Tag: real estate

Compromises Needed to Reduce Foreclosures

Posted on March 13, 2012

Pressure continues to mount on Fannie Mae and Freddie Mac — the two agencies that dominate the U.S. secondary market for home mortgages — to help prevent more foreclosures. Some experts want to shut down the two agencies in order to make way for private capital. The private sector, however, currently has little appetite for such mortgage risk amid declining home prices and increasing foreclosures.

Wharton real estate and finance professor Susan Wachter says private capital can be attracted only with a set of rules that it finds acceptable, and only if it can provide input into the role played by Fannie Mae and Freddie Mac.

The federal government brought Fannie Mae and Freddie Mac under conservatorship in 2008 to help ride out the housing finance crisis, but “they are failed entities,” Wachter told Fox Business in an interview Monday (March 12), adding that 90% of the financing for home mortgages comes from Fannie Mae, Freddie Mac and the Federal Housing Finance Agency. Banks provide the remaining 10%, but they are constrained by regulatory limits on their capacity to lend, Wachter adds.

She agrees with the popular view that the government does not have to be in the business of financing housing mortgages. “We do need to stand down Fannie and Freddie and stand up alternatives,” she says. “We need private capital at risk. [But] the private mortgage-backed securities market is zeroed out because we don’t have rules of the game that give the private sector confidence itself. There is work to be done.” The contentious issues include those related to the pricing of fees for mortgage guarantees, the sharing of risks and losses in case of defaults and the scope of the government’s foreclosure prevention programs.

Private capital, for its part, needs to reconcile its lending preferences with those of the market, according to Wachter. Borrowers want fixed-rate mortgages because they feel interest rates could rise, but banks prefer adjustable-rate mortgages. “If we took [fixed-rate mortgages off] the plate today, that could harm the market, unstable as it is already.”

Meanwhile, banks have secured some concessions from the federal government as part of a $25 billion settlement they negotiated last month over alleged abuses in foreclosure practices, the Wall Street Journal reports. They reached an agreement on how to structure write-downs and who should bear losses. A part of the settlement money will be used to help homeowners with “underwater mortgages” — a situation in which the market price of their homes has fallen below what they owe their lenders.

Many observers have called upon Fannie Mae and Freddie Mac to write down the principal balances in underwater mortgages, contending that such write-downs will arrest the pace of foreclosures, keep more distressed homeowners in their homes and contain the losses for investors. But Edward DeMarco, acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has resisted those calls. He says Congress has vested his office with the responsibility “to conserve and preserve” the assets of those agencies. DeMarco “is all about the ledger books, in the narrowest sense,” wrote Peter S. Goodman in a scathing column last week in the Huffington Post.

According to Wachter, a common strategy should be constructed to overcome such conflicts. “There needs to be consensus,” she says. “There needs to be a plan, and the plan has to be one that, over time, will allow more capital to come in.”

 

 

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Déjà Vu for Latin America’s House Hunters?

Posted on January 13, 2012

Bucking a global trend as house sales slide in countless other countries, home ownership is increasing across Latin America. For the region’s growing middle class, the mood is indeed bullish as many Latin Americans eagerly plow savings and borrowed capital into the housing market.

Banks and other lenders are now offering financing on terms that even lower-income buyers can afford. From Bogota to Brasilia, Latin American governments are stimulating home buying by subsidizing property prices and mortgage rates paid by low-income buyers. First-time low-income home buyers in Colombia, for example, are paying 7% interest on a fixed-rate, 15-year mortgage, or five percentage points less than the going market rate.

But some real estate experts say prices are rising too much and too quickly in some housing markets, and some parts of the region could face dangerous bubbles similar to those in the U.S., China and various parts of Europe. Marja Hoek-Smit, adjunct real estate professor and director of Wharton’s International Housing Finance Program, cites Brazil as a housing market that could be vulnerable to a correction if the economy were to weaken. “The mortgage sector in Brazil is heavily subsidized on the bank deposit side and the lending side, and therefore the housing sector is more prone to see price escalation, particularly in areas where supply cannot keep up with demand because of land and labor shortages,” she says. “If house prices come down, or there is stress on the repayment ability of borrowers, this could expose the banks and the government that guarantees the portfolios to credit risk.”

For now, the panorama in most Latin American housing markets is positive. Bogota in particular is seeing a frenzy of construction activity. A total of 4,000 houses and condominiums will be sold this year in Pereira, a town of 450,000 in western Colombia’s coffee-growing region, double the units sold in 2006, notes Julio Cesar Cardona, an economist with the city’s largest homebuilding trade association.

It’s a similar story in other parts of Colombia. According to the government, property developers sold 152,000 new houses and condominiums in 2010, up 30% from 2009. Through July 2011, new unit sales nationwide were up 19% over the first seven months of last year. Sales could accelerate in the coming months in light of the 80% year-on-year growth in construction permits granted, and some experts predict a 10% rise in house prices in the country.

But can the surge continue? Colombia suffered a housing bubble in the late 1990s that burst when interest rates shot up. The government was forced to intervene, and essentially forgave payment on up to one-third of mortgages, a social policy decision aimed at avoiding a mass wave of evictions.

Local experts insist mortgage lenders have learned their lesson and have imposed tougher underwriting standards. Buyers typically put up 30% down payments of the purchase price, making them less likely to speculate or walk away from an investment if times turn tough. What’s more, the majority of loans are now fixed rate, so borrowers are less likely to be caught out by inflation.

