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Banks are facing substantial risk of losses from commercial real estate loans, according to a new Moody’s survey of lenders, which found that some borrowers are already struggling and others may hit trouble when more of their loans mature.
The survey’s findings also suggest that some banks may not be tracking CRE borrowers’ health as closely as others — since they weren’t able to provide fully up-to-date metrics when asked.
The lack of timeliness in some banks’ disclosures was “eye-opening,” said Stephen Lynch, senior credit officer at Moody’s Investors Service. Up-to-date data about commercial property values and borrowers’ ability to cover their interest payments is critical for spotting potential problems, Lynch said.
“Good underwriting can maybe compensate for subpar portfolio analytics,” Lynch said, but strong analytics give banks the ability to mitigate problems early, rather than the often-costlier option of letting them bubble up.
The survey drew responses from 55 banks — including large, regional and community banks — in June and July. Since banks’ public disclosures are somewhat limited, Moody’s asked the respondents to provide more detail about certain key metrics.
Those measures include the percentage of CRE loans maturing soon; debt service coverage ratios, which show borrowers’ debt obligations relative to their cash flow; and loan-to-value ratios, which quantify the amount of debt outstanding as a percentage of the property’s value.
Some banks provided up-to-date data, while others submitted information from the end of 2022.
The Moody’s survey found that U.S. banks have significant amounts of CRE loans that will mature in the next 18 months. For the median bank that responded, those loans amounted to 46% of their tangible common equity — a percentage that Moody’s said was material. Some banks were substantially above that figure.
Upcoming maturities may pose problems for borrowers because they’ll need to refinance those loans, and they’ll need to do so at much higher interest rates and with banks being more demanding in their underwriting criteria.
Properties whose values have fallen sharply may get some help from providers of private capital, which can kick in additional equity to help property owners meet banks’ more stringent criteria. But the amount of money available likely isn’t going to “move the needle,” given the large amount of loans outstanding, Moody’s Lynch said.
While private equity firms, hedge funds and other sources of private capital may see opportunities to jump in, they are “not going to solve every problem,” said Brendan Browne, an analyst at the ratings firm S&P Global. Private money will help where companies see a chance to make significant returns, but there will also be cases “where the economics probably just don’t work well enough,” Browne said.
Overall, banks will feel “some pain” on CRE loans — particularly banks with larger exposures to the sector, Browne said. Most of the banks that S&P rates don’t have such outsized exposures, he added.
The Moody’s survey pointed to office and construction loans as the riskiest property types, given the shift at some companies toward remote work and the fact that properties that serve as collateral for construction loans don’t earn income while those loans are outstanding.
A loan may be at greater risk now if the borrower is having a tougher time paying its obligations. So Moody’s asked banks about how many of their loans have debt service coverage ratios below 1, an indication that the borrower does not have adequate cash flow.
The median respondent has 13.5% of its tangible common equity in CRE loans where the debt service coverage ratios are below 1, Moody’s survey found.
That figure was higher than Moody’s expected, Lynch said.
Source: nationalmortgagenews.com
Mortgage rates accelerated past 7% for the first time since November, landing at its highest level since 2002, according to Freddie Mac’s weekly Primary Mortgage Market Survey.
The average 30-year mortgage rate came in at 7.09% for the seven-day period ending Aug. 16, up 13 basis points from 6.96% a week earlier. The current level now stands close to two percentage points higher from the 5.13% average reported a year ago. The latest rise also marks the fourth straight week of increases in the 30-year rate.
The last time the 30-year average was as high in Freddie Mac’s survey was April 2002 when it stood at 7.13% Since finishing 2021 at 3.11%, the 30-year rate has shot up almost 4% in 20 months.
Experts pointed to the effect recent economic data had in driving rates higher. “The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb,” said Sam Khater, Freddie Mac’s chief economist, in a press release.
Similarly, the 15-year average jumped up 12 basis points to 6.46% compared to 6.34% seven days ago, according to Freddie Mac. In the same weekly period 12 months ago, the 15-year rate came in at 4.55%.
Strong retail data over the past week helped fuel additional upward movement after the Federal Reserve announced a 25-basis point hike in the federal funds rate in July, according to Orphe Divounguy, senior macroeconomist at Zillow Home Loans. The retail sales report “showed that U.S. consumers continue to spend despite higher interest rates and inflation, which remains elevated despite continuing to cool,” Divounguy said in a research statement.
