Originations

Moody's Investors Service has identified unanticipated interest shortfalls as an emerging problem for the commercial mortgage-backed securities industry.Such shortfalls have led to some downgrades and watchlist placements, and more are expected, according to the rating agency. In CMBS transactions, servicer advances for principal and interest, property protection, and trust expenses help provide liquidity to the securities. Servicers that facilitate this liquidity are reimbursed for the amounts advanced plus interest on a priority basis "at the top of the distribution waterfall." Nicholas Levidy, a Moody's analyst, pointed to a problem posed by this arrangement. "Unfortunately, in some cases where the servicer seeks reimbursement for large advance amounts, the senior certificates have been adversely affected by the advancing mechanism currently found in most CMBS documents," Mr. Levidy said. "By taking the money owed from advances in one payment rather than spreading the payments over a period of time, the shortfall problem is created." A tentative solution proposed by Moody's is to spread the servicer recoveries out, perhaps in combination with "reimbursement of nonrecoverable advances out of general collections of principal." Moody's can be found online at http://www.moodys.com.

The Department of Financial Institutions in Washington state ruled recently that it "could not disapprove" the merger of Wells Fargo Financial and Pacific Northwest Bancorp, even as it expressed "serious concerns about certain issues."The agency’s qualified approval on July 24 came after consumer groups -- including the Association of Community Organizations for Reform Now -- contacted it with concerns about Wells' alleged predatory lending practices. The DFI said it would continue to consider such issues in its future dealings with Wells and asked the Federal Reserve Board to take the accusations seriously. The board is next in line to examine the merger.

The Market Composite Index, an overall measure of mortgage applications, dropped to 972.4 on a seasonally adjusted basis during the week ended July 25 from 1284.3 the week before, according to the Mortgage Bankers Association of America's Weekly Mortgage Applications Survey.On an unadjusted basis, applications were down 23.7% on the week and 2.4% from the level recorded a year earlier. On a seasonally adjusted basis, the Purchase Index decreased from 442.4 to 426.9, and the Refinance Index declined from 6181.2 to 4145.8. Refinancings represented 60.4% of total applications, down from 68.7% the previous week, while adjustable-rate mortgages accounted for 20.6%. "The level of applications to purchase homes showed only a modest drop and is still near all-time highs," said Jay Brinkmann, the MBA's vice president of research and economics. "In contrast, refinance applications have fallen to the lowest level seen this year and are down more than 50% from where they were just four weeks ago -- not surprising given the sharp increase in rates since mid-June." The average contract interest rate for 30-year fixed-rate mortgages rose from 5.72% to 5.87%, and points (including the origination fee) increased from 1.53 to 1.64 for loans with 80% loan-to-value ratios, the MBA reported. The MBA can be found online at http://www.mbaa.org.

Cleveland-based KeyCorp has announced that its KeyBank Real Estate Capital unit has secured a $200 million Fannie Mae revolving credit facility for United Dominion Realty, a Denver-based real estate investment trust.The transaction represents a $140 million expansion of an existing $60 million line of credit. In a separate transaction, Key said it secured two single-asset financings totaling $37 million on behalf of the REIT, which has expanded its interests in Southern California and St. Petersburg, Fla. "This greatly enhances our ability to invest in markets that offer both long-term growth potential and the opportunity to maximize our existing property management operations," said Thomas W. Toomey, United Dominion's president and chief executive officer. Key can be found online at http://www.keybank.com.

Equity Office Properties Trust, the largest real estate investment trust by market capitalization, has reported net income of $149.9 million ($0.37 per share) for the second quarter, compared with $166.5 million ($0.40 per share) a year earlier.The Chicago-based office REIT attributed the decline to lower occupancy levels in its portfolio, lower lease termination fees, and asset sales of about $662 million in the past year. The REIT's funds from operations, a widely used indicator of performance in the REIT industry, totaled $310.2 million ($0.69 per share) for the second quarter, compared with $366.3 million ($0.78 per share) for the comparable period of last year. "Our leasing activity year-to-date has been strong, but we continue to face higher-than-expected early lease terminations," said Richard Kincaid, EOPT's president and chief executive officer. "Our occupancy level this quarter was stable with the prior quarter for the first time in 12 quarters, and our top 20 markets had positive net absorption of approximately 5.4 million square feet. These trends lead us to believe that the office markets are starting to stabilize." EOPT can be found online at http://www.equityoffice.com.

Janus Hotels and Resorts, Boca Raton, Fla., and Janus Acquisitions have announced an agreement under which the latter will acquire Janus Hotels and take the company private.The acquisition is to be carried out via a merger under which shareholders in Janus Hotels -- other than Janus Acquisitions, whose shareholders currently own or control about 70.4% of the stock in the hotel company -- would receive $0.65 per share of common stock held, the companies said. "This transaction represents an important step in the evolution of Janus," said Louis S. Beck, chairman and chief executive officer of Janus Hotels. "By becoming a private company, Janus will significantly reduce its administrative costs and eliminate filing requirements associated with being a public company. This will allow us to concentrate on core business strategy." The hotel company can be found online at http://www.janushotels.com.

