Sunday, July 29, 2012

Eminent Scopolamine Mortgage Seizure Update

I continue to read updates on this insane plan and my initial response is always that there just simply is no way it will be allowed to push forward. However, a dedicated reader highlighted the plan has spread to Chicago and they're having hearings on it. One can hope that whomever is at the hearings will not be in a drug-induced coma and see the glaringly obvious problems surrounding this idea, but just in case I'll highlight a few in a an easy to read bullet point format:

"some arguing that the initiative may actually do more harm than good", from the article.
  • No more mortgages available to Cook County residents. Ever. Big bad mortgage lender finds out that in Cook County, they're contracts are worthless. Why would they ever, ever lend here again. No one would ever lend in Cook County again, and home prices would dramatically decline. After homeowners were devastated by the new equity losses, the law would ultimately be reversed, similar to what happened in Georgia when they pushed through a flawed assignability law.
  • One municipality is simply stealing from residents outside the municipality - the victims will not be happy. The plan is to focus on Non-Agency mortgages first, then Agencies. So, the responsible mortgage payer in one part of the country (via their ownership of pensions, mutual funds, and ultimately Fannie/Freddie/Ginnie) will ultimately be bailing out irresponsible mortgage defaulters in another part of the country (Cook County, in this example). Can someone pull out the history books and see what happened the last time a State seceded? Oh yeah, it was something about States feeling their rights to govern themselves were infringed on due to some constitutionality thingy - even though the key argument was over slave ownership (aka their property, in their opinion, not mine) not their property in the sense of retirement accounts, investments, tax dollars, but I can see the correlations. Please feel free to call me crazy in the comments.
  • Does nothing to help the struggling homeowner. They're only focusing on mortgages that are current, but underwater. So, your typical beneficiary has no problem making the mortgage payment, the value of their collateral has simply declined - instead of having to post new collateral, this is suggesting they just get a pass on their losses... I can't even dream up the situation where that makes sense. It certainly doesn't solve any problems, and only creates more. I guess if you bought a house with your savings, and no mortgage, and the value declined we should just send you a check for your loss - heck, if you bought an apartment building as an investment, you should get a check for your loss too. Let's let our government(s) pay for it so basically every investment everyone makes will never lose. I'm sure it will work out fine...
  • The community on the forefront of this idea is going bankrupt. Are we really suggesting that we should look to a community who has failed to manage its expenses properly for solutions to a complex financial issue?

Cumulative Defaults slightly lower than expectations (Fitch)

Fitch reports,

Cumulative default rate for fixed-rate CMBS increased 25 basis points to 13.2% as of the second quarter of 2012 (2Q'12). The steady increase in the default rate has so far in 2012 has been slightly better than Fitch's expectations.

Earlier this year, Fitch predicted that cumulative defaults would reach 14.5% by year end 2012. Newly defaulted loans for 2Q'12 total $2.1 billion (143 loans). Following the trend from first quarter 2012, office continues to lead new defaults at 44% with retail following at 34% by balance, respectively.

The total universe represents fixed-rate deals issued between 1993 and 2012, totaling $569 billion (excluding the Freddie Mac securitizations). Loans are considered defaulted if they have been reported 60 plus days delinquent at least once.

Tuesday, July 17, 2012

Bloomberg states that new issue CMBS LTVs exceed 100%

Of course if you actually make it to the 8th page of Ms. Mulholland's Bloomberg article...
Lenders use a different formula to calculate a property’s value relative to loan size than Moody’s, resulting in a lower leverage ratio. On a $1.35 billion offering from Morgan Stanley and Bank of America Corp. sold last week, the issuers estimated the average office loan in the pool to be equal to 65.5 percent of a building’s value, compared with Moody’s 109.7 percent, according to the rating company’s assessment of the transaction.
So Morgan Stanley and Bank of America are using appraisals, and Moody's is basically making up a number. It should really just say that at the very top of the article. Moody's takes two numbers to estimate their version of the LTV for a property, stabilized income (so not actual current income, which is what is commonly used in CMBS 2.0 appraisals, and even many CMBS 1.0 appraisals) and higher cap rates then the current or even near-term projected cap rates. While I'm not so naive to believe that appraisals are always accurate. However, it is equally naive (at best) and potentially dangerous for Moody's to imply that this is an accurate accounting of value. Last year, they had the nerve to actually state the following:
In contrast, Moody’s LTV highlighted the growing credit risk late in CMBS 1.0 and is much more consistent with the now evident performance patterns of recent vintages.
So, they would have you believe they saw the storm coming, but continued to rate the bonds exactly the same despite believing that the vast majority IG-rated CMBS they put their stamp on was underwater and would likely be downgraded?

I do believe that Moody's Stressed LTV is useful in analyzing loans in a deal, but it should clearly be labeled as such. In papers specifically about the measure, they label it Moody's Stressed LTV, and highlight that it may be useful in identifying potentially overlevered properties within the confines of a model. But they also seem comfortable with allowing a reporter to publish articles such as the Bloomberg article above and frequently will just call it Moody's LTV.

Monday, July 16, 2012

Skyline Appraisal Wrong... Again. *CORRECTION*

 The appraisal was correct this most recent time - the Trustee just didn't know about it and told Nom Nom the value must be wrong. Nom Nom posted a correction this afternoon, and also noted that

The discrepancy between the various reports, as well as the miscommunication between the master servicer and special servicer, highlights a major issue facing CMBS market participants. We encourage further efforts to improve in-place reporting and communication to limit data errors of this nature.

Nomura noted in a research report today that the servicer submitted the wrong value in the remittance report for the appraisal on Skyline Portfolio (GECMC 2007-C1, JPMCC 2007-LDPX), for the second time. Actually, they go on to say that at one point they changed the first wrong value to the original appraised value (also wrong), so it's been wrong at least twice!

Kind of makes wonder what other kinds of mistakes are being made...

Nomura also noted their target loss severity is at 32% on the loan now, and they're looking for an A/B modification.