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Big Commercial Losses Coming, FHA Changes Now In Effect

February 15th, 2010 by Bill Collins Leave a reply »


Congressional Oversight Panel Warns of Huge Wave of Mortgage Losses in Commercial Real Estate

The Congressional Oversight Panel, the entity responsible for reviewing the Treasury Department’s $700 billion bailout program, expressed deep concerns on February 11th over huge commercial real estate (CRE) losses that could occur over the next several years.   The panel reported in their Executive Summary that:

“Over the next few years, a wave of CRE loan failures could threaten America‘s already-weakened financial system. (We) are deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation‘s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.

CRE loans are taken out by developers to purchase, build, and maintain properties such as shopping centers, offices, hotels, and apartments. These loans have terms of three to ten years, but the monthly payments are not scheduled to repay the loan in that period. At the end of the initial term, the entire remaining balance of the loan comes due, and the borrower must take out a new loan to finance its continued ownership of the property. Banks and other commercial property lenders bear two primary risks: (1) a borrower may not be able to pay interest and principal during the loan’s term, and (2) a borrower may not be able to get refinancing when the loan term ends. In either case, the loan will default and the property will face foreclosure.

The problems facing commercial real estate have no single cause. The loans most likely to fail were made at the height of the real estate bubble when CRE values had been driven above sustainable levels and loans; many were made carelessly in a rush for profit. Other loans were potentially sound when made but the severe recession has translated into fewer retail customers, less frequent vacations, decreased demand for office space, and a weaker apartment market, all increasing the likelihood of default on commercial real estate loans. Even borrowers who own profitable properties may be unable to refinance their loans as they face tightened underwriting standards, increased demands for additional investment by borrowers, and restricted credit.

Between 2010 and 2014, about $1.4 trillion in CRE loans will reach the end of their terms. Nearly half are at present ―underwater – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.

The largest CRE losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion… A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.

It is difficult to predict either the number of foreclosures to come or who will be most immediately affected. In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession. There are no easy solutions to these problems…”

If you are interested in perusing the entire 190 page report, please click on the following link:

February Oversight Report – Commercial Real Estate Losses and the Risk to Financial Stability (Opens a .PDF file)

Real Capital Analytics reports that there are currently more than 10,200 troubled commercial properties in the United States with a total worth of more than $204 billion.  Additional information from Real Capital Analytics can be found by going to their site as follows:

Real Capital Analytics – Troubled Asset Search – Distressed Commercial Properties

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FHA Changes Now in Effect

The FHA’s Mortgagee Letter 2009-28 is now in effect, including the following mandates:

“FHA-approved lenders have new responsibilities to ensure that FHA appraisers are ‘…compensated at a rate that is customary and reasonable for appraisal services in the market area…'” and “The fee for the actual completion of an FHA appraisal may not include a fee for management of the appraisal process or any activity other than the performance of the appraisal.” “AMC and other third party fees must not exceed what is customary and reasonable for such services provided in the market area of the property being appraised.”

How long will it be before the first lender or AMC is disciplined by the FHA for violating this mandate? Please send us your thoughts (3 months? 6 months?) and we will have a special prize in the future for those who come closest to guessing that date!

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Rates & Dates

The Mortgage Bankers Association (MBA), in its most recent Weekly Mortgage Applications Survey for the week ending February 5th, reported that the average rate for 30-year fixed-rate mortgages was at 4.94%, down from 5.01% for the week ending January 29th.  Freddie Mac also reported a slight decline in their most recent survey with rates for 30-year fixed-rate mortgages declining from to 4.97% during the week ending February 11th from the previous week’s rate of 5.01%.

Additional information from the Mortgage Bankers Association can be found by going to their site at: Mortgage Bankers Association – Research and Forecasts

Additional information from Freddie Mac can be found by going to: Primary Mortgage Market Survey PMMS

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Shouldn’t They Have Known Better?

The Wall Street Journal reported on February 8th that the Mortgage Banker’s Association had agreed to sell its 10-story Washington, D.C. headquarters to CoStar Group for $41.3 million, well below the $79 million it had agreed to pay in 2007 while the building was still under construction.  This figure is also considerably short of the $75 million in financing that the MBA received for the purchase.  When asked by the Wall Street Journal about whether the MBA would pay off the full loan amount, John Courson, CEO of the MBA, reportedly stated that “We’re not going to discuss the financing.”

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The Housing Market After Federal Aid Ends

As the federal government begins to withdraw some of the support that it has given to the housing market, many people have concerns about the continued health of the real estate market in their communities. The New York Times focused on some of these concerns in an article yesterday. Read the full text here: U.S. Housing Aid Winds Down, and Cities Worry

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Interested in Exposing Real Estate Scammers?

The Huffington Post Investigative Fund would like to “shine a light on real estate schemes going on around the country” and if you would like to contribute to their efforts, please go to Victim of a Real Estate Scheme?

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Still No Response From Andrew Cuomo Regarding Ending BPOs.

It has now been over six months since we asked Andrew Cuomo to investigate the extensive use of BPO’s as substitutes for appraisals by licensed and certified appraisers and asked for his assistance in ending this dangerous practice.  Still no response from Mr. Cuomo…

Please go to if you would like to see what we had to say then or if you would like to obtain Mr. Cuomo’s mailing address and send him some of your own thoughts.

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Appraisal Practice Tips

Commercial appraisers: The developing concerns in the CRE market will be presenting many opportunities as lenders and property owners struggle to deal with “underwater” properties and troubled loans.

Residential appraisers: Continue to work on building an appraisal practice that is balanced between mortgage appraisal business and private appraisals.  The focus on the near future: consider expanding the number of management companies that you work with for FHA appraisals with the expected increase in appraisal fees that will be forthcoming for this work.

Both residential and commercial appraisers: Tax Grievance season is approaching in many parts of the country and the large number of over-assessed properties along with the sensitivity towards paying more than one’s fair share in taxes promises to make this year a busy one for appraisers performing this service.

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Angie’s Question of the Day

First, we want to congratulate the winners of the last contest, Kym White of Kym White Appraisals in St. Petersburg, Florida (overall winner) and Cynthia Sulamo of Sulamo Appraisal Service, Folsom, California (west coast winner) who knew that the correct answers to last week’s questions were Charles Haddon Spurgeon and Alan Greenspan.

Today’s two part question: Who said:

“A banker is a fellow who lends you

his umbrella when the sun is shining,

but wants it back the minute it

begins to rain.”

The choices are:

1. Mark Twain

2. Donald Trump

3. George Bernard Shaw

4. Ben Bernanke

5. Robert Louis Stevenson

“Small opportunities are often the beginning

of great enterprises.”

The choices are:

1. Henry Ford

2. Donald Trump

3. Bill Gates

4. Lao-Tzu

5. Demosthenes

The winner of this week’s contest receives a free copy of the Directory of Appraisal Management Companies for FHA Appraisers.

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Tell us what you think!

We invite your responses to any of the issues raised in this newsletter. Please e-mail us at: with your thoughts!

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We really hope you find our newsletter to be informative!  If you have any input on future topics for discussion, please email me your questions and I will do my best to address them in the next issue.  If you want to look back at past issues you can see our archive at


Bill Collins, Appraiser Help Inc.

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