2 Commercial Foreclosures Speak Volumes About How Bad The Market Is

 Two recent transactions involving failed class-A office properties in two different markets speak volumes about the depth of the commercial sector‘s crisis. Fort Worth's Burnett Plaza has dominated the city's skyline as its tallest building since 1983. In San Jose, the property at 3100 North First Street was similar to one of the city's premier commercial destinations. Both properties became distressed assets that sold for pennies on the dollar.

Standing over 500 feet tall, Burnett Plaza included 40 stories and one million square feet of Fort Worth's most desirable commercial and retail space. Surrounded by a public park, Burnett Plaza was the kind of building businesses moved into as a signal to the world that they had arrived. As is the case with any high-rise, the higher floors were the most expensive and the leases were normally triple net.

Burnett Plaza was a bona fide financial powerhouse for much of its life. In the years since its construction, its consistent rental returns helped it appreciate until 2021 when NYC-based Opal Holdings LLC bought it for $137.5 million. At the time, most people would have felt confident Burnett Plaza would continue to appreciate and earn money for its new owners. However, that didn't happen.

COVID hit the commercial real estate market with all the force of a Category five hurricane, and like most big cities, Fort Worth took it right on the chin. Burnett Plaza's occupancy plunged to 78%, which is disastrous because the building needed 95-96% occupancy year-round to make money. There was no way Burnett Plaza could even cover basic expenses at 78% occupancy, and it wasn't long before Opal Holdings fell behind.

Public records show $1.6 million in mechanic's liens filed against Opal Holdings by unpaid contractors. Then, Opal Holdings defaulted on a $13 million loan to Pinnacle Bank, which initiated foreclosure proceedings in early 2024. Despite being assessed as worth $104 million by the Tarrant County Assessor’s Office, Burnett Plaza was bought back at auction by Pinnacle Bank for only $12.3 million.

That translates to about $12.30 per square foot for a building Opal Holdings originally purchased for $137.50 per square foot. It's safe to say that even Pinnacle didn't expect to purchase the entire building for less than the loan’s outstanding balance they foreclosed on. By all accounts, it was a financial disaster for Opal Holdings and their investors. However, Burnett Plaza is just one of many deeply distressed commercial assets.

Fort Worth wasn't the only down commercial market in the country. Until recently, San Jose, California was one of America's strongest commercial real estate markets. San Jose was ideally situated in a Northern California location that made it accessible to both tech giants and venture capital mavens. For much of the 2000s, its office market reflected that reality and the property at 3100 North First Street was in the epicenter of the city's business district.

The property was on the corner of Montague Expressway and North First Street, giving its tenants easy access to the adjacent light rail line. That meant many people lucky enough to work at 3100 North First Street had the bonus of being able to take public transportation from their homes in the suburbs to the office. 3100 North First Street featured roughly 100,000 square feet of San Jose's finest commercial space.

It was such an appealing property that Vista Investment Group of Santa Monica, California paid $25 million in 2018. The timing of that purchase looked very good because Chinese Electric Automaker Nio USA leased out a large chunk of space at 3100 North First Street in the same year. Unfortunately for Vista Investment, Nio USA's lease expired in October 2023, and they didn't renew it.

By then, commercial real estate vacancy rates were climbing nationwide and there was a huge glut of open office space all over Northern California. Perhaps not coincidentally, October 2023 was also the first month Vista Investment Group began missing mortgage payments. Vista continued missing payments until East West Bank financed the original purchase and initiated foreclosure proceedings.

When past due loan balance, late fees, and interest were calculated, Vista Investment was $25 million in arrears. In an echo of the Burnett Plaza foreclosure, a subsidiary of the original lender bought 3100 North First Street for just $18 million. The drop in cost per square foot isn't the same as Burnett Plaza but 3100 North First Street was an unmitigated disaster for all parties involved.

Considering nearly $1 trillion in commercial loan debt is set to mature in 2024, many more foreclosure fire sales on premium office properties will likely be nationwide. That's only going to push their value down even further. While no one can be certain where the bottom is, Burnett Plaza and 3100 North First Street are evidence that commercial real estate could get much worse before it gets better.

https://finance.yahoo.com/news/two-commercial-foreclosures-speak-volumes-173011103.html

Freddie Mac proposes buying home equity loans

 Government-backed mortgage securitizer Freddie Mac is considering whether to broaden out its portfolio from first-time mortgages to become a purchaser of home equity loans, a move that could offer borrowers more favorable terms than those of private credit markets.

