Priel's Perspective

Real Estate Recovery: The Race is On

2011-12-09T11:02:00.000-08:00

Real Estate’s journey in 2011 has been a wild ride based on the criteria many use to measure success. Optimistic expectations at the beginning of the year have not produced sustainable returns at year’s end. Or have they? The saga of the real estate recovery in 2011 seems to enact the familiar fable of the tortoise and the hare. Which approach would be the most accurate in characterizing the sector’s performance --- an aggressive approach seeking tangible, quick returns or a more measured approach whose success is measured by long-term results? While the inclination may be for instant gratification, perhaps a “slow and steady” perspective provides the best evaluation of how well real estate has performed this year and where it’s headed in 2012.

2011 started, and the race was on, driven by hopes of a much better year than 2010. In some instances, optimism had merit. There was a general, shared sentiment that the economy, overall, would rebound, creating jobs and a stronger environment for small business to begin to grow again. High-profile commercial property acquisitions and note purchases driving up the values of assets in key urban markets captured the real estate headlines. Businesses felt confident enough to expand into new square footage, while both existing households and newly-forming “echo boomer” households valued renting over ownership which drove down vacancy rates in both office and multifamily sectors resulting in steady revenues for commercial investors.

The average consumer had reason to be optimistic as well, as seemingly negative economic influencers created new opportunities. The deluge of foreclosed homes on the market (which drove sale prices down), combined with political and financial volatility abroad drove fixed mortgage rates tied to Treasury yields to record low levels affording consumers with new buying power not seen in years. Even distressed borrowers had reason for optimism as the government promoted a dizzying number of “Home Affordable” programs; and lenders, under the scrutiny of regulators, slow-tracked foreclosure filings due to processing improprieties like robo-signing.

But along the way in 2011, the hope for a brisk recovery took a cat nap, as evidenced by the following:
• Threat of a “double-dip” recession reflected by anemic GDP growth and stubborn unemployment
• Scarcity of commercial deals in top markets accompanied by a stall in the ascent of commercial asset values
• Homeowners unable to qualify for historically-low mortgage rates to purchase bargain-priced homes
• Decline in equity in non-distressed home values as a result of a market flooded with distressed properties
• Less Americans seeing the long-term value of owning a home versus renting
• Lenders, now confident about their back-office procedures, filing foreclosures at a stepped-up pace starting in the 3rd quarter 2011
• Extremely tight guidelines for loan qualification

Those seeking signs of a speedy housing recovery could point to the above as proof that 2011 was a year the industry should forget. However, the following represents just a few of the areas quietly developing this year to support the notion that real estate is showing signs of improvement:
• Commercial opportunities emerging in “out-of-market” areas (suburban or “B” class office assets)
• New construction to meet demand (unexpected demand for rentals and short supply sparked new construction in the multifamily arena)
• All-cash investors sustaining the market (all-cash investors accounted for up to 31% of all purchases in 2011, filling the vacuum created by the absence of first-time buyers)
• Surge in loan modifications, short-sales as an alternative to foreclosure (over 5 million approved as of the third quarter 2011 involving both interest and principal reductions to keep borrowers in their homes )
• Non-distressed home values appear to be stabilizing in many markets

But perhaps the most important evidence of a recovery can be seen in the segment most affected by the housing crisis: the consumer. As noted before, more borrowers are taking advantage of modifications and short sales to avoid being a foreclosure statistic. Additionally, consumer debt and delinquency levels in mortgage and in all other credit products dropped significantly in 2011. Compared to the consumers during the housing boom of the last decade, today’s consumers are significantly better-educated in managing debt and knowing the consequences. A key component is the accountability of appraisers deciding true values based on the reality on the street and not on the number needed to complete a loan.

When credit conditions make home ownership a viable option again, these consumers will be ready to jump-start a new phase of responsible home purchases from a stable credit footing. And what benefits the average borrower in the future will also benefit the smart investor who is ready to leverage opportunities in a new cycle of real estate growth.

The race isn’t over for real estate. Fundamental gains took place in 2011 that will bear substantial fruit in the years to come for investors and consumers alike. “Slow and steady” wins every time.

Private Equity and Commercial Notes Strike the Right Chord

2011-11-03T10:22:00.000-07:00

Commercial note trading is big business these days, with motivated parties on both sides. Recently, Bank of America agreed to sell a commercial note package valued at approximately $880 million to an institutional investor / hedge fund JV partnership at a discount rumored to be as high as 25% off the original pool value. The note pool was comprised of performing as well as
non-performing assets. On a smaller scale, private equity firms nationwide have also enjoyed healthy returns of lucrative note acquisitions. This segment has great potential for sophisticated investors if partnered with the right private equity firm.

While commercial banks clearly control a substantial segment of available note inventory, smaller equity firms are quietly carving out a successful niche in the note sector with the goal being acquisition of distressed assets. As the pool of desirable commercial assets available for outright acquisition diminishes, investors have turned to distressed note purchases. Institutions holding problem mortgages are extremely motivated to sell distressed notes through discounted sales rather than foreclose and dispose of these assets on the open market at an even greater loss. Unfortunately, due to the inherent complexity of the typical commercial loan deal involving not only the borrower, but also multiple financing instruments used to complete the purchase, along with the fact that lenders don’t openly promote these offerings; it requires an experienced private equity shop with an ear to the pavement to ferret out and negotiate these opportunities. The issues relating to compliance, guarantees, bankruptcy among others are paramount for determining the success of such acquisitions.

One of the greatest strengths private equity firms bring to the table is their willingness to explore a workout solution for existing borrowers in an effort to achieve sustainable returns in the long run. In instances where the borrower is also owner / tenant of the commercial property, the borrower has a vested interest in the property and will be extremely motivated to continue to manage and maintain the property. If a workout is not feasible, private equity firms can often craft an exit strategy that works for all parties. Private equity firms have the flexibility to find ways of making the borrower a part of the overall solution in ways that institutional lenders cannot. This flexibility provides private equity firms with the option to nurture a non-performing note to “performing” and maintain the asset as a revenue source until the market price is right to sell it.

There’s an abundance of capital poised to invest in commercial real estate these days. It’s projected that 2012 and 2013 may prove to be milestone years for commercial investors as 2002 and 2007 vintage commercial notes reach maturity, and short term loan extensions negotiated for some commercial borrowers during the mortgage meltdown come due. It’s our belief that as the availability of profitable commercial assets in top markets become increasingly rare to find, the availability of distressed notes will rise to meet the demand. Investors partnering with the smaller private equity firms not only avail themselves of access to available deals but also to the opportunity of long term gains through restructuring the lending terms with existing borrowers. As a result, these firms create a healthy environment in the commercial market that benefits its investor base as well as provides much needed relief to distressed borrowers in need of alternative financing solutions their lenders can’t offer.

Cautious Optimism for Market Recovery

2011-10-05T09:15:00.000-07:00

The country has gone from one extreme — lax oversight in financing — to the other, making it nearly impossible for potential homeowners to qualify for loans and purchase property resulting in a large inventory of homes and unstable markets. It’s now up to the banks. The only way for the residential real estate market in the U.S. to recover is for the banks to return to more flexible lending processes. At the commercial level, however, deals are taking place as pent-up cash rushes to well-priced real estate.

At Peak, we are more optimistic in the real estate market’s recovery and see buyers ready to commit to developments in both residential and commercial property, creating both opportunities and new jobs. We lend our own capital and are committing to new townhouse developments and shopping centers nationwide.

Three trends to watch in 2012:
1. Banks will increasingly embrace both short sales and modifications to loan principals. Over the past few years as new bills were introduced to protect homeowners, it’s become harder for banks to foreclose on properties, though in California alone over 800,000 properties were lost to foreclosure in the past five years, according to property information service DataQuick.

