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China Home Prices Cooling Off: Is It a Blessing?
Tuesday, January 03 2012 | 10:30 AM
Chief Executive Officer & Co-Founder,
NEWOAK CAPITAL LLC
|The latest home prices data in China confirms the broad-based falling trend for home prices in China. New home prices dropped from the previous month in 49 of the cities monitored by the government, according to the Chinese national statistics bureau. The dampening of home sales and falling prices is a natural outcome of government real-estate industry curbs. Despite the European crisis and other easing measures, the government has reiterated its tightening property policy and intensified the restrictive measures this year by raising down payment and mortgage requirements, and have imposed further home purchase restrictions in key cities. Analysts expect the real-estate policies are targeting home prices to fall by as much as 20% from their peaks in 2011.
The government’s main goal is to reduce speculation in the sector and avoid a drastic credit bubble burst induced by real estate. The restrictive measures seems to be working gradually and are expected to further cool off Chinese property markets throughout 2012. The controlled and gradual falling of Chinese home prices may prove to be a blessing and not cause for concern. In retrospect, it would have been wise if the US government had followed a similar path and imposed more restrictive mortgage lending measures starting in 2004 to prevent the precipitous and uncontrolled home price fall in 2007.
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FDIC Posts Q1 2010 Results - Yee Haw!
Monday, June 27 2011 | 02:27 PM
President / CEO,
|According to today's FDIC Press Release the number of institutions on the FDIC "Problem List" rose to 775 in Q1 up from 700 at the end of 2009.The total assets of these "problem" institutions rose to$431B up from $403B at the end of 2009. Only 41 institutions failed in Q1 (but we have added an addition 33 for Q2 to date).Sounding like a Jon Stewart quote Shelia Bair noted that "the vast majority of "problem" institutions did not fail." To me this is a little like saying that "the earthquake in Haiti did not kill everyone, so things aren't as bad as you think."On a brighter note the release said that the Deposit Insurance Fund (DIF) "improved" from a "negative" -$20.9B to only a negative -$20.7B. Happy days are here again!Further they reported that the FDIC's Liquid Resources stood at $63B a decline from $66B at the end of 2009. So let's do the math : $63B Liquid Resources minus $431B problem institutions equal -$368B add the -$20.7B in the DIF deficit and you get a rosy negative -$388.7B or about half of the original TARP total for all banks, AIG, Auto Industry and Fannie & Freddie. (This number is just for the FDIC)More good news, they reported the number of non current loans rose from 5.38% to 5.45% the highest level in the 27 years that institutions have reported these numbers.Direct Quote for the PRess Release:Chairman Bair concluded by stating, "There will be more failures, to be sure. The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility. But the positive signs I've outlined today suggest that the trends continue to move in the right direction." Oh, in that case please re-read the numbers above and double check my math.So let me end on a truly positive note. The FDIC reported that the nations 7,932 reported a collective Q1 profit of $18B. Of course that includes income from such famed banking institutions as Goldman Sachs, JP Morgan, Citi and BofA who all posted perfect games in Q1 trading whereby they made money each day for 61 consecutive trading days totaling well in excess of the $18B reported by the FDIC. But I'm not an accountant only and interested reader with a calculator.|
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Restarting CMBS Lending
Wednesday, March 30 2011 | 09:53 AM
|The DDR deal, the first CMBS deal after nearly eighteen months, was ten times oversubscribed. The following two deals also saw good demand even though they did not allow for TALF financing. So, clearly, there is good demand for CMBS bonds backed by well underwritten loans. Also, borrowers clearly want loans if they can get a reasonable cost of financing. DDR loan, with about 4.25% all-in cost of financing for the borrower, showed that a low cost of financing is possible even in the current market. Yet, prospects of a conduit style multi-borrower deal seem bleak at the moment. Any CMBS deals that come to market are expected to be single-borrower deals, as in those deals the borrower takes the market risk and not the underwriter doing the deal. Securitization shops do not want to take the spread risk while aggregating the pool because there is no way to hedge that risk, and so are unable to originate loans even though many are eager to restart their lending operation. If they do originate loans without ability to hedge, they would require much wider spread resulting in higher cost of financing than borrowers would find attractive.
