Serinova Financial Commercial Finance Blog

Over the past few weeks, well actually, since April.  I’ve had this feeling that the housing market was in a downturn.  I was speaking with Rich Baxter, the president of Brownstone Development, who works primarily in the Phoenix historic districts, who commented to me that traffic at open houses was down.  Tony Calvis of Calvis Wyant mentioned that they had been reducing prices on some of their property as well.  Other developers have been saying similar things about traffic, pricing, profit margins and costs.  The auctions seem thinly attended.  Independently none of these comments means too much, but when I take them as a whole, it says that we are experiencing another downturn in the Phoenix housing sector.

What might some of the contributing factors be?  I never really thought the home buyer tax credit was making much of a difference in peoples purchasing habits, however, the expiration of the tax credit in April seems to be having more of an effect than I anticipated.  In fact, since the expiration, the housing market appears to have deteriorated quite quickly.   

Diana Olick at CNBC pointed out recently that in May, “the height of the spring housing season, Mortgage applications to purchase a home began to sink. Four weeks later, mortgage purchase applications were down nearly 40 percent, to their lowest levels since April of 1997. Yes, you can argue that a larger-than normal share of buyers today are all cash, but those are largely investors.  That means real organic buyers are exiting in droves.”

Other industry pundits have also pointed out similar observations.  David Rosenberg, Chief Economist & Strategist for Gluskin Sheff, mentioned the declining mortgage applications, “for new purchases fell 4.1% and down for four weeks running. This is where the rubber meets the road for new home sales — a fresh 13-year low.” 

Drew Hearon, a director at Deutsche Bank, has been saying for a while that deflation, rather than inflation, is the issue the fed should be more concerned about at this point in time.  If we look at the price of lumber since April, we can clearly see that it’s tanking big time — a 40% reduction in cost.  Some of my WPO buddies own concrete supply companies and they’re telling me that concrete is being sold at or below the cost of materials. 

I believe another contributing factor is the impending change to Arizona’s immigration laws. One of the multi-family properties Serinova is trying to acquire currently has a 60% occupancy level. On site management has received notices from approximately half of those residents that they will be vacating their apartments. Before the end of July that property will be 30% occupied — That’s great for Serinova because we’ll get an incredible price from the bankruptcy trustee on a great asset, but, the point is that poorly thought out legislation caused this to happen. 

The people leaving are not just illegals, but, the legal Hispanic residents as well. Wives, children, aunts, uncles of an undocumented resident all leave when an illegal leaves. And, they’re not returning to Mexico, they’re going to California, Nevada and Texas.  According to a report by the Perryman Group, If all unauthorized immigrants were removed from Arizona, the state would lose $26.4 billion in economic activity, $11.7 billion in gross state product, and approximately 140,324 jobs.  During an already tenuous recovery ousting tens-of-thousands of workers, legal or not, is simply ill-advised and the impact of this change in the law is being clearly seen in skyrocketing vacancy rates.

I drove through south Mesa today while inspecting a group of 4-plexes. These once vibrant streets were practically deserted, homes and apartment buildings that used to enjoy 90%+ occupancy are now completely vacant and home to any transient that needs a place to flop for the night. I don’t think anyone that backed SB1070 understood the economic impact of their actions. 

Finally, I have a sense that investors have absorbed as much inventory as they are able to handle for the time being. We’ve seen a distinct increase in the number of investors that have contacted us looking to place debt on portfolios of single family homes.  The portfolios are owned free and clear, but, the investors don’t have any liquid assets left to acquire more property.  This is having a huge impact on the downturn as well.  It is also interesting to note that with prices in the Maryvale area receding, some of the investors that were flipping homes are now trying to rent them.

In summary, there is no question in my mind that we are experiencing another downturn in Phoenix housing.  The question I have yet to answer is: whether we will test the lows that were set in November 2008 or not?

There’s an article in National Real Estate Investor that discusses the impact of the new FDIC policy statement regarding impaired loans and workouts.