In reality, legislation has only delayed the inevitable foreclosure, exposed banks to legal issues and provided no real motivation for lenders to make the system move again. Banks have several options available to them to maximize cash flow in 2012 including short sales, which allow a third party to buy the property and the bank to recoup more of its investment than with foreclosures and loan principal modifications which incentivize homeowners to not abandon property and keep paying mortgages while recalibrating the system to current fair market values. With California’s Bill SB 458 signed into law in July, we’ve seen an uptick in short sales as homeowners feel protected against any future lien holder payments on the property. In 2011, the number of federally-sponsored and proprietary loan modification programs increased substantially despite the wave of new foreclosures.

2. Demand will return and necessitate new construction. While the building industry has suffered along with every other sector of real estate and construction of new homes – a key indicator of economic health – recently posted its largest decline in 27 years. Smart investors see potential in the building and construction industry.

Analysts at Fannie Mae and other organizations predict that the available rental units many consumers are turning to – away from single family homes – will not meet the growing demand for affordable housing. Also, on the retail and office front, as businesses expand, there will be shortages in commercial square footage. With new capital from private equity and large banks, selecting the right location to build in good markets is key to achieving a fair return on investing in new construction.

3. Revolutionary ideas will help kick-start the industry. From sanctioning Freddie Mac and Fannie Mae to act as landlords, effectively managing and renting distressed properties, to razing large numbers of homes to reduce the sprawling inventory and stabilize home prices, there are a number of expert recommendations on how to save the real estate industry. Enticing home occupancy to improve a community’s overall property value may be the best option. Without it, properties will depreciate.

As the natural cycle of short sales, loan modifications, and foreclosures runs its course, coupled with new construction driven by demand and implementation of strategies to liquidate the governments’ inventory of distressed properties, we feel a market recovery benefitting homeowners as well as investors is within reach.

REO to Rentals: What's in it for Investors?

2011-09-01T13:43:00.000-07:00

The government, in its bid to seek solutions to extricate itself from the mortgage business, is asking investors for help. In August, the FHFA (who oversees the government’s conservatorship of Fannie Mae and Freddie Mac) along with the Departments of Treasury and HUD, openly solicited ideas on how to divest itself of over 250,000 homes. Stealing a profitable page from the investor communities’ playbook, these three agencies are extremely interested in whether or not investors would step up to buy blocks of government-held REOs for transition to rentals (R to R). And with good reason: over the past few years, savvy investors seized the opportunity to snap up bank-owned bargains. Through this anemic housing market they have implemented a “buy and hold” strategy and are renting out these properties. This not only meets the growing demand for single family rentals, investors are enjoying a healthy revenue stream on their investments. In this context, a governmental R to R strategy appears to be a slam-dunk. At least, that’s how the government would like to position it.

It’s easy to see how this R to R strategy benefits the government. If you add the 800,000+ delinquent mortgages on the foreclosure fast track to the 250,000 the government has had to take back, you can feel the lump in the administration’s throat starting to rise if it doesn’t get the private sector to back this strategy.

This strategy benefits the community as well. Occupied homes increase the value of the community. Vacant homes lead to disrepair, crime, and depreciation of value. And clearly, this strategy benefits the average consumer and distressed borrowers in that it should provide more affordable housing options including the possibility of leasing lost properties back to their distressed borrowers to keep them in their homes with continuity for families.

The real question is, will investors jump in knowing that an investor/landlord status in this scenario will potentially saddle them with questionable returns. The private sector needs to be convinced that this R to R strategy does have merit for them. While such a plan could clear the backlog of foreclosed homes off the government’s books, if there’s no real benefit to investors, the strategy will be seen as merely shifting the albatross to the private sector without curing the problem. Success, therefore, is predicated on three conditions favoring investors and the government’s willingness to implement them:

Below-market pricing on foreclosed properties. Government entities will need to make serious price concessions on already discounted pools of distressed properties to mitigate the risk and expense of investors inheriting potentially non-paying tenants. As an example of how steep discounting of assets created a win-win for the government and investors, the FDIC disposed of a large pool of distressed properties to fellow investors at a significant discount. With below-market rates and aggressive LTVs, the government also gave loss-sharing security to further motivate the pool purchases.
Favorable financing conditions. As part of the program, the government would need to facilitate financing that provides investors with a rate that needs to be very favorable to insure an income stream. The length required to hold any property as rental cannot exceed five years and must include a recovery measure that may allow the disposition by the investor in as little as three years.
No government involvement. The government needs to allow the private sector to manage its newly-acquired assets without interference. The bureaucracy and micromanagement typically associated with Federal “participation” after the deal is done would only stymie efficiency and ultimately erode long-term investor profitability. The idea is not to create a new “Government Landlord Agency.” An efficient system of compliance can be monitored with clear penalties for non-compliance by investors. The paramount concern will be to assure that these rentals do not in actuality bring down a neighborhood. Investors must agree that property maintenance cannot be neglected. Such neglect will only perpetuate declining values for years to come.

In a recent town-hall speech, President Obama conceded that the government needed the help of not only the public and bankers, but also the help of investors to tackle the current housing crisis head on. The investor community will be more than willing to help if the government can make it worth their while and not over-regulate.

Real Estate's Mid - Year Report Card for 2011: Hard Grades for Tough Times

2011-07-29T09:23:00.000-07:00

The real estate industry looked with optimism to 2011 as the year of renewed growth and rejuvenation. Now that we've passed the halfway point, the industry's performance as a whole has been a mixed bag. Commercial real estate investing scored best thanks to a healthy multi-family sector, while bullying from a tough economy and lending-averse banks kept consumers from reaching the front of the class. But a business as broad as real estate is truly a sum of its parts. To truly tell if real estate is passing or failing at midterm, we need to look at the key markets and the factors influencing their progress this year:

Investors
• Distressed properties at bargain prices - Typically engaging in all-cash transactions, great deals abound this year in banked-owned and short sale properties.
• Increase in value of multi-family inventory - As homeownership loses favor to renting, vacancies have dropped and rents have risen to make apartments a profitable investment. Offering a safe return, the cap rates have been amazingly low on quality projects.
• Increased value in office properties in top urban markets – Prime office space values are climbing forcing investors to widen their search into suburban commercial space.
• Access to credit - In contrast to the residential market, banks are starting to return to the commercial market as a source of loan origination, and have more confidence in securitizing commercial loans. The qualification process is difficult but getting better.
• Rising delinquencies on old commercial debt - Securities backed by commercial loans originated between 2005 and 2007 are showing increasing signs of impairment in contrast to loans originated in 2011.

Consumers:
• Falling home values seem to be stabilizing – Downward pressure will continue as a result of the flood of foreclosed homes and short sales anticipated. High loan-to-value mortgage holders are suffering the most.
• The cost of the average mortgage - The good news: average mortgage rates remained below 5% for the first two quarters of 2011; the bad news: loan closing costs are nearly 9% higher than in 2010.
• Tighter credit – More stringent underwriting guidelines implemented by major lenders this year has kept many first-time buyers from obtaining mortgage loans.
• More homeowners facing foreclosure - Despite recent statistics showing a drop-off in foreclosure starts, industry experts agree the trend is a result of continuing bottlenecks in the servicers’ processing track. Consumers continue to face the threat of foreclosure in the coming years as lenders address internal issues and resume foreclosure filings in full force.
• Loan modifications gaining traction – Even with the specter of a wave of new foreclosures, the number of both federally-sponsored and proprietary loan modification programs has increased substantially this year helping more borrowers stay current.

Which brings us back to how is the industry doing? Over the past thirty-five years, I’ve seen the ups and downs of a number of cycles. With this current cycle, there are now guarded signs of an upward trend in all markets. Investors are clearly the best positioned to see strong returns in a safe environment with multi-family properties and single-residence rentals standing to gain the most in a longer-term outlook. Today, delinquent commercial loans present opportunities for those investors who specialize in purchasing distressed notes. Servicers have begun addressing the inadequacies identified in their foreclosure process procedures and have reluctantly embraced short sales, loan modifications, and other cures as options to remove distressed properties from their foreclosure pipelines; which brings us to the consumer. As lenders receive more pressure to relax credit criteria and if rates remain low, homeownership should become more attractive during this unprecedented era of deflated home prices.