Public comments closed less than a week ago on the proposal, which is getting praise from low-income housing advocates and disapproval from bankers and Republicans.

The new rule, which would provide borrowers a cheaper loan option than cash-out refinancing, is specifically responsive to the higher interest rate financing environment that is putting the squeeze on the housing sector. Interbank interest rates currently sit at an effective 5.33 percent, their highest levels since 2001.

“In the current mortgage interest rate environment, a closed-end second mortgage may provide a more affordable option to homeowners than obtaining a new cash-out refinance or leveraging other consumer debt products,” the Federal Housing Finance Agency (FHFA) wrote in its proposal.

FHFA is the federal agency in charge of overseeing Freddie Mac — formally known as the Federal Home Loan Mortgage Corporation — and Federal National Mortgage Association, also known as Fannie Mae.

Fannie and Freddie each buy mortgages and package them into mortgage-backed securities, which are purchased by investors. The sales are intended to broaden the pool of Americans who can afford home loans and keep rates lower.

In a scenario comparing the new home equity loan proposal to a cash-out refinancing option, borrowers could save $136.77 in monthly payments as a result of the new product, FHFA said.

The new type of loan is the first time Freddie Mac or any of the government-sponsored enterprises (GSEs) that underpin the U.S. housing market have offered a fundamentally new type of product since they were nationalized as conservatorships in the wake of the 2008 financial crisis.

“We applaud Freddie Mac for its innovation and identifying a need in the market and seeking to create liquidity for a mortgage product other than a first lien mortgage loan,” Garth Rieman, a director of the National Council of State Housing Agencies, which advocates for low-income housing groups around the country, told the FHFA last week.

Rieman said the bounds of the new rule should be expanded, allowing for secondary loan amortization write-offs to extend throughout the course of the primary loan rather than cutting them off at a 20-year limit, as proposed.

Bankers and Republicans are against the new product proposal and fear it will cut into the business of the enormous private lending market. In 2022, there were $37.8 billion in secondary loan originations and $211.1 billion in maximum credit extended to borrowers, according to a 2023 study of the home equity loan market by the Mortgage Bankers Association, a trade group for home lenders.

“Government subsidization will not only enable the proposed product to offer terms that are economically impossible for private capital to match, but represents a vast (albeit indirect) expansion by the GSEs into these other credit markets,” Republican legislators including Sens. JD Vance (Ohio) and Mike Crapo (Idaho) as well as Reps. Warren Davidson (Ohio) and Blaine Luetkemeyer (Mo.) wrote to FHFA on Friday.

Several Democratic congressional offices declined to comment on the proposal, including those of House Financial Services Committee ranking member Rep. Maxine Waters (Calif.), and Senate Banking Committee Chair Sherrod Brown (Ohio). The White House also declined to comment, referring questions to FHFA.

Asked about precedents for the new product, its effect on private lending markets, and how exactly it will be securitized, the FHFA told The Hill on Tuesday that it is “reviewing comments from the public to inform our evaluation of this proposed new Enterprise product.”

“As with all activities FHFA considers, the safety and soundness of the [GSEs] and the mortgage finance system are fundamental requirements of any program,” the agency added.

Bankers blasted the secondary mortgage from Freddie Mac as unnecessary.

“The Freddie Mac proposal published by FHFA offers no data to support an assertion that the private market is not sufficiently meeting the demand for these second liens,” Joseph Pigg, senior vice president of the American Bankers Association, wrote to FHFA last week.

“While our members report growing demand for second liens, they have not raised concerns about insufficient capacity,” he wrote.

While FHFA says that resolution and loss-mitigation servicing for second mortgages would basically work as it does for first mortgages, private insurers are also against the proposal, arguing that it’s “duplicative of an already active private market, and raises important, unanswered questions,”said Seth Appleton, president of the U.S. Mortgage Insurers trade group.

Despite the pushback from bankers and insurers, one industry representative told The Hill that because it’s the first time the GSEs are offering a new product since the 2008 collapse of the banking sector, the move represents a first test of a new rulemaking process.

