Originations

Continuing the wave of real estate investment trust merger-and-acquisition deals, Crescent Real Estate Equities Co., a Fort Worth, Texas-based REIT, is being acquired by Morgan Stanley Real Estate for a total price of about $6.5 billion.The price includes $22.80 per Crescent share and the assumption of about $3.1 billion of the REIT's debt, Crescent said. In addition, Crescent's preferred shares are to be redeemed by Morgan Stanley RE. The purchase price makes for a 12% premium over the Crescent stock's recent average closing price on the New York Stock Exchange, according to the REIT. The Crescent portfolio consists of 70 office buildings totaling 27 million square feet, as well as some resort holdings. The transaction is expected to close in the third quarter.

Mortgage Bankers Association chairman John Robbins has urged Congress and federal regulators to refrain from mandating underwriting standards that could precipitate a credit crunch.Mr. Robbins told the National Press Club that the mortgage industry has the tools and the capacity to help distressed subprime borrowers avoid foreclosure. The subprime market is already correcting itself, the most aggressive lenders have been punished, and the most aggressive lending programs have been eliminated, Mr. Robbins maintained. Mandating tougher underwriting would force lenders to shut the door on homeowners who need to refinance out of adjustable-rate 2/28 mortgages and exacerbate delinquencies and foreclosures, he warned. "We hope the regulators take a realistic view and allow the industry to deal with the issue and not try to regulate or legislate," Mr. Robbins said. The MBA chairman did call for the licensing and regulation of mortgage brokers.

Federal banking regulators could issue subprime mortgage guidance in the next few weeks, and it will look a lot like the original proposal, according to John Reich, director of the Office of Thrift Supervision.In speaking to reporters, Mr. Reich indicated that the final guidance will require lenders to underwrite adjustable-rate 2/28 mortgages at the fully indexed rate and that it should satisfy the demands of Senate Banking Committee Democrats. However, he wants to be sure that lenders have the flexibility to modify or refinance existing subprime ARMs that are due to reset over the next 12 months so the monthly payments remain affordable and the borrowers are not forced into foreclosure. "That is an issue that the regulators need to address," Mr. Reich said, and he indicated that the issue is still being worked on. Separately, Comptroller of the Currency John Dugan said he wants the guidance to curb the practice of making "stated-income" subprime loans and emphasize the importance of verifying a borrower's income.

Job postings for the commercial real estate industry soared by 35% in the first quarter, and 60% of industry employers expect to increase hiring over the next six months, according to the first SelectLeaders Job Barometer report.Compiled jointly by SelectLeaders (an online CRE job board) and Cornell University's Program in Real Estate, the report also revealed a shortage of talent in some places. For example, New York and California are the "hottest areas for real estate finance jobs, but New York attracts twice as many applicants as California, which has led to a talent shortage on the West Coast," SelectLeaders said. The Southeast, led by Atlanta and Charlotte, N.C., had the fastest job growth of any region (60% in the first quarter), with the Midwest, led by Chicago, finishing second with 43%. "If the candidates are willing to pursue prospects in other states and sectors, they will broaden their options as well as their resumes, and with multisector jobs accounting for 46% of all postings nationwide, cross-sector experience makes a candidate extremely appealing," said Dr. David Funk, director of the Cornell RE program. The organizations can be found online at http://www.selectleaders.com and http://www.realestate.cornell.edu.

A commercial real estate index maintained by the National Association of Realtors rose slightly in the first quarter to the highest level on record, though its rise has decelerated over the past year, according to the NAR.The Commercial Leading Indicator for Brokerage Activity stood at 120.3 in the first quarter, up 0.2% from 120.1 in the fourth quarter and 0.8% from 119.3 a year earlier, the association reported. "Rising industrial production, a rise in the REIT price index, growth in commercial jobs, rising income, and gains in wholesale sales contributed to the rise in our leading indicator," said NAR senior economist Lawrence Yun. "On the other hand, deteriorating economic conditions have been a drag -- specifically, a marked decline in durable goods shipments, a decline in return on commercial investment, and an increase in the number of people filing for unemployment insurance." The association can be found online at http://www.realtor.org.

