U.S. May Existing-Home Sales Fell 9.7% to 3.91m Rate – Lowest Since 2010 (Inventory Low, Median Prices High)

The Covid-19 epidemic is taking its toll on existing home sales. US existing home sales declined 9.7% in May to the lowest level since October 2010.

Inventory of existing home sales remain low despite historic low interest rates while the median price of existing home sales continues to soar.

During the housing bubble, both inventories and home prices rose together. But the reverse has happened since 2012.

Even The Federal Reserve can’t fight a virus. Although The Fed can create asset bubbles.

There is no escaping The Federal Reserve and their bubble-making powers!

Fed Will Begin Buying Broad Portfolio of U.S. Corporate Bonds (Will Munis, Stocks and Residential Real Estate Be Next??)

Well, it was only a matter of time with foreign central banks buying corporate bonds … and stocks.

(Bloomberg) — The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.

The central bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility.

“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”

The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.

The Federal Reserve announced Monday it will begin purchases of individual corporate bonds.

The move comes nearly three months after first unveiling the Secondary Market Corporate Credit facility and one month after it began buying corporate-credit ETFs through the program.

The central bank will “create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds,” according to a press release. (Like Fed Chair Jerome Powell’s portfolio?)

The Fed’s late-March announcement of its move into corporate bond purchases set a floor for risk assets and helped valuations rebound from their pandemic-induced lows.

Speaking of setting floors on risk assets, does that apply to ETF or residential housing too? How about municipal bonds debt like Chicago’s??

Fed Chair Jerome Powell channeling Thurston The Great Magician!

St. Louis Fed researchers say negative interest rates may be needed for economic recovery (L-shaped recovery and the mortgage market?)

Market Watch: Federal Reserve officials from Chair Jerome Powell on down have been pretty consistent in their scorn toward negative interest rates, even as the market briefly priced in the expectation that U.S. rates would fall below zero.

That criticism takes two forms — one, Fed officials say evidence doesn’t show much effectiveness where they have been tried, and two, negative interest rates might throw markets, such as those for money markets, into turmoil.

So it’s notable, if not a signal of future intention, that a publication from the St. Louis Fed argues in favor of negative interest rates.

Like Rudebusch’s -13.52% Fed Funds target rate?

But don’t get your hopes up for negative mortgage rates. At best, 30-year mortgage rates will shadow the already low 10-year Treasury yield. It really depends on how the 10-year Treasury yield responds.

Lowering the Fed Funds Target rate to negative territory may simply steepen the US Treasury yield curve. Or flatten it like in Japan. Note that the Japanese 10-year sovereign yield is .01% and Japan mortgage rates are around 0.440%.

Ignoring the damage done to savers (how low will CDs and deposit rates drop?), the US will likely not see actual negative mortgages.

Fed Chair Jerome Powell will resist negative target rates.

Bill Allowing Commercial Tenants to Renegotiate, Break Lease Deals Advances in California

Only in California.

As the Commercial Observer reports, last Friday, the California Senate Judiciary Committee advanced a bill that would allow small businesses — like cafes, restaurants and bars — to renegotiate and modify lease deals if they have been impacted by shelter-in-place orders and economic shutdowns. If an agreement isn’t reached after 30 days of negotiations, the tenant can break the lease with no penalty, effectively starting a revolution in the world of credit by retroactively transforming commercial loans into non-recourse debt.

Landlord advocates have, predictably, been mobilizing in opposition, arguing that the proposal is unconstitutional, and that it would “upend” leases around the state. Justin Thompson, a real estate partner with Nixon Peabody, told Commercial Observer that it was illuminating to see so many industry organizations come out “so vehemently opposed” in a short period of time. Having heard from industry groups all week, Thompson said the general consensus in the commercial real estate community is that the bill is “overly broad, overreaching, and it is a bit of a sledgehammer” when something less blunt would do.

“Everyone recognizes that restaurant tenants and smaller non-franchise retail tenants in particular really are in dire straits and in need of assistance,” Thompson said. “But I think the implications of SB 939 are really laying it at the feet of landlords, and putting them in the situation where, even if they have tenants that were going to make it through this, they might now rethink that and leave the landlord in the lurch.”