Accordingly, mortgage bankers are stressing that there are still a lot of unknowns about what’s going to emerge.

“What does Freddie Mac estimate base loan pricing will look like? Will pricing be equitable for lenders of all sizes?” Pete Mills, head of residential policy at the Mortgage Bankers Association, wrote to FHFA.

Amid higher interest rates and a concentration of consumer-facing inflation in the housing sector, housing agencies have shown some sensitivity to the pressures facing renters, tenants and mortgage holders.

In April, the Department of Housing and Urban Development put in place what amounts to a 10 percent rent increase cap for the low-income housing tax credit, a move that was hailed by tenant rights advocates.

https://thehill.com/business/4689663-freddie-mac-proposes-buying-home-equity-loans/

Zero Percent Down Mortgages Return, What Can Go Wrong?

 It’s a perfect time to do something really stupid, like offering zero percent down payments on mortgages.

Case-Shiller national and 10-city indexes via St. Louis Fed, OER, CPI, and Rent from the BLS

Perfectly Stupid Timing

Morningstar reports One of the Biggest U.S. Lenders is Offering 0%-Down-Payment Mortgages for First-Time Home Buyers.

Home buyers will be able to buy a home without putting any money down under a new program launched by United Wholesale Mortgage, one of the largest U.S. mortgage lenders.

The Pontiac, Mich.-based company’s new program will be available to first-time home buyers and people earning at or below 80% of an area’s median income, the company said in a press release.

UWM (UWMC) will give eligible buyers a second-lien loan of up to $15,000, in the form of down-payment assistance, for 3% of the home’s purchase price. The loan will not accrue interest or require a monthly payment.

“Homeownership is something we’re very passionate about,” Melinda Wilner, chief operating officer at UWM, told MarketWatch.

The company had previously allowed buyers to put down as little as 1% on their homes, but it wanted to go further to help home buyers, she said. The lender is anticipating a higher volume of borrowers with its new zero-down program, Wilner added.

Poor underwriting practices were a key driver of the subprime-mortgage crisis in the U.S., the International Monetary Fund wrote in 2008. But unlike the low- and no-down-payment loans that proliferated during that time – when lenders made loans to people who eventually were unable to pay them and lost their homes – UWM’s program is different, Wilner said.

“The aspect of this program that makes me nervous is the silent second mortgage,” Anneliese Lederer, senior policy counsel at the nonprofit Center for Responsible Lending, told MarketWatch in an interview. “It’s great that there’s no interest on it, but it’s a balloon payment, and borrowers need to understand what a balloon payment is.”

A balloon payment refers to a bigger-than-usual one-time payment that is required by the lender at the end of the loan term, according to the Consumer Financial Protection Bureau.

On its website, UWM states in the fine print at the bottom of the page that the second loan “has no minimum monthly payment requirements, a term of 360 months and is fully due as a balloon payment upon the occurrence of either a refinance of the [first mortgage], [or] payoff of the [first mortgage] or the final payment.”

Not Like 2008?!

• Housing prices are stretched
• The economy is slowing
• The lender has no cushion against falling home prices
• There are indications of steeply falling homes in many markets.

OK, we don’t have massive liar loans like we did in 2008. But mortgage affordability is the lowest ever, and unemployment is starting to tick up.

Anything to Keep the Bubble Going

To top it off, these mortgages are explicitly for people who make 80% or less of an area’s median income.

How dumb is that? In general, such borrowers have no down payment, if any savings at all, and many are already likely on the edge.

It would make more sense giving these mortgages to those who make 120% or more of an area’s median income, provided they also have little debt, and just lack the down payment.

Vote Buying

President Joe Biden called on Congress to provide up to $25,000 in down-payment assistance to first-generation home buyers in his State of the Union Address.

These vote buying proposals to keep the economy humming long enough to win an election are always at the expense of those who fall for the scheme.

The loss of a job or any unexpected debt will throw these buyers right over the cliff.

There are many signs a slowdown is underway.

Economic Slowdown Underway

May 24, 2024: Another Massive Revision, This Time Durable Goods, What’s Going On

The Commerce Department revised March durable goods orders from +2.6 percent to +0.8 percent. Now it reports a 0.7 percent gain vs an expectation of -0.5 percent.

May 23, 2024: New Home Sales Sink 4.7 Percent on Top of Huge Negative Revisions

New Home Sales plunged. And the Census Department completely revised away last month’s fictional 8.8 percent rise.