It won’t be easy for real estate to end the year overall with a good grade, but it is possible. If investors continue to sustain the market and if lenders make it easier for consumers to participate in a rebound, we may see the next upturn more quickly than anticipated.

To build or Not to Build?

2011-06-29T09:58:00.000-07:00

A tough question in light of today's stubborn economic recovery. Even though we've spotted a few bright spots on the economic horizon (a shrinking foreclosure rate, a growing cash-investor class taking advantage of bargain distressed property prices, rising values of existing commercial properties), tepid job growth and an inventory of unsold REOs seem to negate any optimism.

Arguably, the building industry has suffered as much as any other sector. Construction of new homes, one key indicator of economic health, posted its largest decline in 27 years and finds itself struggling with rising material costs in an environment not conducive to raising prices to cover costs. While conventional wisdom suggests that investors should distance themselves from the building and construction industry, first impressions could be misleading. A strategic return to the sector could yield great returns for the smart investor.

The secret lies in pinpointing specific demand and if enough demand exists to drive growth. UCLA’s Anderson School of Business’ recent findings echo findings from a number of other sources indicating a consumer “shift” is occurring to affordable rental units from the traditional single family home. Higher down payment requirements, tight credit and other factors make renting a more practical choice for current homeowners and the growing segment of “Echo Boomers” – defined as children of Baby Boomers born between 1975 and 2000. Fannie Mae estimates that the currently available 15.2 million rental units will not meet the growing demand for affordable housing for this group in the future. Similarly, on retail and office market fronts, analysts predict shortages in retail office spaces as businesses expand. While the fate of the traditional single-family home may be unclear at the present time, the need for affordable apartments and commercial square footage is increasing. Demand exists.

The economic downturn crippled the construction industry. The credit vacuum created by the voluntary exit of lenders and the FDIC shutdown of banks with non-performing construction loans brought building to a virtual halt. New project starts diminished and ongoing developments that lost financing stalled. These factors combined to stymie the supply of units brought to market.

Now that demand is showing signs of returning, some mothballed projects may begin to make sense at today’s prices. The initial infrastructure work leading up to construction (permits, environmental studies, plans, etc.) that comprise the up-front costs and take years to complete, new investors can now obtain for pennies on the dollar. Private equity funds and large banks are once again injecting new capital into projects. Activity is increasing at construction sites nationwide to meet projected demand, providing much-needed jobs to their immediate communities. We recently completed a development project that was able to sell at attractive current levels based on the fact that we saved on both the land cost as well as benefited from existing infrastructure. This in addition to the short time frame from investment to repayment, made the difference.

The key factor is to begin in the areas that were located within good markets and avoid those areas that were on the outer rim of the growth pattern. If the project is well located it should achieve a fair return using very conservative projections.

Is it time to build again? The answer depends on finding the right location at the right price at the right time when land is cheap and the up-front costs have already been absorbed by previous investors. The heavily discounted infrastructure and approvals, in my opinion, are the key elements

The All - Cash Investor -- Bringing Balance to the Housing Crisis

2011-05-31T11:35:00.000-07:00

Supply, demand, and price — the three indisputable factors of economics on display during our current housing crisis. The supply of unsold homes, high unemployment, a sluggish economy,

restricted lending, and the emerging renters’ market work together to affect both the consumers’ ability to afford a home and pushes down demand.
As a result, prices on unsold inventories fall in the hopes of stimulating demand to reduce supply, which in turn affects the equity of surrounding homes. President Obama recently declared the housing market as the biggest “headwind hurting the U.S. economy.”

It’s no secret that the inventory of foreclosed homes isn’t going away any time soon, and the glut continues to send home prices downward. However, a new class of all-cash investor has emerged to bring balance to the equation and inject some much-needed hope into the housing industry.

According to the National Association of Realtors, approximately 1 million homes were sold to investors in 2010 and the 1st quarter of 2011 saw even more activity from deep-pocket buyers. Las Vegas, holding the unenviable title of “Foreclosure King“ with 1 in 9 homes in default at the end of 2010, saw all-cash investors snap up almost 5,000 homes just this past April alone. The same trend played out in California, where all-cash buyers accounted for nearly 31% of sales in January of this year. Sales activity in these two states clearly illustrate that the harder a market is hit with defaults, bargain prices are bringing a higher percentage of all-cash deals. The housing crisis has presented real estate investors with opportunities not seen in years, and investors from all over the world are stepping up to the plate.

The current property buying spree is not only providing all-cash buyers with profitable investment vehicles, it’s also providing significant support for a floundering residential real estate market waiting for the economy to improve enough to allow “average” consumers back into the game. All-cash investors accounted for as much as one-third of all home sales this year which helped bolster real estate sales figures and keep realtors employed, not to mention the impact of clearing the backlog of distressed properties from lenders’ books. As lenders’ tight credit standards make it more difficult for buyers to obtain loans, the all-cash buyer fills an important void in the purchase cycle. Moreover, with rehab needed on many of these distressed properties, investors are driving much needed business toward contractors to prepare properties for a future sale or rental. All in all, all-cash buyers have definitely given the housing industry a much needed boost.

Analysts predict that the inventory of foreclosed properties will continue to place downward pressure on home values through 2012. While the economy is showing signs of recovery in many sectors, that recovery has not fully extended to residential real estate. All-cash investors are a crucial component in maintaining the equilibrium in the real estate supply-demand-price formula. And as a result of this pivotal role, they’re not only keeping the industry moving, they also stand to be rewarded with strong returns and a great upside potential.

Commercial Real Estate Shows Signs of Life in 2011

2011-04-08T09:26:00.000-07:00

I am confident in stating that we are clearly seeing the foundation for a sustained commercial property recovery. The geographic results may vary, but there seems to be a consistent positive outlook. Nobody is saying they expect prices to skyrocket anytime soon but a fundamental floor is evident.

In a sign of the new times, the Mortgage Bankers Association recently sold its Washington D.C. headquarters to an investor group for $41.3 million. In February 2011, that same investor group sold the building for $101 million. This is just one example and I can add another recent example: one of our own deals that was acquired as a distressed note acquisition. The market stalled for the developer and we were able to complete the project and sell the property with multiple offers. These examples illustrate how, over the past couple of years, commercial real estate values have appreciated as much as 30% in some markets.

At the height of the mortgage meltdown, while economists, Federal officials, lending institutions, and investors held their collective breath waiting for the other shoe to drop - the collapse of the commercial property markets - it never materialized to be the end-all collapse most had forecasted. Due to more stringent underwriting and higher capital levels required for investments, commercial real estate held steady. Today, with the resurgence of securities collateralized by commercial loans, major financial institutions’ actions underscore investor confidence. Analysts project $13 billion in commercial-mortgage-backed securities (“CMBS”) will have been issued in the first quarter of 2011 alone. We are seeing a consistent stream of lenders who pulled out, re-enter the lending arena with large capital commitments for this sector. Commercial real estate is enduring the economic turmoil and remains a sound choice for many investors.

Thawing credit markets are breathing life into small and medium-size business growth which is fueling an increased demand for office space. Although vacancy rates remain historically high in many markets, the trend is clearly going to the side of absorption. This increased demand for office space combined with a decline in new office building construction, has lowered overall vacancy rates, stabilized rents, and generated dependable returns.

Profitability in the multi-family sector is directly related to developments in the single-family housing sector. For the average consumer or first-time homebuyer, stiffer underwriting guidelines, higher loan-to-value requirements, and higher interest rates have made it more difficult to afford a home. Despite favorable “buyers market” conditions, only investors with cash in hand are truly taking advantage of market opportunities. Many Americans, for the first time, are questioning the long-term value of homeownership. Recent surveys indicate that the numbers of Americans who believe homeownership is a safe investment is decreasing annually. Moreover, homeowners displaced as a result of foreclosure or other loss mitigation activities such as short sales and deeds-in-lieu have created a new class of renter. The outcome: vacancy rates for apartment rentals are plummeting and rents are increasing accordingly based on simple supply and demand. Analysts predict a mere 5% rental vacancy rate by 2012 with an increase in rental charges as much as 10% or more in major U.S. markets.