I saw Seth Godin several years ago, probably on the tour in 2003 when this was recorded.  It really underscores how important it is to provide a product or service that is remarkable, stop marketing to people that don’t give a darn about your product and focus on the handful of people that really do care.  Enjoy.

Ever since I moved to Arizona in 1989 I have had the feeling that I’m living in the wild west.  A place where people with guns have the power to make up their own laws.  You would think that in 2010 we would be above the kinds of shananigans that Sherrif Joe and his band of merry man continually pull.

In a recent court hearing  Adam Stoddard, a sheriff’s detention officer, was caught on video as he stole documents from a defense attorney’s file.   The stolen documents were passed to an accomplice who quickly left the courtroom. You can watch a video of the theft yourself: here.

The judge, Gary Donahoe, found Stoddard guilty of contempt of court and slapped him on the wrist.  All that was required of Stoddard was that he apologize.  In a feat of uncomprehensible defiance of the authority of the court system that employs Stoddard, he  refused.  The judge sent him to jail.  

Can you find it hard to believe that the day after Stoddard reported to serve his sentence, nearly 20 of his colleagues called in sick, paralyzing court activities. A subsequent bomb threat led to the evacuation of the court for three hours. Court business, including criminal hearings, came to a halt. Instead of urging detention officers to fulfill their important duties, Sheriff Joe Arpaio remarked that he encourages sick employees to stay home, and he referred to Stoddard as a “political prisoner.”

Sherrif Joe is responsible for these men and their actions.  There is an old saying, “a fish rots from the head down“.  I don’t know about you, but, in the next election I think our collective slogan should be,  ”Sherrif Joe Needs to Go”.

Q: What has stayed the same in the new law?

1) First-time home buyers still get a credit of as much as 10% of the purchase price, up to a maximum $8,000. “First-time” means people, including both partners of a married couple, who haven’t owned a principal residence for three years before the purchase.

2) All taxpayers who claim a credit must use the home as a principal residence for the next three consecutive years.

3) The credits offer dollar-for-dollar reductions of tax and are refundable. This means that a taxpayer who doesn’t pay enough tax to offset the credit can get a refund. For example, if you qualify for an $8,000 credit but only owe $5,000 in tax, you could receive a $3,000 check from the Internal Revenue Service.

4) Under the new law, as under the old, 2009 home buyers may claim the credit on either their 2008 or 2009 returns, and 2010 buyers may claim the credit on either their 2009 or 2010 returns.

5) Taxpayers do not qualify for a credit if they buy from a lineal ancestor or descendent, including parents or grandparents and children or grandchildren.

Q: What has changed?

Several important features took effect as of Nov. 6:

1) To take advantage of the tax credits, a buyer must have a contract in place before May 1, 2010, and the deal must close before July 1, 2010. No further extension is expected.

2) The price of the house is now capped. For purchases made after Nov. 6, no credit is available for any home costing more than $800,000.

3) There is now a tax credit for repeat buyers as well as for first-time buyers. Taxpayers who have lived in one residence for five consecutive years of the past eight can now qualify for a tax credit of as much as 10% of the purchase price, up to a maximum $6,500, of a new principal residence. The new home does not have to cost more than the old one.

4) Income limits for people who qualify for a tax credit are far more generous than under the previous law. For single filers, the credits now phase out between $125,000 and $145,000 of modified adjusted gross income; for married couples, the range is $225,000 to $245,000. For most people, modified adjusted gross income will be the same as adjusted gross income.

5) The new law contains anti-abuse measures designed to stem fraud, which became a problem with the previous home-buyer tax credit. Most buyers must be 18 or older, and no taxpayer may take a credit if he or she is claimed as a dependent on someone else’s return. Taxpayers taking the credit will also have to furnish proof of purchase. According to Robert Dietz of the National Association of Home Builders, this will usually be a HUD-1 form.

6) People taking the tax credit, as under the old law, aren’t allowed to buy a home from a lineal ancestor or descendent. The new law, applying to purchases made after Nov. 6, also says a person may not take a credit if the home is purchased from a spouse or the spouse’s lineal relatives.

Q: If I bought a house last spring or summer, can I get a tax credit?