May 22, 2024: Discretionary Spending Tumbles at Target, Shares Drop 10 Percent

Target CEO Brian Cornell said the results show “continued soft trends in discretionary categories.” [The key word above is continued.]

May 22, 2024: Existing-Home Sales Decline 1.9 Percent, Sales Mostly Stagnant for 17 Months

Existing-home sales fell 1.9 percent in April and are also down 1.9 percent from a year ago. Sales have not gone anywhere for 17 months.

Key Highlights

• Existing-home sales faded 1.9% in April to a seasonally adjusted annual rate of 4.14 million. Sales also dipped 1.9% from one year ago.
• The median existing-home sales price rose 4.8% from March 2023 to $393,500 – the ninth consecutive month of year-over-year price gains and the highest price ever for the month of March.
• The inventory of unsold existing homes climbed 9% from one month ago to 1.21 million at the end of April, or the equivalent of 3.5 months’ supply at the current monthly sales pace.

Big Negative Revisions to BLS Monthly Jobs in 2023

On April 24 the BLS released a little-read jobs report that shows reported jobs in 2023 may be wildly overstated.

Business Employment Dynamics (BED) data and and Monthly Job Data both from the BLS, chart by Mish

On April 24, I commented Expect Big Negative Revisions to BLS Monthly Jobs in 2023, GDP Too

The BED report is based on records on 9.1 million private sector establishments. Current Employment Statistics (CES) is the monthly jobs report based on 670,000 establishments.

Obviously, the BED report is more timely, but it lags. CES provides an opportunity for economists (and the president) go gaga over numbers likely to be wildly wrong.

CES Overstatement

• 2023 Q2 CES Overstatement: 489,000 Jobs
• 2023 Q3 CES Overstatement: 832,000 Jobs
• Q2+Q3 Overstatement: 1.321 Million Jobs

Thus, the BLS says that the BLS monthly job reports for 2023 Q2 and Q3 are overstated by a total of 1.321 million jobs.

Zero Percent Down Synopsis

An economic slowdown is underway (see five previous links).

Jobs are overstated by 1.3 million, discretionary spending is faltering, and UWM (UWMC) is offering zero percent down mortgages to buyers most likely to get in trouble if anything goes wrong.

For discussion of the lead chart, please see Home Prices Hit New Record High, Don’t Worry, It’s Not Inflation

The Case-Shiller national home price index hit a new high in February. That’s the latest data. Economists don’t count this as inflation.

Other than the late stages of the 2008 housing bubble, there has been no worse time in history to offer zero percent down mortgages.

https://mishtalk.com/economics/zero-percent-down-mortgages-return-what-can-go-wrong/

'East Midtown’s Roosevelt Hotel could be migrant-free by end of 2024: sources'

 It’s been one year since the city turned the once-proud Roosevelt Hotel into what we once termed a “migrants’ theme park.” 

NYC Health and Hospitals executive Dr. Ted Long cheerfully refrained to Spectrum News NY1 last week a claim he’s made before — that the hotel is the “new Ellis Island” where migrants can get hot meals, help with asylum paperwork, medical care and health screenings.

That’s the PR. The reality is an often squalid creepshow in the heart of commercial East Midtown. Residents who aren’t always comatose camp out on East 45th and 46th streets between Madison and Vanderbilt avenues, seemingly uninterested in the hotel’s warm-and-welcoming facilities. 

3

JLL was tapped by the Roosevelt’s owner to evaluate the property’s potential for large-scale, mixed-use development.Helayne Seidman

More of the building’s storefronts are empty than filled, retailers having fled from rampant shoplifting, harassment of customers and doorfront urination.

But there might be hope. As we reported in February, JLL was tapped by the Roosevelt’s owner, the government of Pakistan, to evaluate the property’s potential for large-scale, mixed-use development.

Although the city paid Pakistan $220 million to lease the hotel as a migrants’ center for three years, we might not have to wait until 2026.

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One neighborhood shop manager claimed the migrants “will be gone” by the end of this year.Steve Cuozzo

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More of the building’s storefronts are empty than filled.Steve Cuozzo

Sources said the deal includes exit options for the city at certain points during the term. One neighborhood shop manager who talks regularly to hotel insiders even claimed that the migrants “will be gone” by the end of this year.

