Origination

A report from the Federal Reserve Bank of St. Louis suggests that the number of subprime mortgage loans terminated between 2001 and 2006 outweighed the number of estimated first-time homebuyers who sought subprime mortgages. The analysis appears in the March/April issue of Review, the St. Louis Fed's bi-monthly journal of economic and business issues, and was conducted by Yuliya S. Demyanyk, a senior research economist with the Federal Reserve Bank of Cleveland and formerly of the St. Louis Fed. She focused on whether borrowers intended to keep their subprime mortgages long enough to substantiate an increase in homeownership or planned a quick exit strategy at origination, using subprime loans as bridge financing to speculate on house prices — in other words, quickly sell the house for profit after its value increased. Ms. Demyanyk found almost half the loans originated between 2001 and 2006 exited the market either through prepayment or default within the first two years of origination and about 80% did so within three years of origination. "Subprime mortgages were very risky all along," she said. "The extent of their risk, however, was hidden by the rapid appreciation in house prices, allowing termination of the mortgage by refinancing or prepayment. When prepayment became costly — with zero or negative equity in the house increasing the closing costs of refinancing — defaults took their place." The number of defaults in the limited sample of subprime purchase-money mortgages within two years of origination is almost equal to the number of first-time homebuyers who took a subprime mortgage. "If the data for the rest of the market were available," said Ms. Demyanyk, "the number of defaults would no doubt be even greater."

JER Investors Trust Inc., McLean, Va., is making a $150 million public offering of 10,000,000 shares of its class A common stock, a new class of common stock. Each share of class A common stock represents rights equal to those of 15 shares of JER's existing common stock. The company expects to use the net proceeds of the offering primarily to invest in senior investment grade tranches of commercial mortgage-backed securities. It also intends to use approximately $15.7 million of the net proceeds to repurchase all of its outstanding trust preferred securities with an aggregate liquidation amount of $60.0 million. JMP Securities LLC is acting as book-running manager and Friedman, Billings, Ramsey & Co. Inc. is acting as co-manager for the offering.

Fitch Ratings, New York, has downgraded the issuer default rating of the New York-based iStar Financial Inc. in a move driven by continued weakening of iStar's loan portfolio, pressures on liquidity, and the implications of the company potentially entering into a new secured term loan facility in the near future. The IDR was reduced to B- from BB and placed on Rating Watch Negative. For the quarter ended Dec. 31, 2008, iStar recognized approximately $250 million of loan loss provisions and $110 million of corporate loan investment impairments. For full year 2008, iStar recognized over $1 billion of loan loss provisions and nearly $300 million in asset impairments. Non-accrual loans increased from 9% at the end of 2007 to over 27% at the end of last year, and Fitch said it expects things to get worse in 2009. "Continued reduced capital availability in the commercial real estate debt capital markets has decreased the ability of iStar's borrowers to repay loans, as many borrowers historically have refinanced their loans via the secured debt markets or have sold assets. The decreased ability of iStar's borrowers to repay loans reduces the company's ability to meet its own future funding obligations and debt maturities from internally generated cash sources. This reduction in cash sources could result in iStar having a liquidity shortfall in 2009 in the absence of accessing external capital, given the magnitude of iStar's future funding obligations and debt maturities over the next 12 months," Fitch said.

River City Mortgage & Financial, Eagan, Minn., has acquired American Mortgage Corp., a privately held correspondent lender, and plans to begin originating through some of the latter's 12 offices in the Twin Cities area. Former American Mortgage offices that River City plans to begin originating through include Edina, Elk River, Coon Rapids and Eden Prairie. American Mortgage was founded in 1997 and has originated over $2.5 billion in the last 10 years. Its website lists Jim DeWall as owner and chief executive and Wes Kehe as owner and president. River City was founded in 1994 and it has produced over $3 billion in loans, including $1 billion in the last five years. It now has 55 loan officers in six offices.

The average Freddie Mac rate for a 30-year fixed-rate mortgage inched upward during the week ended March 5 when economic indicators included "only scattered, tentative signs of stabilization" in housing. "The Federal Reserve noted in its March 4 regional economic report that residential real estate markets remained in the doldrums in most areas," said Freddie chief economist Frank Nothaft, who noted that benchmark rate-indicative bond yields moved higher during the week in response to the net effect of this and other indicators. The average 30-year FRM rate during the period rose to 5.15% from 5.07% the week before but was down from a year ago when it was 6.03%. The average 15-year FRM rate jumped to 4.72% from 4.68% but was down from a year ago when it was 5.47%. The average rate for a five-year hybrid Treasury-indexed adjustable-rate mortgage inched up to 5.08% from 5.06% but was down from 5.34% a year ago. The average one-year Treasury-indexed ARM rate jumped to 4.86% from 4.81% but was down from 4.94% a year ago. Average points were as follows: 0.7 for 30- and 15-year FRMs, 0.6 for five-year Treasury-indexed hybrids and 0.5 for one-year Treasury-indexed ARMs.

