THE “HALF-EMPTY” PERSPECTIVE: It is estimated that more than 50 percent of American homeowners are either in or near a negative equity situation. And if all that is not bad enough, check out the latest news:

•  U.S. mortgage applications plunged to a seven-month low last week as demand for home refinancing loans tumbled 30 percent, data from an industry group showed on Wednesday.
• The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended June 26 decreased 18.9 percent to 444.8, the lowest reading since the week ended November 21, 2008.

So why is all of this happening? In addition to plummeting home values, sicking employment rates, and tons of toxic assets on the banks books,  these dismal facts reflect the strict scrutiny that refinances are currently undergoing, with respect to undervalued and/or depressed appraisals, even regarding those 50 percent that have positive equity in their homes.

For example, if you had 40 percent equity, and your property value dropped 30 percent in the last two years, you still have 10 percent left. However, that may not be enough Loan To Value (LTV) to refinance and benefit from the lower rates, given the more stringent bank lending criteria. The pendulum has most definitely swung to the conservative side of the ledger.

So the question is, are there “existing” systems in place to find and motivate the other 50 percent of homeowners and home buyers that actually qualify for financing?

THE “HALF-FULL” FACTS:

• According to the latest statistics by the Federal Reserve, U.S. homeowners still have more than $8 trillion of home equity remaining—even after the record plunge in home sale prices.
• American households still have an aggregate net worth (assets minus liabilities) of $56 trillion.

So keep in mind, there are still many Americans who have positive equity in their homes. The only question is where are they, do they qualify with respect to enough positive equity to meet the more rigorous LTV bank lending ratios, and are they even interested in taking action?

Just something to think about ….

Fannie Mae and Freddie Mac to refinance for homeowners with 125% loan to value ratio. YOU READ IT RIGHT …. 

Deja vu all over again!! Read all the details at the Wall Street Journal.

• The move lifts current 105% limit to aid more borrowers struggling to make payments.
• GSEs to offer new 25 year mortgage for some refinances to accelerate debt payments.

Moody’s has released its April 2009 Moody’s/REAL Commercial Property Price Indices (CPPI) update and it is a doozy: -8.6%, after what many had expected was a shooting green reading of just -1.7% in March.

The problem that many don’t grasp that once capitulation in CRE sets in, the bottom will be torn out.

New York, June 22, 2009 — Commercial real estate prices as measured by Moody’s/REAL Commercial Property Price Indices (CPPI) decreased 8.6% in April, leaving the index at 25.3% below its level a year ago and 29.5% below the peak in prices measured in October 2007.

Moody’s says the large negative return for April likely reflects in part the fact that deals closed during that month were negotiated at the end of 2008 and in the first quarter of 2009, when securities markets and overall sentiment were plunging.

“The size of April’s decline, following a 5.5% decline in January, also suggests that sellers are beginning to capitulate to the realities of commercial real estate markets,” says Moody’s Managing Director Nick Levidy. “While loss aversion is no doubt still in play with many owners, more distressed sales appear to be occurring, resulting in more negative returns and causing larger drops in the index.”

Overall sales volume in the market also fell in April as compared to March, and by count April had the lowest number of transactions in the history of the CPPI.

In the Eastern region, the CPPI shows prices for all four property types declining over the last year, but with apartment prices holding up best. These have declined 11.8% from a year before, compared with drops of 15.9% for industrial properties, 27.2% for offices, and 21.5% for retail.

Overall, the South has been the worst performing region over the last year. All four property types have seen annual declines of more than 20%, with industrial properties falling the most, with a decline of 28.8%.

The indices also show that all four property types have performed worse in Southern California than they have in the Western region as a whole. In Southern California, the office market has been the worst performer, with prices dropping 22.2% in the last year.

The three major office markets — New York, San Francisco, and Washington DC?have all posted signifiicant annual declines. The San Francisco office market saw a drop of 20.3%, while New York had a decline of 12.9% and Washington 21.1%, both less than the yearly decline for the Eastern region of 27.2%.

Moody’s notes the Florida apartment market, like the apartment market in the South as a whole, has experienced three straight years of falling prices. Florida apartment prices are now down 31% from their peak.

The CPPI

Moody’s/REAL Commercial Property Prices Indices are based on the repeat sales of the same properties across the US at different points in time. Analyzing price changes measured in this way provides maximum transparency and methodological rigor. This approach also circumvents the distortions that can occur with other commercial property value measurements such as appraisals or average prices, says Moody’s.

