|Posted August 3rd, 2010 in Arizona REO, Commercial Finance, Commercial Real Estate, Private Lending, Residential Real Estate||No Comments »|
Residential real estate on the low end will continue to show signs of improvement and positive velocity. Higher end homes will continue to remain week throughout 2010.
“The phoenix housing market overall continued to show gradual improvement through June but with mixed results in various segments of the market. April was the first month the overall market showed a year-to-year increase (.7%) with the preliminary June increase at 1.8 percent. Based on index values from last year and current conditions in the housing market, it is likely that small increases in house prices will continue for only another month or two, followed by an extended period where house prices remain relatively flat. The trend of improving performance continues for lower priced houses with the 9.2 percent gain in April increasing to 11.5 percent by June. It appears that this segment of the housing market, which was hard hit during the downturn, will see price increases throughout the rest of 2010 but at gradually slower rates. Unless economic and housing market conditions change dramatically, prices are likely to be relatively stable going into 2011. For higher priced houses the April decline of 3.0 percent compared to 2009 is basically unchanged at -2.2 percent by June. The data indicate that the higher priced segment of the market is likely to show small declines on an annual basis through the rest of 2010.”
– Karl Gunterman and Adam Nowak,
ASU Center for Real Estate
|Posted September 7th, 2009 in Commercial Finance
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According to the CMSA (“Commercial Mortgage Insurance Association”) members on Wall Street are starting to embrace Life Settlement investing in increasing numbers as they funds seek new, more secure, ways of generating healthy returns. A Life Settlement is when an individual sells their life insurance policy for less than face value before they die. Investors purchase these policies at a discount, calculate life expectancies and profit when the individual dies. With all of the bad publicity Wall Street has received in the past few years, is it a smart move to get in the business of profiting from death?
From the New York Times on Sunday:
“Wall Street Pursues Profit in Bundles of Life Insurance (Sunday New York Times; A1)
After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one. The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die. The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money. Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.”
Is Life Settlement investing all bad? Proponents say no. When a Life Settlement investor purchases life insurance policies, they are adding liquidity to the general public by purchasing the policies from owners who would otherwise let their policies lapse. The downside is, as the New York Times stated, the insurance companies may have to increase the premiums to cover their increased payouts. In the end, Wall Street will make money, and the Insurance Company will make money, but the end consumer may be the one flipping the bills, again. Life Settlements are a very lucrative investment, but I would consider the moral hazard if I were contemplating investing. (Warren Buffet exited the business years ago due to moral hazard and public image concerns.)
|Posted September 7th, 2009 in Private Lending||No Comments »|
Commercial Real Estate shoe finally starting to drop as expected…
Commercial real estate owners and lenders are in for an interesting few years ahead. Commercial real estate delinquencies are starting to rise to historically high rates and even some of the best banks, lenders and investors are bracing for the pain to come.
“Capmark Distress May Signal Bank Failures Topping 100 (Bloomberg)
Sept. 4 (Bloomberg) — Capmark Financial Group Inc.’s possible collapse may signal a new wave of real estate losses for banks — this one tied to business property — that could push the year’s tally of failures past 100. Capmark, ranked among the largest U.S. commercial real estate lenders by Moody’s Investors Service, posted a $1.6 billion quarterly loss on Sept. 2 and said it might go bankrupt. The Horsham, Pennsylvania-based company struggled as the default rate on commercial mortgages held by U.S. banks more than doubled to the highest since 1994. “We haven’t really experienced the full extent of the distress,” said Sam Chandan, chief economist at property research firm Real Estate Econometrics LLC in New York. “When you look at community banks and some smaller regional banks, they tend to have a far greater concentration in terms of their exposure to commercial real estate.”
|Posted July 15th, 2009 in Commercial Finance||No Comments »|
In a world of tight credit, rapidly decreasing asset valuations and rising default, private lenders are rethinking their business models. Strict asset based hard money has shifted investment strategy, and they are smart for doing so. What do borrowers do when they do not qualify, and most don’t, for conventional financing? Understanding how to structure a deal before presenting to a private lender / investor, is more important than ever to close a transaction in this market. Structured correctly though, there are funds available and ready to participate.
In the past, there was a wide spectrum of lenders in the marketplace for Commercial and Industrial loans. Insurance companies were the most conservative, financing only the most pristine properties from the strongest borrowers. On the complete polar opposite side of the spectrum lied the hard money private lenders. These lenders, most often, looked at property collateral and pro-forma based assumptions to secure their principal repayment. Competition in the marketplace drove many of these lenders to take on risks outside of their original business models. Loans were written at higher and higher leverage ratios. The cannibalization by competing lenders is now over. Large well known private lenders are dealing with legacy issues on their balance sheets – most due to shrinking asset valuations and rising foreclosures. The lenders that have survived, thus far, are rarely lending at all or have completely shifted focus to alternative investment strategies. New lenders are entering the market, but using a different approach to deal structure.
One popular approach being used by new lenders is the hybrid debt and equity strategy. In this case, the lender will fund a loan under typical private money coupon rates, 12 – 15%, but will also structure equity participation. Lenders are looking at properties from both sides of the equation, borrower and lender. The calculation of potential, realistic, upside of their equity position is the premium lenders are requiring to take on the tremendous risk associated in this tumultuous economic environment. Structured correctly, a lender may experience a 20 – 30% or higher internal rate of return on the transaction.
Although, this may not be the most desirable finance structure for a borrower, without other options, any finance structure where capital preservation is available, may not be a bad choice. If not, Opportunity Funds have recently raised in excess of $100 Billion Dollars to buy distressed assets upon defaults. Borrowers, in many current situations, would be wise to look at new financing structures with an open mind.