You qualify if you are a first-time buyer and meet the other requirements, but not if you are a repeat buyer. The new credit for repeat buyers applies only to purchases made after Nov. 6.

Q: What is the definition of “principal residence”?

If you own more than one home, your principal residence is usually the one where you spend most of your time. In determining residence the IRS may also consider where your family lives and your mailing address for bills and correspondence, among other factors.

Q: Can a principal residence be something besides a conventional house?

Yes. A principal residence may also be a condominium, co-op apartment, attached or semi-attached townhouse, or even—if it has eating, sleeping and toilet facilities—a boat, motor home or trailer. Manufactured homes qualify in some states.

Q: Does the person who claims the credit have to use the home as a principal residence?

Yes.

Q: If I buy a new home and live in it, do I also have to sell my old one in order to take advantage of the credit?

This is unclear. The law appears to allow repeat buyers to retain their old home, for which no tax credit was given, while claiming a credit for the new one. What is clear is that if you buy a new home using the credit, you must use it as your principal residence.

Q: How may the credits be allocated among two or more unmarried buyers?

This also is unclear. But if the IRS adopts the rules that applied to the previous tax credit, which are detailed in IRS Notice 2009-12, there is room for planning. The notice says that taxpayers may use “any reasonable manner” to allocate the credit. It even provides an example in which two unmarried buyers allocate the credit to the lower earner in order to qualify for it.

Q: I need the credit refund to help make the down payment. What can I do?

There’s no rushing the IRS. But one option is to adjust your current withholding from your paychecks to reflect the fact that you will be taking the credit later. But be careful: If you don’t make the purchase, then you may owe interest and penalties. Consult a tax adviser.

Q: Is it possible to qualify for a credit if I am building a home on a lot I already own?

Yes, according to the National Association of Home Builders. The purchase date is usually considered to be the date of first occupancy, so you would need to move in before July 1, 2010.

Q: May I take a credit if I am building a large addition to my home?

No; these credits apply only to the purchase of a home.

Q: Are there special rules for the military?

Yes. In general, members of the military and foreignservice and intelligence communities who are serving overseas on “official extended duty” for at least 90 days during 2009 and the first four months of 2010 have an extra year to take advantage of these credits. Consult a tax adviser who specializes in this area.

Q: Where can I get more information?

Go to federalhousingtaxcredit.com, a Web site sponsored by the National Association of Home Builders. You can also look for links from the IRS’s home page, www.irs.gov, or search for Homebuyer Credit. Another option is to consult a professional tax adviser.

1) Unemployment rose 0.4% m/m to 10.2% (vs. con of 9.9%); 2) underemployment (includes part timers seeking full time work and discouraged workers) rose 0.5% m/m to 17.5%; 3) Oct payrolls declined 190k vs con of -175k, but Aug/Sep were revised up 91K.

…but some positives in other jobs data

1) Hourly wages rose 0.3% m/m (vs con of 0.1%) ; 2) Avg hours worked were unchanged; 3) Temp hiring rose 34k (largest gain since Oct 2007), the 3rd consecutive monthly gain.

*Banks the worst performing group the last 6 months

Since May 8th, banks are down 1% vs up 15% for the S&P reflecting concern that a recovery in bank earnings will lag other sectors. More recently, it also reflects increased uncertainty regarding new regulatory rules for the banks–most notably what capital requirements will be. We continue to believe over time the largest banks will need
to hold 10% Tier 1 common and smaller banks 8-9% vs. 7.5% currently.

*$100b-plus of issuances likely to weigh on stocks

Over the next few months, there will likely be more than $100b of bank equity worldwide to be absorbed–incl large rights issuances among European banks, a likely sale of the gov’ts $30b of Citi shares and capital raises by US banks (incl potentially by BAC, PNC and WFC) to
repay TARP. While the Citi sale isn’t dilutive and issuance to repay
TARP could even be net accretive, this still represents a lot of equity to absorb.