African-Americans and Latinos in New Orleans are about twice as likely to receive a subprime home loan as nonminorities, according to a new report released by the Louisiana Community Reinvestment Coalition.The report, compiled by the National Community Reinvestment Coalition, also found that disproportionately fewer small-business loans are going to businesses in minority census tracts. "It's not clear if the imbalance in loan type among whites, African-Americans, and Latinos is due to discrimination, predatory practices, or some other factor," said Emma Dixon, project director of the LCRC. "What is clear, however, is that local lenders must do more to provide affordable, equitable lending products and to minimize the large number of high-cost subprime mortgages and small-business loans to people of color and in minority neighborhoods." The report found that prime loans represented 82% of all single-family loans to whites in New Orleans, 68% of such loans to Latinos, and 51% of such loans to blacks. The LCRC is a joint project of the Boston-based UFE and the Washington-based NCRC, which can be found online at http://www.ncrc.org.

Mortgage lenders Fifth Third Bancorp, Cincinnati, and R&G Financial Corp., San Juan, Puerto Rico, have signed an agreement under which Fifth Third will acquire the Puerto Rican company's R-G Crown Bank, which operates 30 branches in Florida and three in Augusta, Georgia.The combination strengthens Fifth Third's presence in the Florida markets of greater Orlando and Tampa Bay and expands its footprint into the Jacksonville, Fla., and Augusta, Ga., markets. Under the agreement, Fifth Third would pay $288 million to R-G Financial for Crown and assume $50 million of trust preferred securities. Rolando Rodriguez, CEO of R&G Financial, said the transaction "reflects the company's determination to concentrate its operations and core competencies in Puerto Rico. Second, and just as significant, the completion of the transaction will improve the RGF's overall liquidity and capital position."

A Federal Housing Administration reform bill would reduce origination fees on government-insured home equity conversion mortgages, and some reverse mortgage lenders don't like it.The bill (H.R. 1852) recently approved by the House Financial Services Committee keeps a 2% cap on HECM origination fees, but bases the fee on the initial principal amount of the loan. This fee structure is employed in the jumbo reverse mortgage market, but it does not provide enough compensation for lenders making lower-balance HECM loans, according to Peter Bell, president of the National Reverse Mortgage Lenders Association. In addition, the initial loan amount is determined by the age of the senior borrower and the interest rate on the loan. "It would make the origination fee smaller for a younger borrower than an older HECM borrower, which doesn't make a lot of sense," Mr. Bell said. The current 2% limit is based on the maximum claim amount. But AARP supports the committee's decision as a way to reduce borrowing costs for seniors.

The House has passed a bill that prohibits commercial firms, such as WalMart and Home Depot, from gaining control of state-chartered industrial loan companies and entering the banking business.The bill (H.R. 698), passed by a 371-16 vote, also restricts ILCs currently owned by commercial firms from branching across state lines. "This bill will preserve the distinction between banking and commerce that is necessary to protect the integrity of the banking system," said House Financial Services Committee Chairman Barney Frank, D-Mass. "I hope to work with the Senate to forge a compromise bill that the president can sign." But it does not appear that the Senate Banking Committee will act on an ILC bill soon. The Federal Deposit Insurance Corp. has imposed a moratorium on ILC applications to give Congress time to address the issue.

Impac Funding Corp., Irvine, Calif., has agreed to buy Pinnacle Financial Corp. of Florida, a $5 billion-a-year funder that plays in both the conventional and alternative-A markets.No purchase price was disclosed. In years past, Pinnacle, a retailer, had been selling alt-A loans to IFC on a correspondent basis. IFC, a subsidiary of a publicly traded real estate investment trust, is the nation's 10th-largest alt-A funder, according to figures compiled by the Alternative Products Quarterly Data Report. The sale was brokered by Milestone Merchant Partners. Pinnacle operates 133 branches in 26 states. It was founded in 1988 by Douglas L. Long and Jeffrey Vratanina. The companies can be found on the Web at http://www.impaccompanies.com and http://www.pinnaclefinancial.com.