Mortgage volumes are off 35% since May, according to one of the top executives in the industry, but there are a couple of silver linings for the business if interest rates continue to climb.Angelo Mozilo, chairman and chief executive of Countrywide Financial Corp., Calabasas, Calif., told the Western Regional Mortgage Lenders Conference Tuesday that while the last three years have been "a hell of a run" for mortgages, "people born in the refi boom are going to die in the refi bust." But he pointed to the purchase market, which he said has moved steadily up for the past 30 years, and told the conference, being held in Blaine, Wash., that immigrant, minority, and low-income business will continue to buoy purchases over the next 10 years. "Keep an eye on the fundamentals" like building Realtor and homebuilder relationships, he said. And to originators that have done only refis for the past three years and not learned the purchase market, the always colorful executive said, "simply put, you're dead meat."

Commercial Net Lease Realty Inc., a real estate investment trust based in Orlando, Fla., has priced a public offering of 5.6 million shares of its common stock at $18 per share.The net proceeds totaled $95.6 million, the REIT said. Citigroup Global Markets is acting as the sole book-running manager, with Wachovia Securities as co-lead manager. The REIT invests in single-tenant retail, office, and industrial properties subject to long-term net leases. It can be found online at http://www.cnlreit.com.

Nehemiah Community Reinvestment Fund, Sacramento, Calif., has announced the "Moving People from Homelessness to Homeownership" national initiative, which will fund short-term, low-interest affordable housing loans.The Nehemiah Corp. said it will capitalize the fund with an initial equity contribution of $5.5 million to be loaned to community development and faith-based organizations involved in affordable, workforce, and special-needs housing and economic development in low-income and underserved communities nationally. According to Nehemiah, the loan term of these $10,000 to $750,000 loans cannot exceed five years "in order to maintain a constantly recycling pool of funds," and to allow Nehemiah to finance a larger number of community revitalization projects. Target markets include: California, Nevada, Arizona, Kansas, Missouri, Indiana, and Ohio. Nehemiah can be found online at http://www.nehemiahcorp.org, and the fund can be found at http://www.ncrfund.org.

Gregory J. Parseghian, Freddie Mac's president and chief executive officer, has been named chairman of the board of the Freddie Mac Foundation.Mr. Parseghian has served for two years on the board of the foundation, which was created in 1991 as a philanthropic program for children, youths, and their families. As chairman, Mr. Parseghian will oversee initiatives aimed especially at preventing child abuse and neglect, promoting foster care and adoption, and youth development, the foundation said. "The Freddie Mac Foundation anchors our philanthropic program, and I look forward to leading its efforts to make a positive difference in the lives of children," he said. Mr. Parseghian was named president and CEO of Freddie Mac in June. He was previously its executive vice president and chief investment officer. The foundation can be found online at http://www.freddiemacfoundation.org.

The Mortgage Electronic Registration System, Vienna, Va., has announced the launch of MERS Commercial, which is aimed at eliminating the repurchase risk and costs associated with preparing and tracking assignments for the commercial mortgage-backed securities market.The first MERS Commercial loan was a $300 million loan closed by Bank of America earlier this month. The loan was collateralized by over 40 properties in over 20 states, MERS said. The system is designed for use by issuers, master servicers, custodians, originators, and special servicers. It helps eliminate assignments when trading mortgage loans, with MERS remaining the mortgagee of record. R.K. Arnold, president and chief executive officer of MERS, said the initiative "was mainly driven by a need in the commercial marketplace for a simpler loan process, elimination of paperwork, and cost savings." The MERS Commercial initiative has been funded by Banc of America Securities, Bear Stearns, GE Capital Real Estate, GMAC Commercial, John Hancock, and Wells Fargo.

ComUnity Lending, Morgan Hill, Calif., has announced a joint venture with Borrowers Best Mortgage Co. LP, Beverly Hills, Calif., as part of its recently reported entry into subprime lending.ComUnity said Borrowers Best has a staff experienced in the subprime area. "It had been a part of our strategy since early on to partner with another company on subprime lending," said Darryl Fry, president and chief executive officer of ComUnity. He said ComUnity wants to generate "as much business as we can" in the subprime market. The company said its Mortgage Master concept -- where one mortgage professional locks, documents, and funds each loan -- has made ComUnity's loan process "one of the most efficient and effective in the industry." The company can be found online at http://www.comunitylending.com.

The median price of a home in Illinois rose 7.3% in June, compared with that of a year earlier, according to the Illinois Association of Realtors.Sales rose 7.2% over the same period. The median cost of an existing single-family home was $183,270 in June, compared with $170,800 a year earlier, the association said. Record low interest rates in June helped sales reach 12,601 for the month. For the first half of 2003, sales are 2.9% higher than in 2002.