Capitalization rates further underscore the increased value of commercial property. The lower the “cap” rate, the higher the projected rental revenue. In a recent Fannie Mae report, capitalization rates on multi-family properties remained low through 2010 indicating strong returns for the sector. And, as the Federal government seeks to end government involvement in insuring mortgages, current proposals include continued government backing of multi-family loans due to their low default rates. The multi-family sector has been recognized as the first to recover.

All the signs point toward the commercial sector as being the one to watch: unlike their single-family counterparts, commercial properties are appreciating in value; markets for commercial-backed securities are returning to favor; the resurgence of small business signals an increased demand for office space; factors stifling a recovery in the housing industry are generating revenue for apartment owners; and the government’s assessment of the stability of commercial mortgages is positive enough to keep it in the game of insuring them.

At the Peak Corporate Network, we believe that in a hindsight scenario, 2010-11 will be viewed as the “turnaround.” We are seeing this firsthand with increasing demand for space and the improving performance of our properties after several years of decline. We are actively seeking to acquire investments and JV opportunities in this market.

The handwriting on the wall is clear - commercial real estate, for the savvy and patient investor, continues to be the smart investment.

The Implications of a World Without Fannie and Freddie

2011-02-24T10:13:00.000-08:00

$321 billion -- the total estimated cost of keeping Fannie Mae and Freddie Mac on life support since both government-sponsored enterprises (GSEs) went into conservatorship in 2008. Given the high price tag, it's not surprising that the Obama administration has proposed plans for phasing out the programs over the next seven years. While the White House and Congress spar over a variety of partisan issues, they find common ground on the idea of getting the government out of the mortgage business. Recommending the end of Fannie and Freddie may sound like a sensible step to reduce the deficit and Federal exposure to the risks of mortgage backed securities, however, it also poses significant implications for the economy and a currently-struggling real estate industry. The biggest factor is additional uncertainty and insecurity in a market that has been unable to regain a stable footing.

In February, 2011, the U.S. Treasury Department recommended three options to phase-out the GSEs. The first option is predicated on mortgages guaranteed completely by the private sector. The second option is similar, but calls for some government involvement as a “backstop mechanism” which would be funded by premiums charged to a selected segment of higher-priced mortgages, the level of which needs to be determined. The final option relies on the private sector as primary guarantor, however, the government upon approving selected insurers and instituting strict underwriting oversight, would provide capital, if needed, funded by premiums charged to a select mortgage segment.

Under any scenario, FHA insurance would remain untouched; the government would only be divesting itself of the GSEs. Government insurance for mortgages secured for low-to-middle income borrowers by the FHA, the U.S. Department of Agriculture, and the Veteran’s Administration would remain in place under all three options.

The top tiers of the mortgage market could still encounter major headwinds with the phase-out of GSE backing. Adding private sector insurance with its associated higher premiums (undoubtedly passed on to borrowers) to the mix of sluggish home sales, depressed prices and rising mortgage rates could further postpone a full recovery in the real estate market.

Important to note as well is that the government’s proposals regarding the demise of Fannie and Freddie do little to address the inventory of toxic securities taxpayers have been burdened with since taking over their conservatorship. While the hope is that in time, these securities can be sold off, the options presented take a “go-forward” approach to prevent future catastrophes with no real strategies to deal with existing losses. The U.S. taxpayer holds an 80% stake in both GSEs, estimated to have a combined debt of $5 trillion which currently represents about 50% of U.S. first liens. While shuttering these two giants may achieve the long-term goal of extricating the government from the expensive business of mortgage insurance, it will fundamentally change the way loans are bought and sold in this country.

Can we act upon the headlines?

2011-01-25T13:57:00.000-08:00

It’s 2011, and with the beginning of a new year comes new hope for a year better than the last one. If you believe the headline statistics touted by retailers and economists, we’re in store for a rebound. Here are some of the signs heralded as indications of an economy on the road to recovery:

• Retail sales for the 2010 holiday season were at an all-time high
• Auto and Banking industries are repaying bailout funds from 2008 to regain companies
• At the end of 2010 unemployment claims nationwide dropped, and in California stabilized
• Sales of existing homes increased in 2010
• In 2010, foreclosure activity saw a 14% decrease nationwide, according to data tracking from RealtyTrac

Unfortunately, relying on 2010 statistics as a basis for optimism could be misleading, especially when looking into the statistical support for some of them. If one just accepts the statistic that foreclosures sales have fallen dramatically it will not be a true picture. We need to examine the drivers behind decreased foreclosures. As a result of “Robogate”, which exposed the practices of lender middle managers signing affidavits allowing banks to repossess homes in default without fully reviewing the documents, major lenders and loan services halted foreclosure proceedings last fall to evaluate their document review process. It’s now 2011, and financial institutions are gearing up to resume foreclosure activities. What also looms on the horizon is another round of adjustable rate mortgage resets to higher rates in 2011 which could potentially contribute to higher foreclosure numbers if borrowers can’t make increased monthly payments. Or worse still, borrowers faced with higher mortgage payments could decide they owe more than the property is worth and simply walk away in mass numbers.

With all the talk of a rosier outlook for 2011, it’s clear that borrowers are still facing the issue of losing their home. However, loan modifications and short sales still exist as viable options for homeowners to keep their homes while the economy stabilizes. The simple fact remains that lenders don’t want the cost of REOs dragging down their balance sheets, and invite alternatives to keep borrowers out of delinquency. They will invite alternatives that enable their books to show a positive direction. Many insiders are concerned about the prospect of an additional price decline although most that I have spoken to do not feel we should expect another large decline.

The reality is that as long as lenders keep their very tight lending criteria we cannot expect that any increase in values is just around the corner. At some point the reality of profits will need to translate into looser lending.

All the talk of an economic turnaround could lull homeowners facing distressed situations into a false sense of security. But borrowers facing delinquency or foreclosure do have options at their disposal to keep them from becoming the next bad statistic. Short sales and loan modifications are alive and well in 2011, and can help people stay in their homes or at worst have a solid chance of a fresh start.

Is this the time to invest in houses?

2010-09-20T16:16:00.000-07:00

I am regularly asked this question - . Should I take my very valuable saving and buy a house, rent it, and hold it for a good return?

The answer is simple; for sure, maybe, probably not, or no way!! I believe that covers it all.

Let us explore these answers and you can decide what to advise or perhaps what to do on your own.

The correct answer directly correlates to risk, expectations, need for money, alternative investments and available time. An investor who wants to buy will have to identify the right asset for a lease / hold strategy and hold it in an investment portfolio as a separate class in the basket. Let’s explore the data and forecasts to help make this decision.

Existing home sale statistics have been rising over the last year but most recently are showing some weaknesses. According to NAR (including SFR’s & Condos) in June sales fell over 5% from May, but are still almost 10% higher then in June 2009. The supply is much higher then we would like to see. But the overall pricing is stable due to such a severe drop. The prices were higher in 10 of 18 metro markets in 2010 versus 2009. Condo values were flat in most markets year to year. In a broad brush approach – northeast values decreased slightly around 1%, Midwest – down 1%, South – unchanged, West was up 1.5%. It does appear that conditions have become more balanced. It is likely that a balance can continue since the tax credit expired and jobs remain a problem. The job situation may be the most important factor in a specific area if we try and forecast future values. This of course is considered along with the release of new distressed inventory by lenders “holding back.” There is also all the recent press about a “double dip” recession projecting future value declines.

Home value volatility and associated risk remain very high. It seems that the stabilization phase with government policy intervention may have run its course now. There is a strong possibility that we could see further price declines as the economy remains weak.

Digging further into values, according to Core Logic’s year to year home price index for June the following is important: The top 5 states with highest appreciation were South Dakota +6.9%, Maine +6.4%, California +5.9%, Virginia +4.7%, Washington DC +4.3%, Top 5 depreciation; Idaho -9.1%, Alabama -3.8%, Oregon -3.5%, Washington -3.4%, New Mexico -3.2%.