Signs of a robust economy will keep upward pressure on Treasury yields and mortgage rates, which often move in tandem, Divounguy added.
Yields on the 10-year Treasuries showed a mostly steady climb upward over the past week. On Aug. 10, yields came in at 4.02% but began trading Thursday at 4.29%, rising to 4.31% by 12 noon.
But the recent upswing in the 30-year average also comes as productivity, wage and jobs data could cause the Fed to take the foot off the gas pedal in its inflation fight, “something that could offer some much needed relief for interest rates, Divounguy added.
“But for now, upside inflation risk remains and this week’s release of the Fed’s meeting minutes revealed rate hikes may still be on the table,” he said.
Earlier this week, the Mortgage Bankers Association also reported average 30-year interest rates among its members leaping to their highest mark in more than two decades for conforming loans. However, rates for Federal Housing Administration-backed mortgages pulled back below 7%, with volumes rising for applications sponsored by the agency. The increase “could indicate that some buyers remain active in their home buying search despite higher rates,” said MBA President and CEO Bob Broeksmit in a statement.
But larger market forces continue to cap the extent buyer activity can currently grow, with costs also expected to remain elevated through next year, according to analysts at Moody’s Investors Service.
“Demand has been impacted by affordability headwinds, but low inventory remains the root cause of stalling home sales,” Freddie Mac’s Khater said.
Source: nationalmortgagenews.com
Fitch’s recent lowering of Fannie Mae and Freddie Mac credit ratings following an earlier U.S. downgrade highlights some considerations related to whether they should eventually be removed from conservatorship.
For one, as much as the downgrades may not reflect well on the public ties the government-sponsored enterprises have, the rating actions suggest those links still beat the alternative for the GSEs.
“The implicit government support is still the driver of the ratings, and the GSEs would be rated lower without it,” said Eric Orenstein, senior director in Fitch’s nonbank financial institutions group.
So while the earlier lowering of a U.S. sovereign rating did hurt Fannie and Freddie’s equivalents for long-term issuer default, senior unsecured debt and government support, their public ties are still considered a relative positive.
That dichotomy is in line with the fact Fannie and Freddie’s mortgage-backed securities aren’t normally rated because of their government-related support, fueling debate about the extent to which downgrades influence a bond market that drives borrowing costs.
“There’s really not an official rating for the MBS, so the assumed rating is whatever the Treasury is rated,” said Walt Schmidt, senior vice president, mortgage strategies, at FHN Financial. “From that standpoint, I don’t think this has a direct effect.”
And while Fitch said the U.S. has seen “a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters,” Freddie and Fannie’s financials are strong, suggesting they’re not immediate taxpayer risks.
Fitch confirmed it “does not rate any MBS products directly issued by the GSEs.” If they did, those securities would theoretically have a rating that matched Fannie and Freddie’s long-term IDR.
However, the credit risk transfer securities the GSEs use to sell off some of their risk to private-label investors based on reference pools of their loans do get rated. Fitch lowered the ratings of 435 of these. Only those with top ratings were impacted.
Fitch groups Fannie and Freddie’s CRTs with non-agency residential mortgage-backed securities, but otherwise securitization ratings that it considers to be part of the private market weren’t affected.
While some GSE and United States ratings are now one-notch down from the highest possible grade, they have generally remained at the upper end of the scale. Also, Fannie and Freddie’s short-term issuer default rating remained unchanged at the highest rating. (In addition to Fannie and Freddie, Fitch also had downgraded the Federal Home Loan Banks of Atlanta and Des Moines at press time.)
Fitch’s downgrade of Fannie is “not being driven by fundamental credit, capital, or liquidity deterioration,” the GSE said in an emailed statement sent in response to inquiries about the rating actions, echoing some of the wording Fitch used to describe both enterprises.
Fannie and Freddie’s regulator, the Federal Housing Finance Agency, issued a similar statement, while adding that, “As no one can predict future outcomes, FHFA is carefully watching the ratings downgrade to assess its impact on the MBS markets and the GSEs.”