Senate Bill 939 was initially introduced as a statewide moratorium that would prohibit landlords from evicting businesses and nonprofits that can’t pay rent during the coronavirus emergency. But it was amended in the week to also give smaller businesses the ability to trigger renegotiations if they have lost more than 40 percent of their revenue due to emergency government restrictions, and if they will be operating with stricter capacity limits due to continued social distancing mandates.

If the parties do not reach a “mutually satisfactory agreement” within 30 days after the landlord received the negotiation notice, then the tenant can terminate the lease without liability for future rent, fees, or costs that otherwise would have been due under the lease.

One of the bill’s authors, Sen. Scott Wiener, said during the hearing that the bill is focused on the hospitality sector, which has been most devastated. The renegotiation provision will not apply to publicly owned companies or their businesses. The law would be in effect until the end of 2021, or two months after the state of emergency ends, whichever is later.

Quoted by the Commercial Observer, Wiener argued that the state faces “a mass extinction event of small businesses and nonprofits in every neighborhood,” and the “very real prospect” of them permanently closing due to prolonged mandates that reduce capacity, “chopping in half someone’s business.”

“This would change the face of our state permanently,” he said. “It would severely hamper our ability to recover.”

And while not everyone shares this view, most seem to agree on one thing: one way or another California is screwed. Matthew Hargrove, senior VP of government relations for the California Business Properties Association (CBPA), wrote a letter to the committee saying SB 939 “could cause a financial collapse.”

So, the choice facing California is either a “mass extinction event of small businesses” or “financial collapse.” Sounds about right.

* * *

“This postponement of rents will cause … landlord’s financials to crumble and lead to lenders putting out cash calls to lower loan balance and foreclose when landlords cannot pay, and cripple landlords’ abilities to keep their properties open and maintained,” the letter read. CBPA also argued it is unconstitutional for a state to pass a law impairing the obligation to contracts, and warned it would “allow one party to unilaterally abrogate real estate leasing contracts.”

CBPA is the designated legislative advocate in California for the International Council of Shopping Centers, the California Chapters of the Commercial Real Estate Development Association, the Building Owners and Managers Association of California, the National Association of Real Estate Investment Trusts, AIR Commercial Real Estate Association, and others. Those groups also warned members and clients about the bill, and voiced opposition during the hearing on Friday.

Thompson added that the bill risks crushing foundational landlord-tenant relationships throughout the state. Worse, if it passes in California and is adopted in other states across the country, the very foundations of modern finance would be shaken resulting in catastrophic consequences.

“Everything we do, especially in real estate, runs on relationships,” he said. “I think that when you tip the balance so far in favor of the tenant the way that [SB 939] does, it certainly strikes at the heart of the idea that we are in this together. … This does not make it feel like landlords and tenants are in this together anymore.”

The law firm Buchalter, which has offices in L.A., Orange County, San Francisco and around the West Coast, warned clients that the bill sets a “terrible precedent” that will “upend all your leases.”

“The rights afforded under SB 939 would effectively rewrite every commercial lease in California” other than publicly traded companies, the firm said. It “negates all current commercial leases to the benefit of one business over another.”

Instead, Buchalter said the state should provide assistance to tenants impacted by the stay-at-home orders, and pointed to the “more reasonable” renter relief proposals introduced by Senate Pro Tem Toni Atkins

Wiener said they are sensitive to the needs of property owners in terms of their loan obligations.

“It’s a complicated issue. We don’t want these property owners to default on their loans,” he said. “But we also need to be clear: these landlords aren’t going to be able to collect the pre-COVID rents from these restaurants, bars and cafes. That is not the reality. The choice is not between full rent and reduced rent. The choice is between reduced rent and no rent.”

He argued current leases negotiated before the pandemic reflect a “different financial reality.”

“Restaurants, bars, and cafes are expected, frankly, to just suck it up, and magically come up with the high rent that was obtained in pre-COVID circumstances,” he said. “This provision is not for leases to be terminated. It is to provide space and incentive to actually get the renegotiation done. … We know that overwhelmingly, these businesses don’t want to close down. This is their life’s work, they want to find a way to survive.”

Wiener said many commercial landlords are already working with renters, waiving backrents, and restructuring leases.

“It’s not in anyone’s interest where the landlord gets no revenue,” he said. “Sadly, on the other hand, all too many commercial landlords are refusing to renegotiate; are insisting that the pre-COVID, unrealistic rent be paid; are invoking lease-rent escalators; are imposing late fees on backrent. That is happening all over the state.”