There are some factors that show reason for optimism in value expectations. The inventory of new homes being built and released to sell is actually at a very low level. In addition, we have interest rates being offered by lenders that feel like the “limbo” – How low can they go? They are at historical lows and we find 30 year fixed rate loans at around 4.5% to be extremely attractive.

So now having digested the various statistics and investigations, we need to ask if the investor is right for this investment and what a buyer should expect both in return on investment, time commitment, and other issues.

As SFR defaults continue and the housing market seems to stabilize, will SFR lenders increase their strategy to “rent & hold” property rather then dump them or leave them vacant? For many lenders this strategy makes sense even if they are reluctant landlords. A concern for any investor is that these rental homes will become your competitor as well as the multi-family building in the immediate area. Both of these will hold rental values down until the homes are sold and apartments fill-up. This increase in rental unit availabilities can cause a downward spiral for investors holding homes for rent.

As managing director of the Peak Corporate Network, I was recently interviewed by 2 reporters for a cover article in the L.A. Times, August 20th. I was able to provide details due to Peak’s expertise in the default area including our financing products for investors buying houses and our default services. The reporters were responding to reports that institutional investors / funds are jumping into the “trustee sales” investment world. We have seen this directly as we are regularly approached to finance or joint venture in such acquisitions. I believe that the demand to place money is very high now and the property returns on buying at the trustee sale support the “high yield” requirements for many fund managers. I bring this up because it may soon be the case that the way to get the higher “sales price” is at the trustee sales. The same factors that led to previous bubbles with too much money being placed in home loans can lead to too much money chasing the same deals at the footsteps of the courthouse. I can tell you that some of our property loans that have gone to sale have been sold to 3rd parties at prices considerably higher than our analysts advised we wound net at full payoff or as an REO after eviction, repairs and sale costs. This is an interesting phenomenon and will be worth watching. The inventory being acquired may ultimately disappoint the investor and lead to a wave of dumping these homes in 1-2 years.

The days of easy flipping single family homes may be coming to an end according to many savvy realtors and investors. I agree that the markets have in fact “cooled off” as so many remain unemployed and pessimistic. According to one research group, prices will go down even further over the next 18 months by as much as 5-10%. Anyone looking for a short term gain by selling a property is probably heading for trouble. Flipping is going on for sure, but fewer investors will be able to pull it off for a nice profit. Flipping a property requires “cash in hand” with an investment for repairs, holding and selling expenses. The idea of buying it and selling it “as-is” is becoming very difficult to accomplish.

The lenders policies are making it so difficult to close a loan. We regularly make loans for borrowers who simply could not obtain conventional financing in this market even though they are well qualified. Timing is usually the main issue.

Regardless of the roadblocks, investors are buying. The latest NAR figures show that 14% of all transactions in May were by investors. The majority of those being distressed properties that would still be empty if not for the investor.

Is the investment right for you or your client? Investor expectation is the key variable. Banks today are paying from ½ to 2 ½ % for their safer deposits. If we look at real expectations it does not take much of a return to match or beat the alternatives. If one is satisfied with little or no actual net cash flow and is willing to ride out this cycle, we can all agree that values will surely go up from their current levels. The problem of course is where we are in this cycle. I do believe the large downside risk has been stabilized and we are at most within 5-10% of the floor in most major national markets. There could be further declines but some risk is always to be expected and must be assumed. Most properties at these values and current rates cannot throw off cash flow in excess of 5% actual annual returns. In this calculation you have vacancy, cost of funds, repairs, maintenance, taxes, and insurance.

It is a reality that if you are a landlord “things” happen. The same borrowers who had sub-500 fico are now renters. They could not pay their mortgage so why would you expect a good payment record if they are your tenant? This means eviction cost and delays, vacancy, repairs and costs of re-renting. A break in occupancy, even for a short period, will eat up any expected cash flow and probably will result in a “cash call.”

This now brings us to the “time” concern. How available is the investor to handle such issues. Turning the house over to a management company is a solution but it does have a high price tag as well.

Now that we determined that expectations are good and the investor has the capacity to handle the rental I want to give a few tips to help maximize the potential return on investment.

- Talk to top local rental agents about the area and rental conditions.
- Read newspaper ads – How much is being charged for rentals?
- Consider schools and amenities (Shopping / Transportation)
- If Condo – check out HOA restrictions
- Before you rent – maintain it, clean-it up and make it livable.

In conclusion, the concerns are similar if one hopes to flip it or rent and hold. Values are very attractive and if an investor has the wallet to “ride it out” there is a great opportunity to get a very good return at the end. Keep your expectations in line, be ready for surprises and make some money.

Gil Priel, Co-Founder
Peak Corporate Network

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Priel's Perspective - “The Light at the End of the Tunnel”

2010-07-23T12:12:00.000-07:00

I want to start by saying it is clear to me that there are some buying opportunities in today’s uncertain market.

Many real estate investors, myself included, have been saying that commercial real estate is the next shoe to drop, our next crisis. However, the collapse is actually being held up by a “slow-motion” release of inventory. It is clear that values have declined significantly and many in the industry have serious problems holding on to their investments. The emerging reality is that the idea that an investor can sit idle waiting to buy “Class A” malls or apartments for 9 to 10 caps will not happen during this downturn.

The reasons for this are the “Slow-Motion” release of distressed assets by lenders, the willingness to work with borrowers without regulator pressure, and the fact that there is a huge amount of capital waiting to jump in on any opportunity put out to market.

Now that I made my point clear, I do need to make it equally clear that we are not in a “Boom” market or that I expect values to quickly recover to our 2006 peaks. The “Slow-Motion” idea also applies to any recovery. It will be drawn out as hard times will continue for the short to medium term – buyers beware!!

Many lenders are continuing to play the “extend and pretend” game with their loans and over time will need to take action by disposing of their bad debt and assets. This, in turn, means that these will sell at distressed values and further delay the rebound of investments.

The experts at Strategic Asset Solutions, one of the Peak Corporate Network affiliates, act on behalf of borrowers in debt restructuring on commercial properties. We have seen a significant shift in lender willingness to work with a borrower to reach a new realistic basis for their loans and creating a solid value for both lender and borrower/owner. This is accomplished with principal reductions, rate reduction (temporary and permanent), extended maturity date, funding reserve for property repairs, etc. The bottom line is giving the borrower a reason to stick with the program.

These types of negotiations will increase over the coming years as loans are nearing maturity. Deutsche Bank estimates that more than 65% of the loans that have been packaged in commercial mortgage backed securities (CMBS) will not qualify for refinancing when they become due. Some will be restructured while others will turn into distressed asset sales over time.

Another reason why the commercial real estate market will not collapse is that a bulk of mortgages are held by a single lender (not securitized) that is not under the strict scrutiny of Federal Bank Regulators. This gives that lender ample time to attempt to work out a problem loan in a smooth and orderly manner. The downside, again, is that it drags out any correction for years and of course is a delay for any real rebound is values. A 40% decline in values is not uncommon and it takes a robust rebound to bring it back.

In a recent real estate investor magazine survey, 65% of the responding investors indicated that they plan to boost their investment in real estate over the next 12 months. This is an increase of 30% from last year.

For anyone contemplating making an acquisition there of course remain many concerns that are very real, they include:

- Vacancies continue to increase
- Rental rates continue to fall
- 100’s of properties are in default in most markets
- Sales have plunged
- Appraisals and values are falling
- More equity required by lenders
- Still a disconnect between seller and buyers

These concerns will continue to dominate every due diligence model and challenge decision making by prospective investors over the next few years.

The analysis should be made under an extremely conservative perspective as is required in this very volatile market. This strategy is in the face of what we see as very stiff competition for a very limited supply of distressed properties.

At Peak, we continue to make bids for some of these assets and in many cases competing with as many as fifty “all-cash, quick –close” bidders. We recently purchased a non-performing note secured by two office buildings, in Southern California, with a firm belief that we would ultimately own the underlying assets. In a clear example of money being available, we were overbid at our foreclosure sale by aggressive buyers paying all-cash with little or no due diligence.