It’s a buyers market, for sure. Nope. No good news here for sellers. Would you believe that Malls in the Northeast would sell for 50% off their highs …

As reported in today at www.ZeroHedge.com, finally we get a market test valuation of the Commercial Real Estate marketplace.   The Buffalo News reports that REIT Developers Diversified Realty (DDR) is selling back 11 upstate

In 2004 DDR acquired 110 properties from Benderson for $2.3 billion, an average price of $21 million, and is now selling back 11 of these for a total price of $160-$175 million, of roughly a $15 million average price, and a 30% discount.

Not bad for Benderson which buying back what it sold 5 years ago at a 70 cents on the dollar. As Retail Traffic points out, this is very surprising as current estimates have been that retail properties would post at most a 40% decline from peak values achieved in 2007.   A 30% discount from a 2004 price implies a significantly higher discount from the peak. Retail Traffic calculated that the final closing discount from the peak is roughly 50%.  As RT points out: 

• There are a lot of things we don’t know about these assets. Are they healthy assets or do they need work?

• What do the current tenant rosters look like?

• Are the rents at market rates or lower?

• When do the leases come up for renewal?

• Did Developers Diversified sell these assets at a deeper discount than is truly reflective of market conditions out of a need to raise cash?

Without this information it is hard to draw a full conclusion on what it means for the market. BUT, the fact remains that this represents a massive drop in values from just more than two years ago.

And the drop in value is larger than even the most pessimistic estimates have been for the peak-to-trough change in prices for retail real estate.

Also, thanks to this market test, one will be able to recalculate what fair Debt-to-Market Value of Assets ratio is for the majority of mall REITs.

The result will likely be a dramatic rise from previously consensual ratios, presenting yet another data point indicative of the REITs bloated overvaluations due exclusively to short squeezes.

One sellers bloat is another buyers opportunity. This is a market where fortunes are gained and lost, quickly.

When Time Magazine gets around to writing about it, you know it must be true (or old news).

From our perspective, unfortunately, the toothpaste has been out of the tube for quite some time. As such, read Stephen Gandel’s article Commercial Real Estate — the Economy’s Anvil.

Many argue the impact of the commercial real market collapse. Some say the exposure is upwards of $1 Trillion dollars in bad loans. 

Here at MarylandCommercialTitle.com we have been documenting this phenomena for quite some time. No need to reiterate the details, but just thought — in terms of your planning — you should know that the CRE demise is mainstream and for real.

Anyone applying for a mortgage or creating mortgage instruments or selling them — BEWARE.

The Chicago Daily New’s Ken Harney highlights a recent Obama administration piece of legislation and program that was put into law May 20th. It may not have made a big news, but for real estate it was the equivalent of a congressional declaration of war - a war against mortgage fraud. 

Every heard of the the Fraud Enforcement and Recovery Act (FERA)of 2009? The legislation will fund new SWAT teams of fraud-busters and broaden federal legal powers to go after individuals and mortgage operations that currently get attention - if at all - only at the state or local levels.  

So what is the scope of the mortgage fraud problem? The FBI’s mortgage fraud caseload has tripled in the past three years. Reports of potential fraud exceeded 65,000 in 2008 - up from about 25,000 in 2005 and just 5,400 in 2002. 

Which States are the worst? According to the 2009 report from the mortgage researchers, the top 10 states where frauds occur are (and they are not all from the most populus States): (#1) Rhode Island (where clearly less is more!), (#2) Florida, (#3) Illinois, (#4) Georgia, (#5) Maryland (had the highest percentage of frauds involving bogus tax returns), (#6) New York, (#7) Michigan, (#8) California - nearly 40 percent of fraudulent applications carried incorrect verifications of deposits or bank statements), (#9) Missouri, and last but certainly not least, (#10) Colorado. 

How much does this mortgage fraud cost us? The Treasury Department estimates it causes losses to homeowners and the mortgage industry of anywhere from $15 billion to $25 billion a year.  

What do these frauds look like? The Mortgage Asset Research Institute performs an annual study of the problem for the Mortgage Bankers Association, and its 2009 report found that: 

• Roughly two-thirds (2/3’s) of all frauds involve deceptions at the application stage.

• About 28 percent of frauds last year involved deliberate misinformation about tax returns or financial statements. Around 21 percent of fraudulent applications contained faked deposit verifications last year.

• Appraisal manipulation, typically inflated valuations, rank high as well, and were involved in about 22 percent of fraud cases in 2008.

Other widespread forms of home loan fraud include:

• Faked employment verifications,

• Misinformation on closing or escrow documents, and

• Credit reports or scores that have been manipulatedin some way to get unqualified borrowers approved, or lower interest rates, or both.