A General Motors bankruptcy would have a "materially adverse impact" on GMAC Financial Services, according to the latter company's 10-K filing. That filing, made on Feb. 27, was done before GM made its own 10-K filing on March 5. GM's filing included a statement of the existence of substantial doubt about the automobile maker's ability to continue as a going concern. GM owns 49% of GMACFS, with the rest held by an affiliate of Cerberus Capital Management. "We have substantial credit exposure to GM, and a GM bankruptcy could impact certain of our funding facilities." As of the end of last year, it had $2.5 billion in secured exposure and $1.9 billion in unsecured exposure to GM. GMACFS is the parent of Residential Capital LLC. In the 10-K, GMACFS said that ResCap remains heavily dependent on it for funding and capital support but there is no assurance that the parent would provide such support.

JER Investors Trust Inc., McLean, Va., is making a $150 million public offering of 10,000,000 shares of its class A common stock, a new class of common stock. Each share of class A common stock represents rights equal to those of 15 shares of JER's existing common stock. The company expects to use the net proceeds of the offering primarily to invest in senior investment grade tranches of commercial mortgage-backed securities. It also intends to use approximately $15.7 million of the net proceeds to repurchase all of its outstanding trust preferred securities with an aggregate liquidation amount of $60.0 million. JMP Securities LLC is acting as book-running manager and Friedman, Billings, Ramsey & Co. Inc. is acting as co-manager for the offering.

Fitch Ratings, New York, has downgraded the issuer default rating of the New York-based iStar Financial Inc. in a move driven by continued weakening of iStar's loan portfolio, pressures on liquidity, and the implications of the company potentially entering into a new secured term loan facility in the near future. The IDR was reduced to B- from BB and placed on Rating Watch Negative. For the quarter ended Dec. 31, 2008, iStar recognized approximately $250 million of loan loss provisions and $110 million of corporate loan investment impairments. For full year 2008, iStar recognized over $1 billion of loan loss provisions and nearly $300 million in asset impairments. Non-accrual loans increased from 9% at the end of 2007 to over 27% at the end of last year, and Fitch said it expects things to get worse in 2009. "Continued reduced capital availability in the commercial real estate debt capital markets has decreased the ability of iStar's borrowers to repay loans, as many borrowers historically have refinanced their loans via the secured debt markets or have sold assets. The decreased ability of iStar's borrowers to repay loans reduces the company's ability to meet its own future funding obligations and debt maturities from internally generated cash sources. This reduction in cash sources could result in iStar having a liquidity shortfall in 2009 in the absence of accessing external capital, given the magnitude of iStar's future funding obligations and debt maturities over the next 12 months," Fitch said.

River City Mortgage & Financial, Eagan, Minn., has acquired American Mortgage Corp., a privately held correspondent lender, and plans to begin originating through some of the latter's 12 offices in the Twin Cities area. Former American Mortgage offices that River City plans to begin originating through include Edina, Elk River, Coon Rapids and Eden Prairie. American Mortgage was founded in 1997 and has originated over $2.5 billion in the last 10 years. Its website lists Jim DeWall as owner and chief executive and Wes Kehe as owner and president. River City was founded in 1994 and it has produced over $3 billion in loans, including $1 billion in the last five years. It now has 55 loan officers in six offices.

First Bank of Beverly Hills (Calif.) will shift the focus of its asset portfolio from real estate loans and securities to a more diversified mix of mortgages and loans to non-real estate business, if the transaction between its parent company, Beverly Hills Bancorp Inc., and Orchard First Source Asset Management LLC is completed. OFS is a privately owned company that provides senior secured financing to middle market and industrial companies. Under the terms of the deal, it will receive an 80% equity stake in Beverly Hills Bancorp. OFS Funding LLC will be merged into First Bank. The transaction is intended to satisfy the terms of a cease and desist order issued against First Bank by the Federal Deposit Insurance Corp. and the California Department of Financial Institutions. Another change to First Bank will be the creation of a Small Business Administration lending program to loan to Southern California businesses. Beverly Hills Bancorp's stock is trading on the pink sheets. During the afternoon of March 3, when the deal was announced, its price rose from $0.03 per share to $0.15 per share.