RealEstateFlux

Fannie Mae and Freddie Mac have been seized by the U.S. government in a dramatic step to shore up national and global credit markets. Rather than a single equity infusion, treasury Secretary Henry Paulson announced four separate measures to shore up the ailing mortgage giants: (1) Form a conservatorship to manage daily operations and install new leadership (2) Agreement to cover all loses stemming from mortgage defaults, and in return receive preferred stock in each company (3) Creation of secured credit facility for Fannie, Freddie, and Federal Home Loan Banks (4) Purchase of Mortgage Backed Securities to stabilize pricing and add liquidity to frozen secondary market

According to the Mortgage Banker’s Association, 9.2% of outstanding single family home mortgages were at least a month overdue as of the end of the second quarter. With defaults and foreclosures only expected to rise, it is questionable if Fannie or Freddie would survive without intervention. The two GSEs own or guarantee almost half of the $12 trillion in U.S. home loans outstanding, so without a doubt, Fannie and Freddie meet the test of being too big to fail. Yet government intervention and the risk to U.S. taxpayers is at the heart of criticism of Fannie and Freddie in their current forms. Alan Greenspan criticized the inherent incompatibility of their business models: on one hand they promote affordable American home ownership, yet on the other hand they must maximize shareholder returns. To accomplish this, they borrowed at almost risk free rates due to their quasi governmental status, and then lent at market rates. Furthermore, they never were required to meet the capital reserve standard of private competitors, and were only required to maintain about $75 billion to support their $5.3 trillion portfolio. Fannie and Freddie maintained extensive lobbying operations in Washington in order to keep their mandate to stay in business in spite of the risks their leverage implied.

Warren Buffet commented that “Secretary Paulson has made exactly the right decision for the country. He is minimizing the problem of moral hazard and maximizing the benefits for the housing market and for the smooth functioning of financial markets.”

Bush administration officials argued that Fannie and Freddie are too deeply embedded in the economy to allow them to founder. Indeed, many of the measures might be considered too little, too late if Fannie and Freddie became further compromised.

The question is what impact such sweeping measures will have on the housing markets. The new measures are expected to reduce the cost of borrowing and to bolster housing demand. A look at the S&P Case-Shiller U.S. National Home Price Index begs the question of whether home prices have further to fall. The index began the decade at 100, and by Q2 2006 the index reached a peak of 189.93. Now, the index has fallen to 155.32 - still over fifty percent greater than valuations of only eight years ago. See the Real Estate Flux prediction market here.

Bloomberg | Rebecca Christie and Dawn Kopecki | September 7, 2008

“Our economy and our markets will not recover until the bulk of this housing correction is behind us,” Treasury Secretary Henry Paulson, who engineered the takeover along with Federal Housing Finance Agency Director James Lockhart, said in Washington today. “Fannie Mae and Freddie Mac are critical to turning the corner.”

It is remarkable that while Westfield Group and Simon Property Group are sizing up a tremendous growth opportunity in Europe, Centro Properties Group, with their vastly different capital structure, is selling large chunks of their portfolio at wholesale prices in a race to survive.

In answer to Simon Property Group’s disclosure last week of a 3.5% stake in UK retail REIT Liberty International, Westfield Group has announced their own 2.96% position in the firm. With Liberty coming into play and appearing more and more likely as a takeover target, Simon quickly answered on Tuesday by raising their stake in Liberty to 4.22%.

The real question is whether Simon and Westfield will work together in their bid for this choice UK retail portfolio, or if a bidding war will break out. The stakes are an irreplaceable foothold in the world of British retailing. Some of the highlights of the Liberty portfolio include London’s Covent Garden Estate, a prime tourist destination.

The Real Estate Flux market started with a 35% chance that Simon would be the eventual owner of Liberty’s holdings.

Analysts have noted that the acquisition of Liberty could only be a long term strategic maneuver rather than an attempt to capitalize on any share price discount to Liberty’s Net Asset Value (NAV). Prior to these recent disclosures, Liberty was trading below the NAV of its holdings, yet the stock has soared since the announcements, closing up 5.3% in Tuesday’s trading. Furthermore, the Financial Times reports that “A potential price for Liberty of about £12 a share was being talked about in the London market, a premium to the last stated net asset value of £10.95 per share.”

