Origination

Builders gathering at the nation's largest regional housing trade show this week were told they'd have to hang on for a few more years before the market picks up any kind of steam. Eventually, builders will produce 1.4 million units a year, but that's "three or four years down the road," said Elliott Pollack, a Phoenix investor and consultant. Speaking at the Pacific Coast Builders Conference in San Francisco he noted, "There's going to be a recovery, but it's going to be a weak recovery." David Crowe, chief economist at the National Association of Home Builders, said patience will be "a builder's best virtue" going forward. But he also said the states which will recover first are relatively small ones. "North Dakota can double its production and we're not going to feel it at the national level," he said. Kicking off PCBC's new Capital Markets Forum, Pollack told builders not to get caught up in numbers. "Things are going to get progressively better, capital will show up and there will be less competition," he said, noting that the number of builders operating in the Phoenix area has dropped from 864 at the height of the market to 133 today. "If I'm you, I'm doing cartwheels because I'm still here," he told the crowd. Pollack, who heads Elliott D. Pollack & Co., also predicted that house prices will jump once the oversupply of building lots is worked off. But he warned that credit for both builders and their buyers will be tougher to come by. "If you want to know what credit is going to look like, go back to the '70s and '80s," he said.

Essent Guaranty, a startup mortgage insurance firm, has finally written its first policy but isn't giving out much in the way of details. In a statement issued to National Mortgage News, the Pennsylvania-based company said it is "actively engaged with lenders and has issued mortgage insurance certificates." But the company declined to say how many MI policies it has issued and when. The privately held firm was formed two years ago by Mark Casale and other industry veterans. During his career, Casale worked for Radian Guaranty, and Advanta Mortgage, the latter of which eventually was sold to Chase Manhattan Bank (now JPMorgan Chase). With Essent's entry into the market, there are now seven MI firms actively writing new policies. Triad Guaranty is in "wind-down" mode.

Private equity funds have their pockets full of cash for builder loans, even in areas hit hardest by the housing downturn, according to a survey released at the Pacific Coast Builders Conference. "Despite their problems, that's where we are seeing increased activity," said Jeff Meyers of Meyers Builder Advisors, Corona del Mar, Calif. Pension funds, private funds and even high net worth individuals are eyeing places like California, Arizona and Las Vegas because there is a relatively high barrier to entry in those markets, so their returns are better, Meyers explained. Hammered by huge losses on tract development loans, commercial banks have either exited the sector or severely tightened underwriting terms. According to the Meyers poll, investors that are willing to extend credit want to make 20%-25% or more on their money over a three- to four-year period. Not only that, Meyers said, but they typically also now want builders to have some skin in the game. Some are looking for their builder clients to co-invest at least 5%, while others want builders to maintain as much as a 20% share in their developments, the survey found. Equity investors aren't afraid of land deals, either, according to the poll. In fact, they are actually looking forthem—"Preferably those with improvements already in the ground," Meyers said—because they see them as coming with a great exit strategy. Over the next two years, more than half the equity funds which participated in the survey said they will deploy $100 million or more in the homebuilding sector, a signal Meyers is taking as the return to the market of institutional investors.

Developer Jeff Stack has been through five downturns in his real estate career, but the current one is the worst yet. "It's the deepest, broadest, most all-pervasive because it has impacted every industry in the country, not just real estate," said the managing director of the SARES-REGIS group, an Irvine, Calif., firm which builds apartments and other commercial properties. Other panelists with Stack at PCBC in San Francisco have lived through one less cycle, but they weren't any more optimistic. Bradley Forrester, president of the ConAm Group, a San Diego-based company which acquires and develops communities through the country, believes the market is "stuck" at the bottom of the cycle, and Doug Bibby, president of the National Multi-Housing Council, shared that view. "I'm a skeptic" when it comes to the recovery, Bibby said. "I don't think a return is imminent. I think it will be a slow climb out" of the recession. Daryl Carter, chief executive officer of Irvine-based Avanath Capital Partners, an investment firm which focuses on affordable apartments, agreed with the "stuck" assessment. He also pointed out that while there is "a lot of capital cuing up" that would like to buy existing rental projects or back new ones, "what's available doesn't meet their requirements." Still, once investors accept the fact that 15%-20% returns are no longer in the cards unless they want to take "excessive risk," Carter expects to see that capital deployed eventually, and so does Stack. Investors "can't keep it as cash," said Stack.

