Category: Finance & Investment

MBA Releases Templates for Servicer Communications with Existing ARM Borrowers in Preparation for LIBOR Expiration

Falen Taylor
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(202) 557-2771

WASHINGTON, D.C. (April 26, 2021) – The Mortgage Bankers Association (MBA) released today two templates for residential mortgage servicers’ communications with borrowers with existing London Interbank Offered Rate (LIBOR)-indexed adjustable-rate mortgages (ARMs). LIBOR is the leading reference rate for adjustable-rate single-family mortgages in the U.S. A permanent cessation of most tenors of U.S. dollar LIBOR will occur after June 30, 2023.

“MBA continues to work closely with public and private sector entities to provide members with the resources they need to ensure a smooth transition for the mortgage industry and consumers,” said Pete Mills, MBA’s Senior Vice President of Residential Policy and Member Engagement.

MBA members will have access to an editable version of the templates where they can make adjustments as they see fit. One is structured as a notice for existing ARM borrowers, and the other as a letter to existing ARM borrowers. The templates stress that any index changes will not affect most other terms of an ARM, including the maximum interest rate paid during the life of the loan or the timing of any interest rate reset. When LIBOR is no longer available or is deemed unsuitable, lenders will replace LIBOR with a new index to determine the future interest rate and payment changes to a borrower’s ARM.

In 2019, MBA developed and released a separate template intended for mortgage lenders to share with consumers interested in applying for a LIBOR-indexed ARM. For more information and to download the templates, please visit MBA’s LIBOR Transition Resources page.

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Libor’s Likely Reprieve Is a Welcome Acknowledgment of Reality: Mark Gilbert

The financial industry has failed to embrace any potential replacements for the benchmark.

(Bloomberg Opinion)—The overseers of three-month dollar Libor are considering a stay of execution for the benchmark interest rate for trillions of dollars’ worth of securities that was scheduled to expire at the end of next year. It’s a welcome acknowledgment of the reality that the financial industry has failed to embrace any potential replacements for the suite of interest rates once dubbed the world’s most important numbers.

The London interbank offered rates dictate the pricing of everything from mortgages to corporate loans to derivatives contracts, across a range of maturities and currencies. But they’re flawed: The wholesale interbank lending market on which they were based dried up in the wake of the global financial crisis, while many of the banks responsible for setting their values have paid billions of dollars in fines for rigging the benchmarks in their own favor.

So market regulators have proposed alternatives, including the Secured Overnight Financing Rate in dollars and the Sterling Overnight Interbank Average Rate in U.K. markets. But adoption has been slow, particularly in the U.S. market. For example, in the week ended Nov. 20 almost $2.5 trillion of dollar interest-rate swaps tied to Libor were traded, compared with just $70.5 billion contracts that referenced SOFR, according to figures compiled by the International Swaps and Derivatives Association. So far this year, $96 trillion of Libor swaps outstrip the $1.8 trillion of SOFR trades.

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Industrial, Multifamily Price Gains Drove Modest CPPI Increases During the Fall Months

Some commercial property sectors are still seeing increases in values during the pandemic.

Upticks in prices of industrial and multifamily assets and some alternative property types this fall resulted in increases in overall Commercial Property Price Indexes of the three major market trackers.

Real estate data firm Real Capital Analytics (RCA) reported that its U.S. National All-Property Index rose by 0.2 percent in September compared to August and by 1.4 percent compared to September of 2019.

The change upward was driven by modest month-over-month increases in the prices of multifamily and industrial properties (both up by 0.6 percent) and by an equal increase in the prices of office buildings in Central Business Districts (CBDs). Prices on retail assets dropped the most, by 0.7 percent, during September, followed by a modest 0.1 decline in prices of suburban office buildings. RCA noted no major difference in the CPPIs of commercial properties in major and non-major metros—both went up by 0.1 percent.

RCA’s CPPI is based on repeat sales transactions that took place in September and is benchmarked at 100 for prices reported in December 2006.