There has been disagreement among rating agencies related to U.S. sovereign rating. Kroll Bond Rating Agency and Moody’s Investors Service, in contrast to Fitch, reaffirmed top ratings for the United States on Thursday.
But while disagreement among rating agencies and other aforementioned factors do blunt the impact of the Fitch downgrades on the mortgage market, it may not be entirely immune to them.
There might be an impact on Fannie and Freddie’s unsecured debt in particular given the change in that rating and the fact that they’re more reliant on it because those bonds are not backed with mortgage collateral the way agency MBS are.
And while there’s some disagreement on this point, even agency MBS could be at least peripherally affected by the downgrades in ways that could put upward pressure on financing costs, depending on whether other rate drivers outweigh them.
“I think there is an indirect effect in the whole downgrade story. It perhaps has contributed to slightly higher yields, but there are a lot of cross currents in the market,” Schmidt said.
Source: nationalmortgagenews.com
Ratings Raised to RPS2- and RSS2-
MERIDEN, Conn., July 11, 2023 /PRNewswire/ — Planet Home Lending, LLC, a leading mortgage loan primary and special servicer, announced that Fitch Ratings has upgraded Planet Home Lending’s Primary Subprime Servicer rating to RPS2- and its Special Servicer rating to RSS2-. Previously, the ratings were RPS3+ and RSS3+.
In its review, Fitch highlighted Planet’s risk and compliance management, continually improving performance metrics, and effective technology.
Fitch also noted:
About Planet Financial Group, LLC
Planet Financial Group, LLC, Meriden, Conn., is a fully integrated family of companies delivering innovative origination, servicing and asset management solutions. Through this synergistic ecosystem of products, services and technologies, Planet Financial Group provides best-in-class experiences for investors pursuing value maximization and borrowers seeking streamlined end-to-end loan lifecycle support. Planet Financial Group is the parent of Planet Home Lending, LLC and Planet Management Group, LLC, which also does business under the name Planet Renovation Capital.
About Planet Home Lending, LLC
Planet Home Lending, LLC, Meriden, Connecticut, (NMLS #17022) is an approved originator and servicer for FHA, VA, USDA, Freddie Mac and Fannie Mae and a Standard & Poor’s Global Ratings- and Fitch Ratings-rated special and prime residential servicer. Planet Home Lending, LLC has been assigned a corporate family rating by Moody’s Investors Service viewable at www.moodys.com. Its correspondent division offers a full suite of government, agency and niche home loans. Planet Home Lending, LLC is also a special servicer managing diverse investor portfolios. Its customized servicing solutions maximize asset recovery and optimize performance through active management at the portfolio and loan levels. Planet Home Lending, LLC is an Equal Housing Lender. For more information about Planet Home Lending, LLC, please visit https://planethomelending.com. For more information about Planet Home Lending’s Correspondent offerings, please visit https://phlcorrespondent.com.
About Planet Management Group, LLC
Planet Management Group, LLC, Melville, N.Y., maximizes the value of diverse investor assets through active management. For more information about Planet Management Group, LLC please visit https://planetmanagementgroup.com.
Press Contact:
Dona DeZube
Vice President, Communication
Planet Home Lending
[email protected]
(443)538-1767
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SOURCE Planet Financial Group
Source: benzinga.com
The real estate market is cooling down, observers say.
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Reports released this week by several respected market observers point to less good and increased bad and ugly ahead for the housing market.
For some of the good, a U.S. Census Bureau report released late last week spurred a bout of optimism when it revealed that new-home sales jumped by nearly 11% month-over-month in May on a seasonally adjusted basis, after declining by 12% in April.
Moody’s Investors Service, in a housing-market report released this week, puts some ugly back into the home-sales figures for May, however.
“At 696,000 units, May new home sales were around 17% below the recent peak of 839,000 units in December last year,” the Moody’s report notes. “[On June 21], the National Association of Realtors said that existing-home sales declined for the fourth consecutive month.
“Existing-home sales fell in May by 3.4% on a seasonally adjusted basis to 5.41 million, the lowest since June of 2020 and similar to pre-pandemic levels.”
Those figures, along with “sharp recent increases in mortgage rates” and other supporting data, lead Moody’s to conclude that the “U.S. home-price boom is over.” The firm, which rates securitization offerings and provides other capital-market services, predicts “material declines” in both new- and existing-home transactions this year, compared with 2021.