New York-based iStar Financial, a commercial real estate lending company, is acquiring the commercial real estate business of Fremont General Corp., Santa Monica, Calif., for a total cash purchase price of about $1.9 billion.The New York-based company is acquiring Fremont's commercial real estate lending business and retaining a 30% interest in Fremont's $6.5 billion portfolio of commercial real estate loans, iStar reported. Under the agreement, iStar will have a 'B' participation interest in the Fremont portfolio, which will be subordinate to Fremont's 70% 'A' participation, and will fund up to about $4.4 billion in unfunded loan commitments associated with the portfolio. Most of Fremont's employees in eight offices nationwide will be retained, iStar said. "With greater regional reach and an enhanced platform, this acquisition will allow iStar to expand its U.S. footprint and leverage our strong brand across a larger universe of commercial real estate borrowers," said Jay Sugarman, iStar's chairman and chief executive officer. Multifamily properties represent about 60% of the Fremont portfolio, iStar said, with condominium construction and conversion projects accounting for about 45% of the total portfolio. The companies can be found online at http://www.istarfinancial.com and http://www.fremontgeneral.com.

Four classes from two subprime New Century Mortgage Corp. securitizations have been downgraded by Fitch Ratings.The downgrades were as follows: series 2003-2 total groups 1 & 2, class M-3, from BBB to BBB-minus, and class M-4, from BBB-minus to BB-minus; and series 2006-S1, class M-7, from BBB to BB, and class M-8, from BBB-minus to BB-minus. Fitch also placed class M-6 of series 2006-S1 on Rating Watch Negative and affirmed the ratings on 80 classes in 11 New Century deals. The negative rating actions stemmed from the deterioration of credit enhancement relative to expected losses, Fitch said. The rating agency can be found online at http://www.fitchratings.com.

The default rate on subprime adjustable-rate mortgages originated in 2006 "rose briskly" to 7.4% in April, according to a Friedman Billings Ramsey report.Researchers at the investment banking firm based in Alexandria, Va., said the default rate on subprime ARMs had jumped 16.4% since March. Meanwhile, the default rate on subprime ARMs originated in 2005 increased by 5%, to 9.8%, in April. "In comparison to previous origination years, the default rates of the 2005 and 2006 origination years deteriorated considerably faster than the 2002-2004 origination years," the FBR researchers said. (Default rates include loans that are 90 days or more past due, in foreclosure, or real estate owned.) The report also shows that the default rate on fixed-rate subprime product originated in 2006 edged up to 3.5% in April. But the default rate of 2005 fixed-rate product actually declined slightly to 6.8%. Looking at all securitized subprime mortgages, the default rate hit 11.4% in February, according to a previous FBR report.

The industry has to be careful of blaming itself too much for the subprime niche's recent wave of performance concerns, says Countrywide Financial chairman and chief executive officer Angelo Mozilo, citing other "complex" contributing factors such as home price depreciation, Federal Reserve interest rate hikes, and fraud.Addressing the opening general session of the Mortgage Bankers Association's secondary market convention in New York, Mr. Mozilo indicated that the slowdown in home price appreciation in particular helped put the market in a position that can be described by the saying, "You never know you're swimming naked until the tide goes out." He noted that other contributing factors included a lot of competitive "pressure to make loans" in the market.

Originators who made loans knowing that borrowers would not be able to pay were called out by an MBA official in the opening general session of the Mortgage Bankers Association National Secondary Market Convention as among the factors responsible for the subprime sector's woes.Loans that go wrong "after the fact, we can live with," said MBA chairman-elect Kieran Quinn, calling out "people who only care about their commission" and make loans without regard for the borrower's ability to repay. He said the regulatory response to subprime concerns has been "measured" so far, in part due to productive industry dialogue with officials and market participants. But he also noted that while underwriting has tightened, loan performance concerns in general are not over. Early indicators such as statistics in the economically troubled Midwest and California's short-term delinquencies "do not bode well," Mr. Quinn said.