FT.com | Daniel Thomas | August 27, 2008

“Westfield bought 10.7m shares in June and July at an average price of 835p. The company said that the stake was being held for “investment purposes” and declined to comment further. Simon, likewise, has refused to comment on its intentions, although it is unusual for the company to build indirect stakes in rival developers. This is also its first investment in the British property market.”

Bloomberg | Simon Packard | August 26, 2008

“There’s a track record of takeover collaboration between the two companies,” said John Perry, an analyst at Deutsche Bank AG with a “sell” rating on Liberty. “This looks like positioning for something down the line.”

The Wall Street Journal |William Boston | August 27, 2008

“Both groups have now clearly pulled up a seat at the table,” said Merrill Lynch property analysts in a note to clients. “They could be either working together and looking to divide up the assets, or the move by Westfield could be a defensive move to try and keep new entrants out of this market.” Westfield is currently building the U.K.’s two largest malls. Its Westfield London project is scheduled to open in October and Westfield Stratford City on the grounds of London’s 2012 Olympic Games complex is targeted for a 2011 opening. Simon, based in Indianapolis, operates 323 U.S. properties and 51 in France, Italy and Poland but none in the U.K.”

LandCap Partners today announced the purchase of $80 million worth of loans collateralized by unfinished residential lots from Wachovia at a 50% discount. In a sign of forthcoming price adjustments in residential land,  Jeffrey Gault, CEO of LandCap, was able to structure the acquisition so as to enable further acquisitions from Wachovia, who had no comment on the transaction.

The Wall Street Journal | Michael Corkery | August 20, 2008

“The LandCap venture bought the loans out of a pool of about $350 million in such loans that the bank put up for sale earlier this year. But that pool is just a fraction of Wachovia’s overall portfolio of construction loans. According to Foresight Analytics LLC, about 9.4% of Wachovia’s $24 billion in construction and land loans were delinquent in the second quarter. That is up from a 7.7% delinquency rate in the first quarter.”

MarketWatch |August 20, 2008

“LandCap Partners continues to seek investments in national residential land ranging from unimproved land parcels to finished single family lots. The partnership sells and/or options land to public and private homebuilders and also provides mortgage loans and joint-venture financing to other real estate entities. The team at LandCap has years of land development and homebuilding experience, and the ability to complete construction improvements on its land investments.”

Bloomberg | David Mildenberg | August 20, 2008

“The loans were issued for real estate in Arizona, California, Florida and Illinois, Jeffrey Gault, chief executive officer of LandCap, said in an interview. It’s the first joint- venture with a bank since LandCap raised $350 million last year. Gault said his company is talking with many institutions trying to sell loans. The company bought Colorado property directly from a bank earlier this year, he said.“We are paying fair market value for the loans, they retain a small percentage of the joint venture and they hand over special servicing of the loans, which in difficult times is a tough challenge,” Gault said”

July marked a 9.9% drop in housing starts as builders began work on the fewest number of new homes in the last 17 years. The bloated supply of unsold stock is hampering any reprieve in new home construction.

Bloomberg | Shobhana Chandra | August 17, 2008

Underneath the gyrations, demand continues to weaken. Existing home sales fell to a 10-year low in the second quarter and the median price for a single-family house slid 7.6 percent, according to the National Association of Realtors. A third of all sales were foreclosures or “short sales,” in which lenders take a loss on a property.

A critical turning point for the US economy will be the point at which housing markets begin to stabilize. Moody’s Economy.com previously indicated that the 37% drop from Q1 to Q2 in Stockton, CA might be a bellwether for the California housing markets and signal level of necessary price drops. See the Real Estate Flux commentary here. A similar level of devaluation had to be achieved in Cleaveland before buyers came back to the market in force.

Bloomberg | Brian Louis and Kathleen M. Howley | August 14, 2008

“A housing revival in this city of 438,000 on the shore of Lake Erie may portend deeper drops in U.S. markets. Prices for entry level homes in Cleveland had to tumble 37 percent from a September 2005 peak to an almost 11-year low in March before enticing first- time buyers. That may be a sign that U.S. markets with the biggest price increases during the 2000 to 2005 boom have much further to fall before stabilizing, said David Blitzer, chairman of Standard & Poor’s Index Committee.”