The sooner, the better.

City reps didn’t respond to multiple e-mails seeking comment.

https://nypost.com/2024/05/27/business/east-midtowns-roosevelt-hotel-could-be-migrant-free-by-end-of-2024-sources/

China’s Housing Rescue Has a Poor Track Record in Pilot Cities

 

• Beijing’s big push follows trial runs that made slow progress
• Low rental incomes and debt worries were among key obstacles

China’s big housing rescue aims to build on smaller efforts that are already under way – and struggling to get traction.

The People’s Bank of China this month unveiled $42 billion of funding to help local governments buy excess inventory from developers. Pilot programs on similar lines have been operating last year in eight cities, but they’ve had limited effect in stabilizing property markets, and apparently managed to deploy only a fraction of the allocated funds.

https://www.bloomberg.com/news/articles/2024-05-26/china-s-housing-rescue-has-a-poor-track-record-in-pilot-cities

'How Americans view the economy depends on whether they rent or own'

How’s the economy doing? Your answer may depend on whether you own your home.

The newest data shows that renters are struggling more financially, while homeowners continue to reap the rewards of refinancing during the pandemic when mortgage rates were at historic lows.

The growing divide has complicated the Fed’s efforts to bring down inflation, with homeowners propping up consumer prices with their discretionary spending power.

"The post-pandemic economy is treating people very differently, creating a headache for central bankers," Jeffrey Roach, chief economist of LPL Financial, wrote in a research note this week. "The extreme differences can often get traced back to living situations, as renters have a very different experience than homeowners."

'Unbearable for renters'

Since the start of the pandemic, rents have increased by more than 20%, Roach noted, with renters paying about $370 more each month on average.

"A difficult housing market for people across the country became, in many cases, almost unbearable for renters across the country," Shamus Roller, executive director of the National Housing Law Project, told Yahoo Finance.

How unbearable? Nearly 1 in 5 renters (19%) reported being behind on their rent at some point in the past year, a Federal Reserve report this week found, up from 17% in 2022.

They were also more likely to report not paying all their bills in the previous month than homeowners, even when controlling for income. Across each bill type — water, gas, or electric bill or a phone, internet, or cable bill — renters had higher rates of nonpayment.

"Even if they're not struggling to pay rent, rent is consuming such a large part of their income because they have very little left over for the other things in life and that creates anxiety," Roller said.

"They feel a level of economic insecurity … in the midst of an economy that's doing very well."

'If you own a home, you feel better'

The fortunes of homeowners look a lot different.

Roughly a third of homeowners who had a mortgage refinanced in 2020 or 2021 when mortgage rates hovered around 3% or lower, Roach wrote. As a result, they saved approximately $220 per month on average, with their mortgage payments taking up a nearly historically low share of their disposable income.

And unlike for renters, a mortgage payment is a "fairly predictable cost" going forward, Roller noted, making it easier to budget for future expenses.

"I think if you own a home, you feel better about that," Roller said.

At the same time, home prices have only gone up since the pandemic, creating a record level of home equity that owners can tap through refinancing or home equity loans and credit lines.

That extra cash "added to the spending splurge," Roach wrote, "and created a headache for policymakers dealing with an economy less sensitive to interest rate policy."

Homeowners are more likely to own stocks than renters, so they have also benefited from the handsome gains in the stock market over the last year and a half.

To be sure, homeowners have had to absorb higher homeowners insurance costs.

And those who purchased in the last two years when mortgage rates doubled during the Fed’s inflation-fighting campaign are shelling out $2,100 on average per month on their mortgage payment, or $700 more than those who bought before the pandemic, the Fed study found.

But more homeowners remain in a better financial position than before the pandemic and that has "kept the economy out of the doldrums," Roach wrote.

The question remains how long that will last.

https://finance.yahoo.com/news/how-americans-view-the-economy-depends-on-whether-they-rent-or-own-133030938.html

Homeowners hit pause on remodels as costs get 'just ridiculous'

 Americans are delaying their home renovation plans and opting for more affordable options amid high borrowing costs and a housing market recovery that has yet to materialize.

Two of the nation’s top home improvement retailers reported this month that consumers are spending less on big-ticket projects that often require loans and trading down for more affordable do-it-yourself remedies.