During a press conference Thursday, Roberta Economidis, a partner with GE Law Group hospitality law practice, said that in order to survive, “hospitality-related businesses need long-term rent relief, not simply a deferral of high rents now that will become an insurmountable debt later.”

Governor Gavin Newsom already gave local governments authority to halt commercial evictions, and some cities like San Francisco and Los Angeles quickly did so. But SB 939 would cover all California businesses and nonprofits from eviction, whether their local jurisdictions have acted to do so or not.

SB 939 will be heard in the Senate Appropriations Committee this month; if passed it will trigger the next wave of devastation in the commercial real estate space.

Image if this happens in Virginia, Maryland and Washington DC for office market?

NY, NJ Lead USA In Mortgage Forbearance (Forbearance Is NOT Forgiveness)

Forbearance allows troubled mortgage borrowers to delay payments.

If you have a federally-backed mortgage, you simply need to contact your lender and let them know you won’t be able to pay your mortgage bill due to the current public health crisis. Lenders are required to approve forbearances regardless of your delinquency status.

Additionally, you won’t need to provide documentation such as costly medical bills or evidence of a job loss to prove your hardship when you apply, although you will want to demonstrate it later.

Through the CARES Act, you have the right to request forbearance for up to 180 days, with the possibility of another 180 days if you’re still under financial distress. As part of the relief program, you will also be given a mortgage payment reduction option, where future make-up payments will be spread out over 12 months or added to your mortgage payment once the reduction period is over.

As of March 18, the law also includes a foreclosure moratorium of at least 60 days which prohibits lenders and services from taking foreclosure-related eviction action during this period.

WHERE is forbearance prevalent? New York and New Jersey, of course. They lead the nation in COVID-19 cases as well.

Forbearance is NOT forgiveness, just a temporary restructuring of mortgage debt.

The face of forbearance, NY governor Andrew Cuomo (former HUD Secretary under Clinton).

Mortgage Purchase Applications Rise 9% YoY Even With COVID-19!

According to the Mortgage Bankers Association, the Refinance Index decreased 0.2 percent from the previous week and was 176 percent higher than the same week one year ago. The seasonally adjusted Purchase Index increased 9 percent from one week earlier. The unadjusted Purchase Index increased 7 percent compared with the previous week and was 9 percent higher than the same week one year ago.

Mortgage refinancing applications declined slightly by -.23% despite near historic low mortgage rates.

Take that, COVID-19!

US New Home Sales Decline 6.2% YoY In April Despite Near-Record Low Mortgage Rates (Case-Shiller Home Price Index STILL Rising)

According to the US Census Bureau, sales of new homes fell 6.2% YoY in April.

No, it does not look like new home sales from the housing bubble burst of the ALT-A, private label MBS years.

Yes, near record low mortgage rates are helping to mitigate the horrid effects of the COVID-19 fiasco.

Home prices in March, according to the lagged Case-Shiller national home price index rose 4.4% YoY. COVID-19 epicenters Seattle and New York City both managed to see YoY gains in home prices in March. (Phoenix AZ is leading the nation in YoY home price growth at 8.2%, nearly twice the national average).

So far the COVID-19 epidemic does not look like the notorious housing bubble burst of the second half of the 2000-2010 decade of The Big Short frame. But the CMBX BBB- index of commercial mortgage-backed securities is getting crushed by retail, hotel and office losses.

Although this has nothing to do with real estate, this Bloomberg headline grabbed my attention: “Macron Pledges $9 Billion in Stimulus to Help French Carmakers.” Hey Macron, how about telling Renault, Citroën and Peugeot to make cars that buyers in US want to buy!

US Existing Home Sales Plunge 17.8% In April, Worst Since 2010 (Lower-end Housing Hit The Worst)

According to the National Association of Realtors (NAR), US existing home sales in April plunged 17.8% from March, the largest drop since 2010.

Existing homes sales MoM is the white line, the Mortgage Bankers Association 30-year rate is the blue line.

Given how unemployment is differentially hurting lower-wage workers, it is not surprising that existing home sales in the $0-$100,000 range fell 33% in April.

While $500k-$750k home sales fell by “only” 12.2%.

Existing home sales inventory remains low while median home price of existing home sales rose 2% from March to April.