I do believe the next 12 months will provide a better flow of deals although many will likely be sold in an auction environment. This requires costly due diligence with a low likelihood of success making it more palatable to the large institutional players who will be the winning bidders with adequate staffing and resources.

As an explanation of the low flow of deals, it seems that the institutions that acquired banks assets during the crisis have had no real reason to sell and no pressure to do so. Now that it is clear that there is a lot of liquidity we feel that change is coming. Currently, Wells Fargo, LNR, and others, are taking billions in loans and assets to market. The capital is available and I would expect an even larger flow of capital looking for safety in the U.S. as economies like Greece and other European countries have their own crisis. Many believe the worst of our crisis is over and the U.S. is a safe haven once again.

In conclusion, the factors I have discussed make me believe that the light visible ahead in the tunnel is not an imminent train wreck, but rather it is the light of optimism.

Gil Priel

Founder and Managing Partner

Peak Corporate Network

"Sitting on the Fence"

2009-11-17T17:58:00.000-08:00

Will commercial real estate values cause another wave of bank failures? Are we heading into a deepening recession or depression? Should I jump in and buy now?

I have been struggling to come up with definitive answers to these questions as the pace of change has created a very tumultuous environment.

I was convinced, as recently as two months ago, that there will be a major collapse of commercial property values. To date it seems that the drop is manageable as CAP rates have risen from sub 6 to over 8 on good quality properties.

We continue to assume falling rents and rising vacancies in our analysis models of commercial deals and loan requests. Perhaps the impact of the residential bloodbath was so severe that it caused a massive reaction by the FED and thus has made the commercial loan impact less of a concern at this time.

Investors and lenders have been forced to focus on their residential portfolios and this distraction has caused them to back off on enforcing their rights when commercial loans are defaulting. We need to comprehend that the volume of commercial loan debt is less than one-third of its residential counterpart. This may make it possible that the bad debt can be absorbed by our economy without the catastrophic impact many fear. This becomes even more likely if the economy actually is growing and the recession is declared at an end.

My belief is that there will be many more bank failures ahead, especially on the regional level. The most likely candidates are those lenders who have a portfolio of loans originated in 2003-2007. For those lenders, as with private individuals, the difference between a recession and a depression is whether it is you or your neighbor. In the private sector, if your neighbor loses a job, it is a recession; if you are losing your job, it’s a depression. For a public financial institution, depression starts when regulators come in and ask questions about the portfolio’s health and valuation- it is at this point that jobs are on the line.

I still sit on the fence thinking things may improve because I have seen, first hand, how many investors with capital are beginning to jump in on any real opportunity. One recent example was a bank sale of an apartment community being liquidated on an all cash basis for a $10mm opening bid. There was a 5 day window to bid- 35 bidders qualified with proof of funds during that short period. I am always working with our institutional partners and I have seen how little attention an “all-cash” and “quick closing” offer gets because many sellers are well aware that the money is readily available.

I recently read that at an Expo in Munich, Germany, there was overwhelming interest by European investors to jump in on the US Real Estate discounts. In the 2008 Expo there was very little attendance and no interest for those exhibiting. Our international relationships have also surfaced and are now requesting that we bring them deals to partner on. There is no question that the aggressive focus is on distressed assets only. However, earlier in the year this was not the case as people were looking for blood.

Now looking over to the other side of the fence, there are plenty of clear indicators and opinions that we are only in the 3rd inning of the value declines and that the worst is just around the corner.

The following are some of the key considerations:
- During the next 15 months approximately $2 trillion of commercial mortgages will be maturing
- Between April and August 09, the value of commercial loans placed in “special servicing” doubled to $50 Billion
- Office and retail vacancies are soaring
- Rents are declining in all sectors
- Flow of new credit remains very tight
- In recent years large project loans have been broken up into layers of securities and if they go bad they will have a very wide impact
- Many projects are standing in various stages of completion and will take months of recovery to justify their completion
- Mark to Market has not been enforced and many lenders are reluctant to reduce values

The market can be kept afloat by the willingness of lenders and the Fed to do modifications, etc. and “extend and pretend”. The idea behind this is to put it off for a later date and not bite the bullet today. Many will argue that things cannot actually improve unless the bad debt is dealt with now and taken out of the system. The prolonged down market is caused by the band-aid approach. The jury is out on this theory.

In summation, I do not feel like we need to jump into deals due to a fear that the “Ship of Opportunities” will sail away if we don’t. However, I must admit that the anchor may be close to being pulled up making us more aggressive in pursuit of investment opportunities in the very near future.

“Still on the fence- but looking for a soft spot to land”. Decisions, Decisions, Decisions.

Gil Priel
Managing Director
Peak Corporate Network

Avoiding a Commercial Real Estate Crash (May 09)

2009-11-17T17:57:00.000-08:00

Just focusing on cleaning up "sub-prime" residential garbage will not bring us back to the days of the real estate boom. The collapse of residential home values is only part of the story. The bigger, and more pressing, financial emergency is on the commercial side of the real estate market.

For some time, the U.S. commercial real estate disaster has been developing like a catastrophic hurricane, swirling in warm waters, gathering intensity, getting ready to hit hard.

Ignoring the reality of a commercial real estate collapse is following the same steps that allowed the free fall in home values. A failure to act in a cohesive effort to pre-empt the impact of a collapse of investment property values will only result in an economic fate similar, or worse, than what we’ve seen in the residential market.

This is a critical time for commercial lenders. Helping honest, qualified borrowers keep their investments is particularly vital to the survival of commercial lending – but perhaps more importantly – has ramifications that will positively affect the economy as a whole.

Back in 1991, during the last real estate down cycle, my own company negotiated a reduced payoff on our office building. The lender received full current value for their loan and we were able to structure a sound deal allowing us to keep the building and ultimately sell it for a substantial profit in a better market. It was this good faith spirit of negotiation that made the deal work out then and can serve as a model for us now, as we brace ourselves for the perfect storm.

Lenders, investors, developers, and many others, will all need to work together to build an infrastructure strong enough to avoid a total collapse of the market.
Initially, the mezzanine lenders will be most affected. They’ve made huge capital investments behind securitized senior loans that took the safer portion (lower LTV). These lenders are not small Mom & Pop lenders; they are huge institutions like GE and Transwestern Insurance.

Recent transactions, like the sale of the Hancock Tower (a premier office skyscraper in Boston) is a perfect example of risky lending practices. The property was sold for $661 million, representing approximately 1/2 of the purchase price less than three years ago. It was clearly acquired during the peak period of value but it is still a trophy property. A 50% drop in values is not at all rare if the property is among the “crème of the crop” in the city. Analysts, lenders and appraisal experts all agreed it was safe to jump in at that price. As part of the original financing package, a half billion dollars were lost by the mezzanine lender, in addition to several hundred million in buyer’s equity.

This is not the only example of the brewing storm and our new reality. There are glaring examples in Las Vegas, Los Angeles, Miami, New York, Phoenix, and most cities nationwide. According to CoStar, there are almost 20,000 distressed office properties in the 50 largest U.S. business markets.

The same factors that led to high valuations in the home market were prevalent in commercial lending. Plenty of appraisers gave willing lenders what they needed to support "out of whack" values. Wall Street money needed to be funded and since values were never going to decline, the call was "bring me your loan and we'll show you the money."

I observed this first hand over the last few years in my capacity as Managing Director of a private investment fund. I was angry to be termed the "value butcher.” I tried to be conservative on valuation, rejecting many loan requests that were gladly gobbled up by other lenders who were not lending their money and receiving huge bonuses based on the volume of funding.

Things have got to change; both in the way we originate new loans and how we handle existing loans that are already facing peril.

In Washington, Treasury Secretary, Timothy Geitner, has presented new rules and proposals that are still being defined and digested (along with all other new Obama Administration policies), based on the hope that the economy will turn around and real estate values will recover before loans are due.

The key is to bring all the powers that be together and infuse liquidity into the market based on real value. Solutions need to be implemented that help borrowers and lenders work out a current loan without forcing it into a default status or creating another future toxic asset.