Senate Banking Committee Democrats are prodding the Federal Reserve Board and the other banking regulators to issue subprime guidance on adjustable-rate 2/28 and 3/27 mortgages as quickly as possible.In a May 17 letter, Banking Committee Chairman Christopher J. Dodd, D-Conn., and four other senators urge the regulators to put aside their concerns that tighter underwriting standards will make it difficult for trapped subprime borrowers to refinance. "Frankly, we find this objection as an admission that the original subprime ARM was inappropriate," the letter says. "It stretches credulity to argue that the path out of a poorly underwritten loan is another unaffordable loan underwritten on the same faulty basis." The proposed guidance requires lenders to underwrite subprime ARMs at the fully indexed and fully amortizing rate. The senators note that the Mortgage Bankers Association, along with major lenders and servicers, has adopted principles to pursue loan modifications if borrowers cannot afford their payment after the ARM resets. "These kinds of modifications offer a real alternative to foreclosure for borrowers, and we urge you to encourage servicers to pursue this course of action," the senators say.

Mortgage lenders support the efforts of federal regulators to strengthen underwriting standards on subprime loans and will help troubled borrowers avoid foreclosure, according to a joint statement issued by five industry groups.The trade groups have been very wary of proposed subprime guidance the banking regulators are expected to finalize soon, and they are very concerned about proposed legislation aimed at providing relief for subprime borrowers facing foreclosure. "We believe the efforts of our members, together with the actions of the regulators, will be effective in dealing with current problems in subprime mortgage lending," the joint statement on responsible subprime lending says. "We urge the federal regulators to ensure that the proposed statement on subprime lending strikes a careful balance that provides enhanced consumer protections without unintentionally limiting the availability of home ownership to creditworthy borrowers." The Financial Services Roundtable, the American Bankers Association, the Mortgage Bankers Association, the Consumer Bankers Association, and America's Community Bankers signed the statement.

Class M-I-3 of Residential Asset Securities Corp.'s home equity mortgage asset-backed pass-through certificates, series 2001-KS2, has been downgraded from B3 to Caa2 by Moody's Investors Service.The downgrade was based on "the analysis of the credit enhancement provided by subordination, overcollateralization, and excess spread relative to the expected loss," Moody's said. The transaction is backed by first- and second-lien fixed-rate, and first-lien adjustable-rate, subprime mortgage loans. Moody's can be found on the Web at http://www.moodys.com.

Class M-3 of Ameriquest Mortgage Securities Inc. Quest 2003-X4 has been downgraded from BB-minus to CC/DR3 by Fitch Ratings.In addition, Fitch affirmed the ratings on 16 classes from three Quest transactions. The downgrade was attributed to deterioration in the relationship between credit enhancement and expected losses. Fitch can be found online at http://www.fitchratings.com.

Inventory in the residential housing market will not grow until the end of 2007 (after two years of decline), and tightened credit could delay the growth to the first quarter of 2008, according to Jamie Woodwell, senior director of commercial/multifamily research with the Mortgage Bankers Association.Speaking at the MBA's commercial real estate/multifamily finance asset administration conference in San Antonio, Mr. Woodwell said the MBA expects economic growth to pick up at the end of 2007 and interest rates to remain at about current levels through 2008. The MBA forecast also calls for home prices to decline 1% in 2007 and resales to decline 6%. Ron Witten, president of Witten Advisors, said he expects solid job growth in 2008 and 2009, after a slowdown in 2007, which should be a demand driver for multifamily rentals. On the condominium front, sales of new units are "much weaker" than condo resales, according to Mr. Witten. In addition, he said a record number of single-family homes for sale, as well as for rent, are now vacant. The MBA can be found online at http://www.mortgagebankers.org.