Home Depot (HD), for instance, said big-ticket transactions of over $1,000 were down 6.5% compared to the first quarter last year.

“We continue to see softer engagement in larger discretionary projects where customers typically use financing to fund the projects such as kitchen and bath remodels,” William Bastek, Home Depot’s executive vice president of merchandising, told investors and analysts on the company's first quarter earnings call.

Lowe’s (LOW) said this week consumers are shifting away from buying multiple to single items, pressuring comparable sales, which fell 6.2% in the quarter as homeowners continue to delay larger discretionary projects.

This differs from the early days of the pandemic, where ultra-low interest rates drove housing sales and remodeling spending. But today rates have spiked, causing more homeowners to stay put in their homes.

That means consumers are putting off making bigger investments in renovations to increase resale value of their homes.

And homeowners are cutting costs where they can. A quarterly survey from John Burns Research and Consulting published in late April found that among those who are renovating their homes, customers are looking for cheaper alternatives in categories like cabinets, flooring, lighting fixtures, and countertops.

“These downgrades are becoming more common with cost-conscious consumers,” Matt Saunders, senior vice president of building products research at John Burns, told Yahoo Finance.

Total spending on home improvement and repairs is expected to drop by over 7% in the third quarter of this year to $451 billion, researchers from Harvard University’s Joint Center for Housing Studies’ latest Leading Indicator of Remodeling Activity showed.

“Homeowners have been pinched by high costs,” Abbe Will, associate project director of the Remodeling Futures Program, which is part of Harvard's housing studies center, told Yahoo Finance this week. “Certainly, inflation is as high as it's been across the economy [and] more broadly it's been even more extreme in building materials, and costs of skilled labor.”

Tim Poterek from West Branch, Mich., is among the many homeowners who have been reassessing their renovation plans. Poterek immersed himself in remodeling and DIY projects during the pandemic. Since then, he’s chosen to be more cautious about spending on home improvements.

“To replace anything nowadays is just ridiculous,” Poterek told Yahoo Finance in an interview. “You're paying top prices for lumber, interest rates on credit cards, loans, things like that.”

Poterek is in the process of repairing his shower stall. He originally wanted to replace it but the cost was out of his budget. Instead, he’s been using DIY Facebook groups to assist him in fixing the shower.

“I'll take pictures and post them, usually I get really good ideas and great feedback,” Poterek said.

Tim Poterek trying to figure what to do with his shower stall. He posted it in a Facebook group asking for suggestions. (Courtesy: Tim Poterek)

With the help of experts and other DIYers whose suggestions ranged from taking out screws to cutting out the bulge on the wall, Poterek was able to think creatively about his options.

“To repair [the shower stall], it's probably going to cost me about $25 to $30 thanks to the people that offered me some suggestions,” Poterek added.

Many homeowners have been reacting to higher financing costs by pausing or delaying projects to a further date, about 36% of consumers reported, per John Burns, while 30% of consumers are spending less on remodeling projects.

“Remodeling is being weighted down by that COVID cohort shock to remodeling where a lot of remodeling activity was done at a very short period of time. This is just now working its way through the system,” Saunders said.

The slowdown in renovations may not last for long, according to some industry experts.

Data from the National Association of Home Builders showed remodeler confidence slightly dipped in the first quarter of this year, with the index measuring current conditions staying unchanged for projects of all sizes and the index gauging future activity — the rate at which leads and inquiries are coming in and the backlog of jobs — also remaining flat. Still, the overall index shows more remodelers view the remodeling market conditions as good than poor.

“Demand for remodeling remains solid, especially among customers who don’t need to finance their projects at current interest rates,” said NAHB Remodelers chair Mike Pressgrove, a remodeler from Topeka, Kan.

There are also potential catalysts that could unleash more home improvement activity.

“We're seeing rising household wealth, which is a strong leading indicator for large discretionary model projects,” Saunders said. “We think in the back half of the fourth quarter of this year is when we’ll start to see remodeling grow again.”

“Half of homeowners today are living in homes that are at least 40 years old and that alone is really helping to drive a lot of the replacement spending that has been happening and that we continue [to see] this year too,” Will said.

https://finance.yahoo.com/news/homeowners-hit-pause-on-remodels-as-costs-get-just-ridiculous-132147387.html