Hopefully by looking back at past mistakes we will learn, and change the way we do business. As such the Fraud Enforcement and Recovery Act of 2009 also created a newly formed Financial Crisis Inquiry Commission (FCIC). The commission has very broad powers to investigate who and what got us into the real estate mess, starting with:

• The sub-prime boom, who triggered the programs (federal, private and hybrid types), and who decided to lower the underwriting standards (greed or government intervention),

• Wall Street and their Mortgage Backed Securities (MBS) bundling and the CRE’s Commercial Mortgaged Backed Securities (CMBS) and

• AIG’s “non-insurance” derivative products which was not regulated by anyone,

• The failure of rating agencies and their practices,

• And more recent bank failures which are building an running at record default levels.

So scammers, both on Wall Street and on Main Street – BEWARE (not that we’re referring to any of our readers, of course!!): Whomever continues with these nefarious activities is likely to end up either before a grand jury getting hit with a big fine or doing prison time.Everyone’s now been warned. There’s a new sheriff in town and it’s certainly a new day.

As reported by ZeroHedge today – Mortgage Delinquencies Hit Record High, New Home Sales Disappoint. Green shoot believers, who are forever searching for clues of positive signs of recovery, will be devastated when they see these grave statistics. Sorry but the numbers are the numbers:

• 12 percent of homeowners with a mortgage are behind on their payments or in foreclosure.

• Half of all adjustable-rate loans to borrowers with poor credit were past due or in foreclosure.

• And we still have to see the Option ARM hurricane ready to implode, as outlined extensively in a Blog post provided  yesterday, here.

• California,

  Nevada,

  Arizona and

  Florida accounted for 46 percent of new foreclosures in the country.

Many have said to us, why publish so much negative news. Where is the good news. Two brief answers. First, it is what it is. Facts are facts. It’s very important that you know what “is.” And next, by knowing the bad news — up front – you not only get a heads-up, but you can position yourself to take advantage of these dynamic and sometimes counter-intuitive-looking market conditions. Having said all that, here’s some really negative news on the horizon ….

According to the Blog, Dr. Housing Bubble – which typically highlights the California mortgage implosion, and many feel is at the heart of America’s debt problem — learn the truth about Option ARM’s, Pick-a-Pay Mortgages, and Alt-A Loans: Looking at Wells Fargo, Bank of America and JP Morgan. 

Anyone who wants to project the future of banks’ balance sheets, and the extent that the feds will have to go to right the economy, this one’s for you.

The author concludes that we are in for some severe pain ahead. According to the piece — and this entry is well document and extraordinarily well reasoned — we are currently in the EYE of the $469 Billion toxic mortgage hurricane.   The problem that we will be seeing is the massive onslaught of recasts, not resets that will be occurring over the next few years. 

The full impact of this tsunami is projected to hit in full force in 2010 and we are already seeing many mortgage holders having trouble with actual recasts brought on by negative amortization.

SeekingAlpha’s Jeffrey Bernstein makes the case that – as a friend of mines 15 year old son Max likes to say —  “things are gonna get a whole lot worse before it starts to get betta.”  

Some glass-half-full rosy-eyed thinkers have even argued that the economy is now fixed. You know all the green-shoots and mustard seeds they talk about on CNBC. 

 HOWEVER, the data you are about to see suggests something quite inapposite to this.

Many have asked where are we going and what should we prepare for?  

Our answer is, as we interpret the data: we are just entering the heart of this credit crunch, with likely negative effects on the general economy, if not the credit card market, commercial real estate market and now corporate debt market.

More negative tea leaves of what is to come in 2010. In a sign of what is to come within the coming year, the Architecture Billings Index — which is compiled from a monthly survey of architecture firms around the U.S. – is a clarion call of leading economic indicators (a precursor of building activity over the next year):

• Still showing doward trending …. Demand for design fell less than 1 point in April 2009. The April 2009 rating was 42.8, down from the 43.7 mark in March 2009. Scores above 50 indicate increases in billings and lower numbers show declining workloads.

• Where will we be a  year from now? The Index shows that design demand (and therefore building projects over the next year)is nearly 3 points below its rating a year ago (in 2008)

• April 2009 was the first time since August 2008 and September 2008 that the index was above 40 for consecutive months, but still indicates an overall drop in demand for design services.

Some Good News Regarding Inquiries: The index does point to possible economic improvement, with inquiries by potential clients going up. The new projects inquiry score was 56.8 in April 2009.

Regional ratings:

• 39.2 for the West

• 45.0 for the South

• 40.1 for the

  Midwest

• 47.1 for the Northeast (better than the rest and getting closer to normal!!)

Project types are as follows:

• Mixed practice (44.2)

• Institutional (43.2)

• Multi-family residential (43.2)

• Commercial / industrial (41.7)