The good news is that there are solutions. I know through my own company’s network of services, we’ve been heavily involved in providing other specific solutions including: Short-sale (allowing a sale for less than the debt), Short-refi (same but with refinancing), Note sales, Discounted payoffs, modifications including reducing loan balance, rate and or terms, Equity Participation with lender and payment plans.

We saw the need several years ago to help homeowners negotiate a solution with their lender to keep the borrower in their home or allow them to sell it to a new buyer at a fair price. These requests were met with deaf ears and only in the last year, or so, has there been a willingness on the part of lenders to work with the borrower.

In today’s economy, all the rules must change and solutions must be implemented quickly in order to keep the level of defaults and foreclosures at a minimum and sustainable level. A flood of failed loans and projects need to be prevented from hitting the market and causing a catastrophic jolt to a reeling economy. These measures in conjunction with the governmental efforts have a solid chance of making the recession shorter and build a solid foundation for a safe and speedy recovery.

Gil Priel, Co-Founder
Peak Financial Partners

The Fight of the Century: Round 1 (Oct 2008)

2009-11-17T17:56:00.000-08:00

Turmoil on Wall Street- a direct hit to the head of credit markets, Lehman declares bankruptcy- another blow, Merril Lynch sold, AIG being supported by the US Government, Taxpayers pick up the tab on a $700B rescue plan- blow after blow, how much longer can our fighter keep standing???

Top financial leaders, including Greenspan, have called this crisis “a once in a century event.” This has not been limited to our shores, as the Global markets have also absorbed serious punishment. Most countries are struggling to “liquify” their credit markets as lenders are holding on to every cent they have available.

The immediate impact to lenders has been that even traditional delinquencies for “lower risk” borrowers are on a steep increase. This is the case as so many fall behind on their mortgage obligations. For the higher-risk borrowers, the story gets worse. There is no capital available to keep them in their homes and avoid foreclosure. The FHA alternative has strict guidelines that are prohibitive to most borrowers. The problems will continue to increase as property values are driven down by the inability to obtain any financing alternatives. This, in my opinion, is the reason that we are likely to be in a declining lending environment for several years to come. Only the reduction of inventory, the stabilization of values and credit being released will eventually lead us out of the crisis. 2010 is my estimation for reaching a stabilization point.

Stabilization will be greatly affected by the regulations being proposed by government, thus making it tougher on lenders. The stricter guidelines will only exasperate the decline in property values and increase foreclosures. The borrowers who truly need the most help are locked out.

I would like to share something with you that is really at the root of the problems we are all facing today. We recently received a submission for a short-term loan on an investor owned home. The loan request was in line with our guidelines and at a very low LTV. We received a complete credit package including an appraisal just completed by a licensed appraiser.

We were prepared to fund the loan and, as a standard precaution, we sent our analyst to perform a property inspection. The appraisal was a complete fraud, showing multiple shots of the interior and exterior of the property and provided documentation of the home being in average condition. The house was a disaster beyond description. The reason I bring this up is that it is exactly the problem that led to the inflated real estate values we witnessed over the last few years. Many appraisers were asking- “What value do you need?” This complete breakdown has to stop and there must be strict legal action implemented. We are pursuing every avenue against the appraiser and broker.

As lenders, we have very little confidence in what we receive. This makes us pull back from lending, increases our costs and ultimately hurts the borrowers who need our funds. I hope everyone does their part to stop the widespread fraud in the current lending environment. Without gaining the confidence of lenders, credit availability will continue to be scarce. If I sound angry it is because I am. I only hope that you all get angry as well and help put a stop to such activities.

All the unprecedented actions taken by the government are geared to one thing: find the bottom and begin to re-build confidence. Our fighter needs to get off the mat.

The mindset of people needs to change before that can happen. Cheap, easy money was available to everyone to spend on luxuries, college, home improvements and vacations. Institutions also used the cheap money to expand their operations and banks were happy to lend as the capital kept flowing in. This is no longer the case and this reality needs to filter through and establish new spending habits. If there is nobody left to finance the previous lifestyles it will probably be “Big Brother- the Government” that will need to keep pumping money in to avoid a complete collapse. All the success that was built on cheap money will lead to further declines in other industries and this will unfortunately be Round 2 of our fight.

I believe the next 6-12 months will be the key in trying to predict what the future will be. The questions to be answered are: If some of the bad debt is pulled out of the banks and other institutions will they suddenly be willing to loosen the grip on credit flow? If housing stabilizes, will lenders jump back in and lend on higher LTV’s? One thing is certain, if that fails to happen we are looking forward to a prolonged recessionary period.

That is the most difficult projection to make. At Peak Capital Group, we have been actively pursuing some of the distressed assets held by Banks. We are buyers of REO’s as well as Non-performing notes, both commercial and residential. Our analysis remains very conservative with an eye toward further declines. We are also lending to opportunistic borrowers who need quick access to cash or property owners trying to salvage their deals. We are clearly one of those lenders that remain very well capitalized but holding back to a degree, primarily due to a market confidence lapse. Although we have reduced our loan production, we are still active and will remain so in our market.

I do look forward to being the creative solution for borrowers as well as sellers of properties and debt instruments. I also look forward to our fighter getting up and landing a strategic blow to the negativity that currently prevails.

Gil Priel

The Mattress or the Bank? (May 08)

2009-11-17T17:54:00.000-08:00

I have been thinking about all of the IndyMac customers running to the bank, standing in line for hours, worried about their life savings.

This has played out over the airwaves and media so many times. It is a sad scene that may be repeated many times in the coming months.

While the FDIC does its thing (insuring most customers), there was still a real loss of over ½ billion dollars for some people that are now devastated.

These unfortunate consumers’ answer to my question would have certainly been; YES! It is time to keep the money under the mattress.

The other answers of course include being aware that there is a limit on FDIC guarantees and to stay below it in each institution. However, I do believe that these turbulent times require consumers to look again at their long term objectives and the value that real estate holds for their plans.

Having been through at least three significant cycles, I am always amazed how values seem to come back or exceed the last high. Real estate does not suddenly vanish. There are few cases of cities disappearing and land becoming worthless. These down cycles present the opportunity we all ask for when prices are skyrocketing. I can’t tell you how often I’ve heard, “The next time it goes down I will jump in full blast.” Then it goes down and our fears and dire predictions take over leaving us on the sideline. This psychology can make or break investors.

There are areas that residential values have fallen up to 75% in less than 18 months!!! I am not talking about the rust belt in Ohio either. I am talking about the Southern California suburbs. Nobody needs to wait for what is believed to be the lowest possible price. My advice has been that if a property is available at a steep discount from the high water mark and is the type of property you would be happy owning for the long term, it may be time to step up. It is clear that there is action on the listings in the depressed areas like Stockton, Riverside, etc. Our valuation department has seen a dramatic change in responses from agents in the field. They are seeing offers and some even indicate they are seeing multiple offers. I am not saying that this is the bottom of the market and it can’t go lower. However, the sword has fallen a long way and catching it now may make good economic sense in the long run.

I am not as confident in matters relating to commercial property values. I do believe there is a significant downside risk remaining in that market. Things have not adjusted to meet return expectations and lender credit tightening. It is the time to take extra precautions and be sure that you are buying at a discount to today’s value. With a strong cash position it is possible to take advantage of collapsing leverage deals and make a prudent purchase that will stand up in the long term.

Our fund continues to be active in commercial bridge loans and residential loans. We look for safe underwriting and liquidity. We are also making an effort to be a source of financing for loans being called by lenders who cannot wait it out or have urgent cash requirements. Recently, we have concluded several construction completion loans, letting the borrower go forward with projects that would have been grounded.

I can summarize by telling you that real estate investments remain a very attractive place to put your money and you will sleep better knowing your money is safer and because your mattress will not be lumpy.