The CoStar Group reported that its equal-weighted U.S. Composite Index rose by 1.4 percent during the month of September and by 2.2 percent during the third quarter of 2020. The growth was driven primarily by sales of multifamily and industrial properties and transactions taking place in the Northeast and Western markets. CoStar’s U.S. Multifamily Index rose by 1.9 percent during the third quarter. The firm’s Industrial Index went up by 3.2 percent from the fourth quarter of 2019 through the third quarter of 2020. Prices on all remaining property types tracked by CoStar’s Index except office declined (the U.S. Office Index remained flat). The equal-weighted Index also remained 1 percent below the one released in March of this year, right before the pandemic overtook U.S. in full force.

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A New Approach for Real Estate Diversification

“Like-kind” exchanges may permit clients to defer capital gains taxes.

The forecast for real estate is highly uncertain in the COVID-19 era, with many experts expecting dramatic change in commercial, residential and industrial markets. However, this much is clear: the portfolios of many older Americans contain a respectable amount of investment real estate, and it’s something advisors need to consider as they help clients pivot their holdings toward an appropriate asset mix for retirement.

American households held $6.4 trillion in investment real estate, exclusive of the value of their primary home in 2016, according to analysis of Federal Reserve data by Realized Holdings, a company that manages investment property wealth. And Realized found that approximately 10.2 families with net worth ranging from $1 million to $15 million had more than 20% of their assets accumulated in investment properties.

This is an area where many financial advisors are outside their comfort zone, according to David Weiland, CEO of Realized. “It’s a giant pool of wealth that has gone unnoticed by most advisors and real estate professionals, generally because they don’t understand real estate at the granular level, and real estate professionals don’t understand wealth management.”

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States Hardest Hit by Closures Could See Property Valuations Fall by Low Double Digits

A new report from Reonomy looks at where property valuations might dip the most.

It’s been made clear by now that the retail, restaurant, travel and energy sectors have been hit the hardest by the impact from the COVID-19 crisis. But a recent report from Reonomy, a data platform for the commercial real estate industry, also highlights that administrative work, arts, entertainment and recreation industries have seen outsized fallout. Across the U.S., all these industries account for approximately 14 percent of GDP, Reonomy researchers point out.

In addition, many of these industries are concentrated in specific states, leading Reonomy to conclude that Alaska, Nevada, New Mexico, Oklahoma and Wyoming will be among those that will suffer more from the pandemic. Firm closures in the impacted sectors can lead to higher unemployment rates and longer-lasting periods of unemployment for workers, and to decreased tax revenues for the states. And decreased economic activity will also weaken property valuations.

In addition to the above-mentioned states, states with high concentrations of at-risk jobs include those that rely heavily on tourism (Mississippi, Louisiana, South Carolina and Hawaii), states with high levels of energy production (Wyoming, North Dakota, South Dakota and Louisiana) and states with large manufacturing sectors (Indiana, South Carolina, Alabama and Kentucky).

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Opportunistic Capital Prepares for Distressed Investment Spree

Investors across the board are interested in co-investment opportunities in distressed assets and loans.

Even as COVID-19 continues to wreak havoc with the global economy—putting the majority of commercial real estate investment activity on pause—entities are lining up gobs of capital to pounce on distressed real estate opportunities expected to arise in the coming months.

“Billions of dollars are being plowed into new real estate funds created to buy distressed debt backed by hotels, malls, office buildings and other commercial properties suffering significant losses of value during the coronavirus crisis,” says Michael D. Underhill, chief investment officer at Capital Innovations. The global real assets investment management firm is receiving inquiries from investors across the board who are interested in co-investment opportunities in distressed assets, including institutional investors, sovereign wealth funds and family offices. “We are seeing significant pent up demand for credit investors to invest in liquid securities and hard assets, including loans and real estate, as many have been biding their time for the last several years,” says Underhill.

Private equity firms such as Blackstone, KKR and Terra Capital Partners are among those firms that have closed on or are currently raising capital for distressed funds. Apollo Global Management Inc. plans to raise up to $20 billion for distressed opportunities.

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Billionaire Sam Zell Sees Economy Permanently Scarred by Pandemic

Zell expects some amount of social distancing and working from home to persist long after the acute phase of the outbreak is over, possibly for years.