Fannie Mae has announced a $2.3 billion second quarter loss, four times larger than anticipated by analysts. Through the last four quarters of operations, losses at Fannie and Freddie have totaled $14 billion.

The Wall Street Journal | James R. Hagerty and Aparajita Saha-Bubna | August 9, 2008

“Mortgage rates can easily go as much as 0.25 percentage point higher this fall, even if general interest rates remain stable or drop,” said Jim Vogel, an analyst at FTN Financial Capital Markets. Losses are turning out worse than generally forecast largely because home prices have fallen more steeply than expected, particularly in such states as California, Florida, Arizona and Nevada, Fannie executives said on a conference call with investors. That means Fannie and Freddie recoup less money from sales of foreclosed homes. Prices for single-family, detached homes in July were down 28% from a year earlier in California and down 17% in Florida, according to data to be released Monday by First American LoanPerformance. For the U.S. as a whole, the decline was 11%.”

Globe St. | Erika Morphy | August 8, 2008

“Volatility and disruptions in the capital markets became even more pronounced in July, CEO and president [of Fannie Mae] Daniel Mudd said in a prepared statement. “In addition, credit performance has continued to deteriorate and, based on our experience in July, we anticipate further increases in our combined loss reserves.”

Forest City’s first step in the planned 5.5 million SF redevelopment of this former US Naval complex is  a marketing pavilion situated to appeal to fans of the nearby Nationals Major League Baseball team. Total cost of this adaptive reuse project is expected to be $1.7 billion.

CPN | Barbra Murray | August 8, 2008

The Yards will ultimately feature 2,800 residential units for sale and for lease, 1.8 million square feet of office space, 300,000 square feet of retail space and a vast amount of green space. The project will involve the adaptive reuse of five historic industrial structures, one of which will become Foundry Lofts. In addition to Foundry Lofts, the first phase of The Yards will yield a retail center converted from another historic building, and a newly constructed office building.

The leading edge of the housing crisis in California has been the city of Stockton according to Moody’s Economy.com. The foreclosure rate here has been the highest in the nation, and home valuations have lost a whopping 37% since the height of the market in 2005. After this vast loss of housing wealth, sales volume is picking up. From Q1 to Q2 2008, volume has doubled in Stockton, and this leads Moody’s to believe that the California markets may have turned back from the bottom.

Bloomberg | Dan Levy and Daniel Taub | July 31, 2008

“Half off in a decent neighborhood is close to the bottom,” said Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund. Property markdowns of 30 percent to 40 percent give the market “price illumination if not sunshine,” he said.

MoneyNews.com | July 16, 2008

“I’m beginning to hope that there are going to be some surprises in the next few months that would indicate we are at or near a bottom in probably a third to half the country,” said Karl Case of the Case-Shiller Home Price Index.

Case points to the fact that new housing starts fell to 975,000 in April from a peak rate of more than 2.2 million in January 2006. In the past 35 years, only three other times have starts fallen from more than 2 million to less than 1 million.That’s a clear signal, says Case.

Bloomberg | Brian Louis | July 25, 2008

Pulte Homes Inc. Chief Executive Officer Richard Dugas said the proposed U.S. housing bill that offers a $7,500 tax credit for first-time homebuyers may help stop the decline in the housing market this year. “It’s possible we could hit bottom this year if we get enough people coming back in,” Dugas said today in an interview. “It could easily save several months, if not a year on downside for this market.”

Most U.S. homebuilders rose today after new-home sales fell less than forecast in June and the inventory of new homes for sale fell the most in four decades. Builders have also been boosted by optimism that proposed federal housing legislation will spur demand for new homes and further clear the number of unsold new and existing houses and condominiums on the market.

Los Angeles Times | Peter Y. Hong | July 24, 2008

As homeowners lose their houses to foreclosure, builders worry about losing their shirts. Many small builders are struggling to stay in business, and larger, publicly traded development companies are reeling under huge losses as lenders tighten credit and housing sales stall. On Wednesday, Ryland Group Inc. of Calabasas reported a second-quarter loss of $241.6 million, seven times higher than the average estimate of a Bloomberg survey.