 The lack of liquidity in the market makes it very difficult, without a very sharp broker like Serinova Financial, to refinance a commercial loan these days.  Most of the tradition sources for loans simply don’t have money to lend or they have filled (or overfilled) their allocations of particular loan types.  As a result, these lenders are asking good clients to find other banks for their business.  The reality is that there are no other banks for the majority of borrowers.   In anticipation of the impending commercial real estate loan maturities, the FDIC has issued a new policy statement on commerecial real estate workouts.

The new policy statement replaces their Interagency Policy Statement on the Review and Classification of Commercial Real Estate Loans  (November 1991).  While this does open the door for restructuring and extending existing loans, the banks are going to attempt to IMPROVE their ability to collect the debt owed.  The statement says, “A renewal or restructuring should improve the lender’s prospects for repayment of principal and interest”.  This may be accomplished through the addition of guarantees, more collateral, curtailment payments, new legal agreements or other means of improving their likelyhood of collecting their debt.  

“The institution should have sufficient information on the guarantor’s global financial condition, income, liquidity, cash flow, contingent liabilities, and other relevant factors (including credit ratings, when available) to demonstrate the guarantor’s financial capacity to fulfill the obligation. This assessment includes consideration of the total number and amount of

guarantees currently extended by a guarantor in order to assess whether the guarantor has the financial capacity to fulfill the contingent claims that exist.”

This policy statement gives the banks the ability to do PRUDENT workouts, where prudent means the bank is going to be in a better position to collect the full amount of debt owed. 

By: Corey Schwartz
Serinova Financial

A reliable friend that is consulting for the FDIC told me in July 2009 that the FDIC had estimated 2,600 banks would be closed before the end of the financial crisis.  Begining with the closing of IndyMac bank they have shut down 142 banks leaving 2,458 left to go.  In March 1989, the FDIC closed 176 banks in that one month.  If we assume that’s the most banks they can handle per month and we assume that they immediately begin closing that number of banks every month, that means that our most optimistic case is 14 months of bank closings to go.  If we look at the bank closings that occurred during the RTC, the FDIC closed 2,832 banks and it took them 10 years to accomplish that.  I would guess that our current path will be similar and that it will take 10 years to see the end bank closings.

Graph of closings per month begining from the closing of IndyMac

PHOENIX–Serinova Financial, a leading Arizona based mortgage brokerage that specializes in commercial transactions, closed a permanent loan of $2.1MM for the refinance of a 22,626 square foot office complex in North Phoenix. The loan was secured through Serinova’s relationship with a national credit union. The loan originated at a 6.5% interest rate and adjusted every 5 years at TCM + 350 bp. The property was 76.6% occupied and cash flowed with a 1.59 DSCR. The new loan carried a term of 10 years and amortized over a 30 year period.

 ”Over the last 60 days we have seen an increasing number of transactions close with very favorable terms,” says Corey Schwartz Serinova’s President. “While many properties and owners are experiencing unprecedented stress, we are still able to provide high quality borrowers with good assets, terms that are more than fair for both institutional and private money.”

In the next 24 months $525MM of CMBS loans are expected to mature. This will force existing owners to refinance. Kyle McDonough, a principal at Serinova, urges owners to, “start the refinance process early and be prepared for it to take six months OR MORE as lenders examine and question every nuance of a transaction. McDonough went on to say that, “one of our recent investor transactions was declined because the homeowners association’s was experiencing slow pays on dues”.

Serinova Financial represents a broad range of institutional and non-institutional investors, and is capable of financing stabilized as well as in-transition assets.

Serinova Financial – Serinova Financial is a direct private money lender and correspondent originating mortgages. The company provides commercial mortgages for stabilized and in-transition investment properties nationwide. They offer permanent financing solutions nationwide for stabilized assets and bridge or interim loans for properties that are in-transition. Their capital partners rely upon Serinova to take each transaction from preliminary underwriting through to closing to provide a seamless execution and positive experience for borrowers.

by: Corey Schwartz

Serinova Financial, LLC
mb #0907246
4757 East Greenway Road #103168
Phoenix, AZ 85032
Phone: 602.652.9414
Fax: 602.532.7274
www.serinova.net
cschwartz@serinova.net