My best wishes,

Gil Priel

"Riding the Whitewater" (May 08)

2009-11-17T17:53:00.000-08:00

Where are we now and where are we going? I can only relate the current market conditions with a river rafting trip I went on. The trip went from smooth water to different grades of rapids from 1 to 5. Being a veteran of real estate cycles I believed I had experienced the toughest cycles over the last 30 years. This was clearly not the case when it comes to current residential property values in California, Florida and most of the Southwest.

Like the river, we are flowing downhill and at an alarmingly increasing speed. We are in a level 5 rapid and I still don’t see the calm water ahead. The question is whether there is a bend in the river, with calm smooth waters, or are we heading into a waterfall?

The experts are telling us many different versions of where we are in this downturn. UCLA forecasts we are not in a recession, Buffet indicates we are. Bush does not want to call it a recession but acknowledges we may be in one. Other economists are lining up with either conclusion. The reality is that everyone agrees things are very bad and will probably be getting worse. The conclusion is that housing is in a deep slide and will be very slow to recover.

There have been several high-profile articles, among them the Wall Street Journal features, that are starting to paint the picture of a bottom in the market. In addition there are the government backed organizations that are stepping in, along with FHA, to make it attractive for new buyers to step in. This all is very important to the psychology of building up demand for purchases.

Personally, we have witnessed increased activity on the residential side now that values have hit the current levels. Builders and brokers I speak with have indicated that there is activity in many markets that were hardest hit like Stockton, Sacramento and the some of the San Bernardino sub-markets. This does give a ray of hope if we are trying to define a low point in values. The concern remains that there is a continuous stream of foreclosures that show no sign of decreasing. I for one, am not ready to concede we are at a bottom, and expect further deterioration in values before we hit bottom.

Investors and users should be preparing to step in over the next 6-12 months when they find the right property, in the right location, at bargain pricing. There should be an extended period of flat values until we see some appreciation so there is no rush to buy.

On the commercial side of the business, It is clear that we have not seen values decline in a significant amount. There is a serious absence of securitization for lenders which will translate to credit tightening and much lower loan to value amounts. The lenders we have met with are consistently telling us that they will not do loans that were clearly in their guidelines just a couple of months ago. This reluctance to lend will perpetuate a more serious decline in commercial investment properties. I would expect CAP rates to increase by 1-2 points in the near term.

The outcome of the river ride is unclear at this time. The FED is taking actions to be aggressively boosting confidence, in the hope of avoiding further erosion. This can only be successful if there is concurrent credit relaxing by all lenders and an influx of liquidity. Just today we hear that the senate has passed the housing rescue bill authorizing $300 Billion in loan guarantees for at risk borrowers refinancing. This kind of support by legislation is critical in bringing liquidity into the market.

At Peak Capital Group, we are being conservative in our underwriting with both residential and commercial loan requests. However, as portfolio lenders we remain ready and willing to lend to borrowers that can benefit from quick access to capital and still have sufficient equity and the ability to assure repayment. We have also expanded our interest in REO pools as buyers and lenders.

We are in the raft with our oars ready to ride it out.

Until next time.

Gil Priel

Take a look at this report - SoCal Deals Abound In Foreclosure

2009-11-17T17:44:00.000-08:00

"The Transition Year 2007"...something from Jan 2008

2009-11-17T17:40:00.000-08:00

I strongly believe that we will look back at 2007 as the year of change. Not only in the direction of real estate but also in the fundamental way lenders can operate. The days of easy credit and high LTV's will at best go into a long hibernation for most capital sources.

As I reviewed 2007, it became clear that after the residential sub-prime meltdown the tightening managed to trickle into commercial lending by July. Spreads increased, Libor increased and the need to find lenders willing to jump in became a long shot. The commercial sector nationally has started to show weakness although there are still pockets of strength.

At Peak Capital Group, LLC our ability to respond quickly and creatively has made us a source of funds for many borrowers and brokers that were left out in the dark. As a portfolio lender with an institutional partner, we are not driven by the need to securitize our loans or search for new capital sources. This gives us a strategic advantage going into this year. As lenders face up to bad debt on their books, they will be forced to sell off their assets at steep discounts.

As an opportunistic lender, we can provide the needed capital for different situations. Our short term financing can serve as the bridge to keep a deal from falling apart and give a seller the time needed to maximize his return. Equally our funds are available for a buyer in need of immediate capital in order to take advantage of a distressed situation. The key is our flexible underwriting allowing nationwide cross collateralization, nationwide lending and quick turnaround times.

Our most complex deal was structured by crossing six commercial properties spanning 3 states. We were able to underwrite the deal and fund it in less than 7 days. The borrower was able to finance 100% of the purchase price needed for two deals and get a good discount from the seller by closing quickly. These type of transactions will become more frequent as the REO market accelerates. Having immediate access to capital will be the "gold" for success in the coming years.

Pilots are not the only ones who negotiate turbulence!!! (April 08)

2009-11-17T17:31:00.000-08:00

Get your goggles and leather flight caps because one thing is clear, in real estate - there is no smooth sailing in the foreseeable future.

While it is now clear that anarchy is the word with residential home loans, commercial real estate has remained amazingly stable. In my recent conversation with numerous commercial lenders, I concluded that although capital remains relatively inexpensive the underwriters are more careful limiting the leverage effect for borrowers. The “squeeze” on commercial credit is on. Lenders are “lending scared” with expectations of falling values in the coming months. I expect that this credit tightening will create the loss in value that they fear is coming. A self-fulfilling prophecy.

I am regularly asked if I believe that all the new policies and programs, being either implemented or proposed, will result in an immediate fix for the current crisis. My response is that monetarily it is not enough but sometimes the perception has a bigger influence than the reality. Investments have a lot to do with psychology, so if we believe things are getting better- they just might.

The key items in the economic stimulus package just approved are the rebate of up to $1800 for families and the increase by almost $300,000 to $729,750 for conforming loan limit.

The other proposals, in my opinion, are political grandstanding like Project Lifeline. It mandates a 30 day freeze on foreclosures so the lender can try and workout a deal for a new loan or modification. I am not aware of any lender today that would not pause for 30 days to work something out with a well intentioned homeowner. Again, this all sounds good and gets lots of air time with the media in this election year. The rebate and the conforming loan increase will have a positive impact in conjunction with continued fed rate reductions. It may be the case of too little too late for many borrowers but I do believe it was a good call. According to the National Association of Realtors, pushing the limits up to only $625,000 should create 350,000 additional home sales in 2008. A higher limit would even be better and the refinancing would of course keep many in a home that they may have otherwise lost.

The main issue is still the fact that the current underwriting and guidelines are effectively locking out the “higher risk” borrowers. Their ability to repay, proof of funds, lower LTV’s, seasoning, etc. are the focus today. The trend continues to go to “full doc” only and the result is the creation of a large vacuum of borrowers who cannot qualify for the lower rate loans or any rate loan. I believe we all can agree that borrowers who cannot afford a loan should not get one, but there are situations where there is a temporary crisis or other situation that has led to the need for a loan. It may be the case that only after values fall further and affordability increases that we may actually be able to see the start of a turnaround. Current inventories are way out of line with demand and only when they come down will we be able to say the bottom has been reached.

All indications for most of the western states and eastern seaboard are we are still in a declining market. New home sales are down 40% year to year with a 5% decline in December alone. Many have said that this will be the deepest correction since World War II. The sub-prime crisis has spread into the prime loans as well with adjustable and interest only products. I for one, expect that we will be in a declining to flat market for the next 3 years. I think this summarizes the overall state of the market and the efforts underway to try and prevent a true recession and shorten the declining stage of values.

Through this period we will be committed to continue funding in both the residential and commercial arenas. We are assisting borrowers with foreclosure bailouts, probates, debt consolidation, regular purchases as well as opportunistic investments. We have also implemented a program to co-lend with other lenders who may have capital or other restrictions utilizing our flexible portfolio financing. “Funding Creativity” puts us in a position to make 1st or 2nd’s with cross collateralization on a national scope.

It is this ability to fund in days rather than months that can give our borrowers the advantage to get through these turbulent times.

We look forward to hearing from you with all your funding needs.

Gil Priel