(Bloomberg) — Sam Zell, the billionaire known for buying up troubled real estate, said the coronavirus pandemic will leave the same kind of impact on the economy and society as the Great Depression 80 years ago, with long-lasting changes in human behavior that imperil many business models.

“Too many people are anticipating a kind of V-like recovery,” Zell said in an interview with Bloomberg Television. “We’re all going to be permanently scarred by having lived through this.”

Just as the depression left behind a generation that couldn’t shake the experience of mass unemployment, hunger and desperation, the burdens this crisis has forced on society may be similarly hard to forget. Zell, 78, said it won’t be easy for people to live as they did before the “extraordinary shock” of the pandemic.

He expects some amount of social distancing and working from home to persist long after the acute phase of the outbreak is over, possibly for years. Retail, hospitality, travel, live entertainment and professional sports are some of the industries he sees continuing to struggle.

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Blackstone Sees Prospect of Buying Opportunities in Crisis

“We are already seeing actionable opportunities appear from the dislocation initially in structured credit and liquid markets,” according to Jon Gray.

(Bloomberg)—Blackstone Group Inc. expects to see plenty of investment opportunities once the current economic crisis abates — and is already taking steps to deploy capital on downtrodden assets.

Current dislocations spurred by coronavirus pandemic, while painful, will allow the company to benefit in the long term, President Jon Gray said Thursday. The shares rose as much as 7.3% in New York.

“We are already seeing actionable opportunities appear from the dislocation initially in structured credit and liquid markets,” Gray said on the company’s first-quarter earnings conference call. “Since the crisis began we bought $11 billion of public equities and liquid debt across the firm and we are well positioned to do more.”

Blackstone will be able to put its dry powder to work in areas that have been most impacted by the economic freeze. These include lodging, location-based entertainment and the travel industry, executives said on the call.

The positive outlook came after the private equity firm reported that asset values across most of its business segments plunged in the first three months of this year as the coronavirus spread.

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Private Funds, REITs Seek to Curtail Capital Outflows Amid COVID Crisis

In recent weeks several fund managers temporarily suspended redemptions and froze or cut cash distributions.

Real estate investment entities were welcoming a steady stream of capital inflows with open arms just a few weeks ago. But now some are doing their best to hold onto cash amid the economic uncertainty generated by the COVID-19 pandemic.

In recent weeks several fund managers temporarily suspended redemptions and froze or cut cash distributions. The move to batten down the hatches to conserve cash has been a common theme across a variety of public and private investment structures, including private equity real estate funds, publicly traded and non-traded REITs and crowdfunding sourced eREITs. “The business decisions that asset managers are making right now are primarily focused around preservation and protection of the underlying portfolio and sustaining liquidity,” says Anthony Chereso, president and CEO of the Institute for Portfolio Alternatives (IPA).

Early examples include some well-known names. It was reported in April that AEW Capital Management would suspend redemptions in its $7.2 billion Core Property Trust, an open-ended diversified real estate fund that invests in U.S. multifamily, office, industrial and retail assets. Fundrise announced in early April that it was suspending redemptions across its mature eREITs and eFunds.

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Weathering Extreme Markets with Real Estate Investments

Inherent illiquidity can be a boon in times of panic.

Recessions present financial advisors with one of the biggest professional challenges they can face. Imbalanced and rudderless portfolios are exposed. Securities plummet as panic selling ensues. Clients and investors often lose a lot of money.

We all know how tough it can be to predict such events—or at least, predict them timely enough to dodge the oncoming financial freight train. Given this inherent risk, strategies should be adopted to prepare for a recession by balancing client portfolios with assets that historically experience less volatility than securities.

The price of stocks and other securities often exhibit fat-tailed distributions. Extreme events tend to hide behind a sample mean that does not predict the actual population mean, so advisors sometimes forget that these events have a much higher probability of occurring than they do in a normal distribution. These “black swan” events often cause economic recessions: the 2001 dot-com bubble, the 2008 financial crisis and the current COVID-19 pandemic.

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