Inability to hedge loans while aggregating a pool for securitization is one of the biggest obstacles preventing restarting of conduit lending for commercial real estate properties.
In the past, the conduit originators were able to hedge loans while they were aggregating a pool big enough to securitize. So, they were not exposed to risk from changes in interest rates and bond spreads between loan origination and securitization. The hedging generally involved hedging the interest rate risk by selling interest rate swaps, and hedging the bond spread risk by using Total Return Swaps on Lehman or Bank Of America CMBS indices. These indices allowed loan originators to effectively sell their risk to investors who wanted to gain exposure to CMBS in their investment portfolio. They sold the risk when they originated the loan, and bought it back when they securitized the loans. The hedge worked because spreads on new CMBS deals moved in parallel with the spreads on existing deals.
The problem now is that those indices are no longer appropriate for hedging, especially for new origination loans, because of two problems. One, ratings downgrades have impacted the composition of the indices. Second, and more important, the spreads on new bonds with newly underwritten loans cannot be expected to move in tandem with spreads on old bonds with the old underwriting. This lack of correlation between the two spreads makes the old bonds or indices unusable as a hedge for newly originated better quality loans.
What this means is that to hedge new loans with better underwriting, originators need bonds with better underwritten new loans. In other words, to originate loans, you need bonds with new underwriting, and to create bonds with better underwritten loans, you need the better underwritten loans. That’s the chicken-and-egg type problem of loan aggregation. This is what has prevented loan origination from restarting once the spreads on old bonds widened out.
To solve this chicken-and-egg problem, back in February 2008, I made a suggestion to Markit, which administers the CMBX indices. My suggestion was to create a new CMBX type of index based on future deals that met minimum credit quality. Only deals which met pre-set criteria based on LTV, DSCR, and other credit parameters would be eligible to be included in the new index. Trading of the index would have allowed the market to determine spreads on bonds backed by good newly originated loans, and provided a hedging mechanism for loan originators, solving the chicken-and-egg problem.
Markit discussed the idea in a conference call with the trading desks, but it was thought to require too much work to create, when dealers were busy with the market volatility. Also, the idea was complicated, since it was based on future deals. Additionally, the CMBX is based on CDS (Credit Default Swap), and cash and CDS markets do not always move together, and so the hedge would not have been as good as Total Return Swaps on cash bonds.
Luckily, things have changed since then.
One, Markit has created new indices called TRX, which are based on Total Return Swaps on cash CMBS spreads, which will be a much better hedge for loans than a CMBX or CDS type of hedge. Total Return Swaps are what many originators used in the past to hedge the credit spreads.
Second, new deals with newly underwritten loans have been done and exist now. So, it is not necessary to base the index on future deals, avoiding a lot of complexity. That simplifies things considerably.
One solution to the hedging problem for newly originated loans is to create a new TRX index based on the new deals. It will allow the originators to sell risk, and will allow all the investors (many who did not get any allocations in the over-subscribed deals that have been done recently) to get exposure to new CMBS bonds.
Some may argue that three deals is not enough diversity to create an index. Admittedly, it would be better to have a more diverse pool of deals for the index. However, even with just three deals, the index will allow many originators considering starting origination to solve the chicken-and-egg problem. Also, this by itself will not solve all the problems the CMBS industry is facing. Yet, it will be better to have something, even if it is not perfect, than to have nothing at all.
I urge Markit and the dealers to make available a new index that will be attractive to both loan originators and investors, and just might help solve one of the major roadblocks preventing restarting of CMBS lending.
Note: This article was published on Seeking Alpha.
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