Interest Rate Roundup

Wednesday, March 04, 2009

First American: 19.8% of borrowers with mortgages now "upside down" -- Plus, more on CRE

First American CoreLogic is a company that tracks all kinds of mortgage and property data. The firm's latest report on "underwater" or "upside down" borrowers -- those who owe more on their mortgages than their homes are worth -- suggests the problem is getting worse.

More than 8.3 million mortgages exceeded the value of the homes securing them in Q4 2008, up from 7.6 million in Q3 2008. That's a whopping 19.8% of all homes that have mortgages against them. Add in those loans that are near the negative equity threshold, and you get a reading of 25% of all U.S. loans. Some more insight from First American on the meaning of these numbers can be found at this Wall Street Journal link.

Meanwhile, I like this Bloomberg story that details how and why lenders and loan investors are STILL hugely reluctant to cut mortgage principal balances ... and how that could doom the Obama rescue plan to the "dud parade" of federal bailout programs. Good reading.

Finally, it looks like the moronic commercial real estate investments made at the peak of that market are coming back to bite investors in a big way. If you had any doubt that big money managers could make the same stupid mistakes in commercial as casual house flippers did in residential, this story should put that out of your mind:

"In a sign that pension funds and other institutional investors are about to get clobbered by losses in commercial real estate, Morgan Stanley told investors to expect as much as a 60% fourth-quarter write-down on the equity in a marquee $8.8 billion real-estate fund, according to a letter reviewed by The Wall Street Journal.

"Morgan Stanley hailed the commercial-property MSREF VI International fund as "the largest-ever real-estate fund" when it announced its debut in June 2007. The Wall Street firm projected a 22.4% overall average annual return for the vehicle, which made big, highly leveraged investments on commercial properties scattered mostly in Japan, Germany, China and Australia.

"The fourth-quarter losses come on top of a $1 billion shortfall during the first nine months of 2008, which means the fund has lost about two-thirds of its $6.5 billion in invested capital in 18 months. Among the fund's bad bets: a $3 billion acquisition of more than two dozen office buildings in Germany in July 2007 at a very low yield of 3.5%. The fund invested $350 million of equity in the project. As of September, Morgan Stanley valued the equity stake at just $23 million, according to the fund's third-quarter report."



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