidders were flat from June, with 2,683 foreclosures sold to investors, or in increasingly rare instances, junior lenders. As a percentage of total sales, those to third parties continued to increase, though lenders still took back 84.4 percent of foreclosures at auction, representing 14,555 loans with a total of $6.93 billion dollars in loan value.

· Foreclosures scheduled for sale rose to 124,874, a 10.4 percent increase from the prior month, and a 93.3 percent increase over the same time last year. The year-over-year gain is significant given that foreclosure sales in July 2008 set a record that has not again been reached.

“Despite the failure of the California Foreclosure Prevention Act to slow Notice of Trustee Sale filings it is clear that lenders and servicers are delaying foreclosure” said Sean O’Toole, founder and CEO of ForeclosureRadar. “More homeowners are now sitting at the brink of foreclosure, just days away from the next scheduled auction date than ever before, yet we simply aren’t seeing the wave of foreclosures many predicted.”

Political pressure, financial incentives, and the postponement of sales awaiting the completion of loan modification trial periods are likely reasons for the delays. The vast majority of foreclosures, 72 percent, are being delayed at the lender’s request or as mutual agreement between the lender and borrower. Only 10 percent are being postponed due to bankruptcy.

According to ForeclosureRadar’s report, the average California foreclosure has a total loan balance of $425,134 on a home that is now worth $236,739. While negative equity is a prerequisite for the vast majority of foreclosures in California, the degree of negative equity varies a great deal by location.

Foreclosures in Santa Cruz County had loan balances just 110 percent of the current estimated value, while in Merced County loan balances average 283 percent higher than the estimated value. The Bay Area counties of Santa Cruz, San Francisco, Marin, and San Mateo were among the least underwater during the month of July. Inland counties including Merced, San Joaquin, Stanislaus, Solono, Sacramento, San Bernardino, and Riverside were the most underwater.

Countrywide Borrowers Begin Receiving Notices of Foreclosure Reimbursements

State officials have begun mailing letters to Countrywide customers who may be eligible for foreclosure relief payments. Countrywide’s parent company, Bank of America, said it will begin issuing checks to borrowers during the first quarter of 2010.

The reimbursements are part of the agreement reached last October between Bank of America, who acquired the once-subprime-leader in 2008, and state attorneys general from across the country to settle allegations of predatory lending brought against Countrywide.

Up to $150 million is allocated nationally to provide assistance for certain borrowers who experienced a foreclosure, short sale, or deed-in-lieu of foreclosure on their Countrywide mortgage. Forty states are participating in the program. Borrowers will be notified by letter from their state if they are eligible to receive a settlement payment.

Rust Consulting, a third-party administrator, will manage notifications and payment processing for eligible homeowners.

The foreclosure relief program is one of three components of Countrywide’s 2008 agreement with state attorneys general. The second part, the National Homeownership Retention Program, calls for the bank to modify loans and lower mortgage payments for up to 400,000 borrowers who financed their homes with subprime or payment option adjustable-rate mortgages serviced by Countrywide.

The third component of the agreement provides relocation assistance to borrowers who experience a foreclosure sale and agree to leave the property voluntarily. They are eligible for a cash payment to help them transition to a new place of residence.

Countrywide admitted no wrongdoing under the agreement reached with state prosecutors, and as a result of the unprecedented settlement totaling $8.4 billion, the individual states dropped their lawsuits against the lender.

Florida Attorney General Bill McCollum, though, has filed a separate suit against former Countrywide CEO Angelo Mozilo, alleging the subprime leader employed deceptive marketing and sales practices to lure borrowers into risky, high-cost mortgages and then knowingly resold those unsustainable loans to securities investors.

According to a report by the Miami Herald, Mozilo is seeking to have the case dismissed on grounds that the Broward Circuit Court in Florida has no jurisdiction over him as a California resident. The hearing on Mozilo’s dismissal motion, originally scheduled for Wednesday, has been postponed but no new date has yet been set.

Mozilo also faces civil charges of fraud and insider trading brought by the Securities and Exchange Commission (SEC) last month.

Foreclosures Comprise Half of Q1 Purchases

While most of the real estate world is still reeling from sunken property values and the effects of the housing bubble fallout, one type of property out there is in hot demand. New statistics released by Los Angeles-based Foreclosure-Support show that during the first quarter of 2009, one out of every two home sales in the nation was a foreclosure or short sale property. Experts with the company say that this data is indicative of a trend that has been growing among homebuyers for the past two years.

Steve Siefken, business analyst for Foreclosure-Support, said, “After the market crashed no one was buying anything. But once foreclosures started to come onto the market in bigger and bigger numbers, I think people began to take notice and thought, ‘Hey, there’s a potential for deals here.’”

Foreclosed homes often sell for extremely large discounts, especially in areas where there are a lot of foreclosures available. Foreclosure-Support says depending on the location and condition of the property, a foreclosure now goes for anywhere from 10 percent to 60 percent off the price it was selling for only a year ago. And even though property values across the country have plummeted, the company says investors are now snatching up distressed properties in anticipation of the eventual turn-around.

Siefken explained, “At first, it was mostly the professionals at foreclosure auction, just like always. Then we got reports of certain sales in the high-demand areas like Texas, California – they were seeing record turnouts at these sales. But the interesting thing was that even though there was high competition, these properties were still going for way less than what was originally paid for them, so the value’s still there.”

High-demand areas like Los Angeles, Miami, and Charlotte, North Carolina, all report significant increases in foreclosure sale attendance. Foreclosure-Support says more foreclosures actually signify smart investment opportunities for savvy buyers.

Foreclosure-Support specializes in providing daily updates of foreclosure listings and foreclosure information from across the nation. With over a decade of experience in the foreclosure marketplace, Foreclosure-Support says its team helps buyers and investors get a detailed perspective on the foreclosure marketplace so they can make informed and profitable purchases.