Worst Property Debt Crash in Years Looms for Workout Specialists (Fitch Says 26% of CMBS Borrowers Asked About Payment Relief)

First it was on-line shopping spearheaded by Amazon that helped crush physical retail space. Then the knock-out punch was the government shutdown of the the US economy.

(Bloomberg) — Emptied out malls and hotels across the U.S. have triggered an unprecedented surge in requests for payment relief on commercial mortgage-backed securities, an early sign of a pandemic-induced real estate crisis.

Borrowers with mortgages representing almost $150 billion in CMBS, accounting for 26% of the outstanding debt, have asked about suspending payments in recent weeks, according to Fitch Ratings. Following the last financial crisis, delinquencies and foreclosures on the debt peaked at 9% in July 2011.

DQ loans_0

Special servicers — firms assigned to handle vulnerable CMBS loans — are bracing for the worst crash of their careers. They’re staffing up following years of downsizing to handle a wave of defaults, modification requests and other workouts, including potential foreclosures.

cmbs rate by vintage

“Everything is happening at once,” said James Shevlin, president of CWCapital, a unit of private equity firm Fortress Investment Group and one of the largest special servicers. “It’s kind of exciting times. I mean, this is what you live for.”

No Relief

A surge in residential foreclosures helped ignite the last financial crisis. Now, commercial real estate is getting hit because the economic shutdown has shuttered stores and put travel on ice.

Not all of the borrowers who have requested forbearance will be delinquent or enter foreclosure, but Fitch estimates that the $584 billion industry could near the 2011 peak as soon as the third quarter of this year.

There’s no government relief plan for commercial real estate. Bankers usually have leeway to negotiate payment plans on commercial property, but options for borrowers and lenders are limited for CMBS.

Debt transferred to special servicers from master servicers, mostly banks that handle routine payment collections, is already swelling. Unpaid principal in workouts jumped to $22 billion in April, up 56% from a month earlier, according to the data firm Trepp.

Make Money

Special servicers make money by charging fees based on the unpaid principal on the loans they manage. Most are units of larger finance companies. Midland Financial, named as special servicer on approximately $200 billion of CMBS debt, is a unit of PNC Financial Services Group Inc., a Pittsburgh-based bank.

Rialto Capital, owned by private equity firm Stone Point Capital, was a named special servicer on about $100 billionof CMBS loans. LNR Partners, which finished 2019 with the largest active special-servicer portfolio, is owned by Starwood Property Trust, a real estate firm founded by Barry Sternlicht.

Sternlicht said during a conference call on Monday that special servicers don’t “get paid a ton money” for granting forbearance.

“Where the servicer begins to make a lot of money is when the loans default,” he said. “They have to work them out and they ultimately have to resolve the loan and sell it or take back the asset.”

Hardball

Like debt collectors in any industry, special servicers often play hardball, demanding personal guarantees, coverage of legal costs and complete repayment of deferred installments, according to Ann Hambly, chief executive officer of 1st Service Solutions, which works for about 250 borrowers who’ve sought debt relief in the current crisis.

“They’re at the mercy of this handful of special servicers that are run by hedge funds and, arguably, have an ulterior motive,” said Hambly, who started working for loan servicers in 1985 before switching sides to represent borrowers.

But fears about self-dealing are exaggerated, according to Fitch’s Adam Fox, whose research after the 2008 crisis concluded most special servicers abide by their obligations to protect the interests of bondholders.

“There were some concerns that servicers were pillaging the trust and picking up assets on the cheap,” he said. “We just didn’t find it.”

Troubled Hotels

Hotels, which have closed across the U.S. as travelers stay home, have been the fastest to run into trouble during the pandemic. More than 20% of CMBS lodging loans were as much as 30 days late in April, up from 1.5% in March, according to CRE Finance Council, an industry trade group. Retail debt has also seen a surge of late payments in the last 30 days.

Special servicers are trying to mobilize after years of downsizing. The seven largest firms employed 385 people at the end of 2019, less than half their headcount at the peak of the last crisis, according to Fitch.

Miami-based LNR, where headcount ended last year down 40% from its 2013 level, is calling back veterans from other duties at Starwood and looking at resumes.

CWCapital, which reduced staff by almost 75% from its 2011 peak, is drafting Fortress workers from other duties and recruiting new talent, while relying on technology upgrades to help manage the incoming wave more efficiently.

“It’s going to be a very different crisis,” said Shevlin, who has been in the industry for more than 20 years.

Ya think?

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