Supporting the ugly outlook for the housing market is the release today, June 29, of the quarterly CFO Survey, conducted jointly by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta. The survey of more than 300 U.S. financial executives conducted between May 25 and June 10, shows optimism about the broader U.S. economy continuing to decline.
The average index score for the current survey was 50.7, compared with 54.8 in the prior quarter and 60.3 two quarters ago.
“Price pressures have increased, real revenue growth has stalled and optimism about the overall economy has fallen sharply,” said John Graham, a Fuqua finance professor and the survey’s academic director. “Monetary tightening [by the Federal Reserve] is one of several factors dampening the economic outlook.”
The CFO Survey’s findings are echoed by a revised first-quarter 2022 gross domestic product (GDP) estimate released Wednesday by the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA). It shows that a drastic economic slowdown is already underway.
“Real gross domestic product [a measure of all goods and services produced in the economy] decreased at an annual rate of 1.6 percent in the first quarter of 2022 …,” the BEA report states. “In the fourth quarter of 2021, real GDP increased 6.9 percent.”
The BEA’s first-quarter GDP estimate, it’s third to date, was revised downward from -1.4% and -1.5% in the two prior estimates. The grim data led Mortgage Capital Trading (MCT), a San Diego-based capital market software and services firm, to broach the “R“ word in its daily market-overview report.
“Concern over a slowing economy and aggressive interest rate hikes from the Fed are beginning to dominate market sentiment,” the MCT report states. “This morning’s GDP release [on June 29] came with a downward revision for the last reading, further supporting views that a recession is either in progress or coming soon.”
What does all this mean for the housing market in the months ahead? The Moody’s report attempts to frame some of the expectations.
“We expect some increases in existing-house prices over the next 18 months, though for appreciation to be well below the general rate of inflation,” the Moody’s report states. “After that, we expect home appreciation to settle in at levels somewhat lower than the rate of overall U.S. inflation.”
The report even indicates that there “is risk that existing home prices will have a minor correction over the next two years, similar to housing markets in many other developed counties facing risks after recent booms.”
The “moderation” in the U.S. housing market is ongoing and the full effects of recent rate increases have yet to be fully realized, the Moody’s report adds, especially with respect to housing prices.
Moody’s predicts that housing demand will “dampen significantly” in the months ahead due to the doubling of rates for 30-year fixed mortgages since the start of the year, which is fueling a huge jump in monthly mortgage costs. Freddie Mac’s most recent Primary Mortgage Market Survey shows the average 30-year fixed rate mortgage at 5.81% as of June 23.
“The monthly costs of new mortgages on existing homes sold at median transaction prices [are] more than 60% higher than a year ago,” the Moody’s report states. “Although higher mortgage rates do not always drive home prices lower, they typically affect sales activity and drive down the rate of price appreciation.
“We also expect higher rates to restrict for-sale supply because current homeowners will be reluctant to lose low-rate fixed borrowing costs.”
So, in effect, moderating or even declining home prices could be neutralized by rising borrowing costs, leading the housing market toward stagnation — the doldrums — in the worst-case scenario.
There is some good news mixed in with all this bad and ugly, however. Moody’s points out that some “fundamental housing strengths” will likely help to mitigate the degree of any market correction, at least over the next 12 to 18 months.
Those strengths include “favorable demographic trends, solid underwriting of outstanding mortgages and lingering housing supply constraints from a period of underbuilding,” according to the Moody’s report. Also on the bright side, according to Moody’s, is that a moderate decline in housing prices could be good for the market longer-term. That’s assuming the Federal Reserve wins the fight to tame inflation, now running at 8.6%, without causing a major spike in unemployment, which was at 3.6% in May for the third month in a row, according to the Bureau of Labor Statistics.
In short, the housing market has reached a fork in the road, based on the Moody’s analysis — with one path leading to the doldrums, or even decline, and the other toward resurgence and a new normal.
“If U.S. home prices were to decline modestly, it would increase affordability for potential homebuyers and improve demand, including for individuals who were priced out of the market in the recent months because of rapidly rising interest rates,” Moody’s reasons in its report. “However, sustained large increases in mortgage rates or a material weakening in the labor market could lead to sharper declines in housing activity and prices.”
Source: housingwire.com