The aisles are a little wider at the Moscone Center in San Francisco at the Pacific Coast Builders Conference, the nation's largest regional trade show, and the crowds are somewhat thinner. But the builders and exhibitors who are here are generally optimistic that the worst is over. According to a survey of registered attendees by Immersa Marketing on behalf of PCBC, nearly a third said their businesses have stopped constricting and 40% said their businesses have actually begun to recover. "We hope the turnaround two out of five builders are experiencing will soon be experienced by many more," said Linda Baysari, senior vice president of PCBC. The West has been particularly hard hit by the housing and banking crises, with only 4% of the respondents saying they have been unaffected by the recession. And as a result, the professionals here say they are adapting. Nearly two-thirds of the attendees said they are becoming more competitive, and 60% said they are exploring new housing products, including smaller houses, better use of design and greater densities. Some 55% said they were becoming more innovative. Furthermore, most said they are committed to a business they enjoy. "Homebuilders tend to be resourceful by nature," Baysari said.

If the demographics bode well for the for-sale sector of the housing market, the numbers look absolutely smashing for the rental side of the business, according to panelists at PCBC's Multifamily Trends day. For every 1% decline in the ownership rate, there is a corresponding increase in renter households, said Clyde Holland, chief executive officer of the Holland Partner Group, a Vancouver, Wash.-based developer. So, if there is another 2% decline in the ownership rate to a long-term average of 64%-65%, there will be a need for 5.5 million to 5.7 million rental units, he told the conference. "Even if (the potential renters) double up, there will be demand for 2.5 million to 3 million apartments," Holland said. And that's on top of the 3.4 million potential renters in the 18- to 34-year-old age bracket—"the largest cohort since the baby boom of the 1960s"—who will enter the market between now and 2015, Holland also pointed out. "This year alone, some 800,000 persons will enter the rental market, and an even larger number will enter the market next year," he said. Household formations, added Brian McAuliffe, managing director of acquisitions at RREEF, Chicago, "are just as critical as job growth, if not more so," to the apartment sector.

A second former Republican presidential candidate has become a spokesman for a reverse mortgage originator. Former Sen. Fred Thompson, who represented Tennessee from 1994 through 2003, and who ran for the Republican nomination for president in 2008, is the new spokesman for American Advisors Group, Irvine, Calif. Thompson is also well known for his acting, with roles in a number of movies and most notably playing Manhattan District Attorney Arthur Branch in the NBC television series "Law & Order." He is also an attorney and radio show host. Among other politicians who have become reverse mortgage company spokesmen is Jack Kemp, who was secretary for Housing and Urban Development in the George H.W. Bush administration. Kemp became a spokesman in 2008 for Generation Mortgage Co., Atlanta. A former pro football player, Kemp sought the Republican nomination for president in 1988 and was the vice presidential candidate in 1996.

The Federal Housing Finance Agency has launched a major new initiative by Freddie Mac and Fannie Mae to improve the consistency and quality of data for appraisals and other loan information, said the government entity on its website, which has both GSEs mandating the use of MISMO Version 3.0 data standards. "FHFA directed the enterprises to undertake the development of the standards to provide greater uniformity in the data they collect," said FHFA acting director Edward DeMarco. "This initiative is a major step toward meeting industry requests for uniformity in appraisal and loan data. Improvements in data quality will benefit all mortgage market participants and strengthen the housing finance system." The GSEs have now gone forward to standardize mortgage lending using MISMO as the backbone of all loan delivery to both GSEs. Specifically, Freddie Mac and Fannie Mae have developed the Uniform Loan Delivery Data Specification, which defines the Uniform Loan Delivery Dataset and the common GSE approach to single-family loan delivery data requirements for all mortgages that will be delivered to either GSE on or after Sept. 1, 2011.

Some real estate lending has improved since early April but May activity was generally slow compared to the prior month, according to the Federal Reserve's Beige Book. "Real estate lending increased even though standards on these loans remained tighter than on other loans, particularly for commercial mortgages," according to the report, which reflected data as of May 28. Commercial real estate activity continued to be characterized as weak but "residential real estate improved since the last report," which covered the period leading up to April 5. "Most districts noted an increase in home sales and construction prior to the April 30 deadline for the homebuyer tax credit, with contacts in many of these districts also indicating a corresponding slowing in activity in May."

The average rate for a 30-year fixed rate mortgage slid to 4.72% from 4.79% the week before and the average 15-year rate set another record low, according to Freddie Mac's Primary Mortgage Market Survey for the week ended June 10. "Following a relatively weak employment report, bond yields fell this week and mortgage rates followed," said Frank Nothaft, chief economist at Freddie Mac. He said this puts the average rate for a 30-year mortgage "near the record low set on Dec. 3, 2009 in our survey." A year ago the average rate for a 30-year FRM was 5.59%. The average 15-year rate in the latest week was 4.17%, down from 4.20% the week previous and 5.06% a year ago. The average rate for a five-year Treasury-indexed hybrid adjustable-rate mortgage during the week ended June 10 was 3.92%, down from 3.94% the previous week and 5.17% a year ago. The average one-year Treasury ARM rate was 3.91%, down from 3.95% the previous week and 5.04% a year ago. Average points were 0.7 for all the aforementioned loan types except one-year Treasury ARMs, for which average points were 0.6.