Many real estate experts also see little chance of the kind of widespread housing market crash in Latin America as witnessed in the U.S. It’s partly because there is still huge pent-up demand for housing in a number of Latin American countries, and mortgage lending represents only 3.5% of GDP in Colombia. Even in Chile, arguably Latin America’s most mature market, it’s around 20%, far lower than in many developed countries.

Concerns exist, however, and many revolve around low supply and weak infrastructure. Experts cite those limitations as the reasons for a 50% rise in housing prices and a 20% decline in unit sales over the first half of 2011 in some parts of Sao Paulo, the continent’s largest city. Traffic jams, in particular, have inflated the value of well-located apartments and houses to astronomical levels. The Brazilian megalopolis, which still lacks a ring road around the urban core, illustrates what the World Bank’s chief economist for Latin America, Augusto de la Torre, describes as the hemisphere’s “structural speed limits to growth.”

Demand for housing across Brazil has been stirred by heavy government subsidies, both with below market mortgage interest rates and price discounts, as part of a goal set by President Dilma Rousseff of building two million new housing units since 2009. But housing supplies have not kept up with the demand that the discounts have helped to create, causing prices to rise to what some describe as bubble levels and raising concerns that it could burst.

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Africa: Build It, and They Will Come?

Posted on May 27, 2011

Five years ago, someone buying a home in Nigeria would go into a bank to find that he or she would have to put down 70% of the sale price to get a loan to cover the rest.

Yet according to Adekunle Faleti, chief executive officer of Diamond Mortgages of Nigeria, as well as other panelists who spoke during a Wharton Africa Business Forum, things are looking up in the world of African real estate. “I am happy to tell you that a lot of transformation has taken place,” said Faleti, who noted that his company, like many others, regularly gives 15-year mortgages with 20% down. “There are just more safeguards. The environment … is slowly getting much better.”

Despite violence that has marred elections in recent years, Nigeria appears to be at the forefront of African real estate and infrastructure development, according to the panelists. There is more and more transparency and a modicum of regulation that didn’t exist years ago. Faleti pointed out that there are now three credit rating services operating in Lagos, the congested capital, and the federal government has started taking an interest in providing better housing and, in turn, financing for individual families who need it.

There is certainly enough demand for housing, according to panelist Joe Quinones, managing director and chief operating officer at Primrose Development Company in Nigeria, and a former real estate developer in the United States. According to Quinones, 16 million people live in Lagos, where there is a 1.3 million housing-unit deficit. He estimated that about 30% of the population is middle income, at least in Nigerian terms.

“If you had 100 developers doing 1,000 units a year, you would not make a dent in the mid-income crunch,” said Quinones. “And what you have is probably 10 developers doing 100 units. So the opportunity is incredible.”

Quinones noted that a big issue is the cost of building itself, and the ingrained expectations of builders and buyers. Materials often have to be imported from Europe, which pushes up costs. “In the developed world, interiors are sheet rock and the framing is wood — but [not] in Nigeria. Everything is cinder block. In Nigeria, they want the hammer test,” Quinones said. “They want to throw a hammer at the wall and see it bounce off.”

If developers were able to build stick-and-frame or modular homes, they would get houses up “in one-third the time and with one-half the cost of materials,” he added. “So maybe they should [switch] to the tennis ball test — make sure a tennis ball bounces off. It would be so much more efficient, and the market would grow far more easily.”

Lack of infrastructure itself is perhaps the biggest hurdle — both in and outside of major cities. “The government now has some skin in the game,” said Opuiyo Oforiokuma, chief executive officer and managing director of Lekki Concession Company, a builder and owner of infrastructure projects such as toll roads and utilities. “If you have a stake in something, you handle it more with kid gloves. Ensuring that the government has a stake in the project [means] they will think carefully about [it].”

But even in relatively well-off African countries like Nigeria, infrastructure cannot be almost entirely government financed, like it often is in the United States, according to Alain Ebobisse, chief investment officer in the global infrastructure and natural resources department of the International Finance Corporation (IFC). It is only recently that public-private partnerships have gained traction. “Finally, there has been a clear acknowledgment that government will not be able to fund these things [entirely],” Ebobisse noted. “When countries have been encouraged to attract private investment, they have been able to do so, and they have vastly improved infrastructure.”

Ebobisse pointed to Mexico, which had great infrastructure gains in the 1990s by looking toward more private investment. Still, Africa has a long way to go. The IFC estimated that there was $155 billion of private infrastructure investment worldwide in 2008. “Unfortunately, Africa did not get much of that,” he said, adding that most of the funding that went to Africa was invested in telecommunications, which provides more immediate and large returns.

The needs are myriad and great, according to Ebobisse. “I don’t know of any country in sub-Saharan Africa where we see enough electricity. In the road sector, it is even worse. Roads are difficult to get returns on…. When you invest in a power project, it may take 15 to 20 years. A road — who knows?”

It appears that much of the infrastructure growth in the coming years in Africa will be centered around urban areas. “No country can grow without a really strong urban center,” said Wharton professor of finance Robert Inman, the moderator of the panel. “And no urban center can be managed without a public and private infrastructure commitment.”

That is how it will be in Africa, according to Faleti. “Lagos … is on the verge of a boom. The Nigerian government sees that and is willing to work with private investors.”

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