CenterPoint Properties Trust, Oak Brook, Ill., has issued $150 million of senior unsecured notes bearing an annual interest rate of 4.75%.The securities, due Aug. 1, 2010, have a yield to maturity of 4.771%, representing a spread of 117 basis points over the seven-year Treasury, CenterPoint said. The joint book-runners of the offering were Lehman Brothers and Wachovia Securities. CenterPoint is a real estate investment trust specializing in warehouse/industrial facilities in the Chicago region. It can be found online at http://www.centerpoint-prop.com.

MortgageRamp, an Atlanta-based provider of commercial real estate technology, has hired Tim Mueller as senior managing director of business development for its Deal Central products.Mr. Mueller was previously a director at Standard & Poor's, where he worked in the Charter Research unit, MortgageRamp said. He has also been chief executive officer of Reaxon, which developed a mortgage underwriting platform, and a managing director with KPMG Consulting's real estate finance group. The company can be found online at http://www.mortgageramp.com.

Conditions in the apartment sector may have hit bottom and could be poised for a turnaround, according to the National Multi Housing Council.In the NMHC's latest quarterly survey of apartment market conditions, three of its four indices were "hovering around 50," the score representing a neutral position between improving (above 50) and deteriorating (below 50) conditions. "While it is still too early to say we have turned the corner, this quarter's survey results offer the first real glimmer of hope," said Mark Obrinsky, chief economist of the Washington-based group. The Market Tightness Index (measuring changes in vacancy rates and rents) stood at 45 in July, its highest level in two-and-a-half years, the NMHC said. Financing conditions showed the biggest improvement in the second quarter, the council said, as the Debt Financing Index rose from 55 in April to 66 in July. The organization can be found online at http://www.nmhc.org.

The Federal Housing Administration insured an all-time high 1,800 reverse mortgages in June, putting the industry on a pace to break the annual volume record of 13,048, according to the National Reverse Mortgage Lenders Association.NRMLA said the most popular reverse mortgage product -- accounting for about 95% of the market -- is the FHA-insured Home Equity Conversion Mortgage. HECM volume is "probably much larger" than the numbers indicate, the association said, because the Department of Housing and Urban Development has a second category for "unendorsed" HECMs that includes loans waiting to be insured by the FHA. As of June 30, HUD reported 17,499 unendorsed HECMs, compared with only 7,945 a year earlier. "With the stock market boom over and interest rates down, many seniors are getting financially squeezed these days, no longer able to count on a healthy stream of dividends and interest income to supplement their Social Security," said NRMLA president Peter Bell. Senior citizens are using reverse mortgages to pay for such things as prescription drugs, in-home health care, and home improvements, the group said. A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their home without having to sell it or give up title.

Pelican Financial Inc., Ann Arbor, Mich., has announced that its board of directors will seek regulatory approval to spin off its wholesale mortgage banking subsidiary, Washtenaw Mortgage Co.Under the proposal, Washtenaw would become a wholly owned subsidiary of a new public company, The Washtenaw Group, and Pelican stockholders would receive identical holdings in the mortgage company, Pelican said. Meanwhile, Pelican Financial would continue as the bank holding company for Pelican National Bank, a community bank based in Naples, Fla. Pelican said it does not expect to make management or "significant" operational changes as a result of the proposal. Explaining the rationale for the proposal, Pelican chairman Charles C. Huffman said "it would appear that the capital markets, using traditional valuation techniques, will place a higher value on the bank and mortgage company as separate companies than as one diversified financial organization, thus enhancing the ability to raise capital to expand operations of each company separately."

The mortgage business is in for a major bloodletting next year if lending volumes fall as expected, according to Sig Anderman, chief executive officer of Ellie Mae.If originations drop by 50%, as some have predicted, companies from the top to the bottom of the lending food chain will have difficulty surviving, he said at Real Estate Connect, a technology conference in San Francisco where he explained how his company allows 40,000 mortgage brokers to interact with service providers. Originations are expected to reach an unprecedented $4 trillion this year, but many forecasters are predicting that production will fall back to about $2 trillion next year. Historically, that's still a very good year, Mr. Anderman said. But with the same number of lenders chasing only half the business, he added, the blood will flow. "It's going to be a painful next 12 months," he said. ".... Everybody in the value chain is going to experience a halving of the market. And with everybody competing for what's left, revenues are going to shrink drastically." Some have suggested that purchase-money volumes will rise next year to offset some of the decline in refinancing activity as mortgage rates continue to climb. But the Ellie Mae officer said it won't be enough, especially if rates reach 7%. "To seasoned veterans, 7% is still a very good rate," he warned. "But for a lot of people, going from 6% to 7% looks like the end of the world."

Existing-home sales fell slightly by 0.3% in June, but sales continue to be strong and housing economists expect 2003 to be a record year.The National Association of Realtors reported that sales of existing single-family homes fell from a seasonally adjusted annual rate of 5.85 million in May to 5.83 million in June. "The slight easing of sales in June may reflect some weakness in the labor markets," NAR chief economist David Lereah said. However, NAR economists don't believe the recent rise in mortgage rates will have a significant effect on home sales. Mortgage rates are below last year's rates and remain at historically low levels, NAR senior economist Lawrence Yun said.