2011 February :: The Construction Management Pro

Industry Reports Point to Renewal in Commercial Real Estate Financing

February 28, 2011

I while back I wrote that the commercial real estate market will signal when the economy will be recovering. That is because as the location of businesses, if this sector stabilizes, that means the companies that house them are stabilizing. Jones Lang LaSalle at the Mortgage Bankers Association’s commercial real estate and multifamily housing convention in San Diego monday reported that “ the tidal wave of sales activity that was widely predicted in 2009 never materialized as lenders and borrowers worked together to stave off defaults.”  Read More

Did you like this? Share it:

Congressional Resolution Supporting Mortgage Interest Deduction

February 27, 2011

Rep. Gary Miller (R-Calif.), has introduced a resolution in the House of Representatives, expressing a “sense of Congress” that the current federal income tax deduction for interest paid on debt secured by a first or second home “should not be further restricted.” I have kept these blog post non partisan and a political. However, the resolution is suggesting that at a time when efforts are being made by this congress to cut the CDBG program by 62%, and public housing capital funds by 43%, no reduction in the mortgage interest deduction (MID) program should be made. So let’s be clear. the current MID program allows for the deduction of mortgage interest payments for principal and second homes with mortgages up to $1,000,000. The funds allocated to the CDBG program must be used to provide assistance to “low and moderate income households, eleminate slum or blight or address another community development need having a particular urgency.” 

I received an email that says that “this Resolution is an important symbolic gesture that shows its co-sponsors are aware of the critical role that the MID plays in supporting homeownership in this country.” However, supporters of this resolution have also stated that it was federal housing policy that lead us to the housing crisis we have just faced; that congress should no be picking winners and losers through the tax code.

So let’s be clear. Congress is currently debating the merits of reducing funds to eliminate slums and blight in our community by 62%, reduce by 43% the funds used to make capital improvements to public housing, yet maintaining the tax deductibility of mortgage interest on a second home’s $1,000,000 mortgage. Need I say more?

Did you like this? Share it:

Contract Termination – A Risk Management Strategy

February 27, 2011

Owners are often scared to terminate a contract. They believe that it may cost more to have another contractor finish the work. The new contractor may not approve and/or take responsibility for the work done by the previous contract. Contractors are aware of these issues and often use them to their advantage.  However, to paraphrase our Declaration of Independence, “… after a long train of abuses and usurpations, pursuing invariably the same object…” it is your duty to remove the contractor and hire a new contractor.

All projects have risks. Construction contracts are no different. Identify the risks and develop a strategy to mitigate them. The contract documents should include the process and procedures you have adopted to mitigate the contract risks. Handling risks should be about implementation of your risk mitigation strategy, not emotions. Don’t let the fear of the potential cost stop you from doing what you know must be done. After all, you have “suffered as long as the evil is sufferable…”

The two biggest risks are time of performance and quality of work. Every contract must have a time of performance. If the contract work is not concluded by the end date of the contract, do not grant an extension of time. The contract is over; pay the contractor for work completed to date and move on.  If you don’t want to wait until the end of the contract period, then your contract must have a provision to terminate the contract prior to that time. I always have the contractor develop a schedule that is appended to the contract and considered a part of it. Therefore, failure to comply with the approved schedule is a breach of contract and the contact can be terminated. In addition, every contract should have a liquidated damages clause. This clause penalizes the contractor for every day the contact work is not concluded.

With respect to the quality of work, most contacts contain a clause regarding how defective work is treated. A notice must be given and a time to cure the defect needs to be specified. If corrective action is not taken, a second notice is given. Failure to correct the work then allows the owner several options. One is for the owner to correct the work. Second is to dismiss the contractor.

These are hammers you hold over the contractor’s head. However, a hammer is only useful if the contractor believes you will use it. I have often stated that project management relies on the three C’s: Communication, Coordination and Confirmation.  You need to communicate with the contractor about the breach of contract and the consequences of that breach, coordinate your process to ensure that you have a replacement contactor upon termination and then execute that process of termination to confirm your intent to terminate your relationship.

Owners often believe that it is less expensive to try to get the contractor to comply with the terms of the contract rather than to terminate it. But how much money is lost in failure to get the project completed, time and aggravation in chasing the contractor and loss of your reputation when the project is not completed on time, in budget or meets the quality consistent with your brand? These costs must be considered as tangible as the expense of replacing the contractor.

Did you like this? Share it:

Bank of America Establishes New Unit to Handle Defaulted Loans

February 11, 2011

By: Carrie Bay                                                                                                         02/04/2011

Bank of America announced Friday that it has set up a new operational division to deal with problem loans and resolve investors’ mortgage repurchase claims.

The newly formed unit, which the company has labeled Legacy Asset Servicing, will service all defaulted loans and discontinued residential mortgage products. It will be led by Terry Laughlin.

Laughlin will oversee the bank’s mortgage modification and foreclosure programs, in addition to his existing duties of resolving residential mortgage representation and warranties repurchase claims.

In addition, Laughlin is charged with leading BofA’s borrower outreach program to include more than 400 housing rescue fairs in 2011, building additional homeowner assistance centers in communities across the country, and expanding partnerships with nonprofits.

The decision to establish a new, separate division to handle the company’s problem loans came out of the North Carolina bank’s very recent, and very public, robo-signing

quandary, which prompted reviews of hundreds of thousands of case files and a nationwide suspension of all Bank of America foreclosures and REO sales.

The bank said in a statement that the issues that came to light in September and October of last year led the company to initiate a “self-assessment of default servicing.”

“While the review of the foreclosure process found that the underlying grounds for foreclosure decisions has been accurate, Bank of America implemented a series of improvements – including staffing, customer impact, and quality controls,” the company said.

Barbara Desoer, Bank of America Home Loans president, will continue to oversee the servicing of the company’s more than 12 million mortgage customers who remain current on their accounts, as well as the mortgage origination side of the business.

“This alignment allows two strong executives and their teams to continue to lead the strongest home loans business in the industry, while providing greater focus on resolving legacy mortgage issues,” said Brian Moynihan, BofA’s president and CEO. “We believe this will best serve customers – both those seeking homeownership and those who face mortgage challenges – as well as our shareholders and the communities we serve.”

Bank of America also said Friday that it is exiting the reverse mortgage origination business, citing “competing demands and priorities that require investments and resources be focused on other key areas of our business.”

Bank of America Home Loans will continue to serve the needs of existing reverse mortgage customers and those with loans in process.

Did you like this? Share it:

S&P Study Finds HFA Delinquencies Exceed State Averages for First Time

February 9, 2011

By: Carrie Bay                                                                                                                                02/04/2011

Although the nation is in the midst of an economic recovery, albeit a slow one, unemployment levels remain extremely elevated, and that – along with lower housing prices, diminished demand from homebuyers, and a large inventory of houses in foreclosure – is leading to an increase in defaults on housing finance agency (HFA) loans, according to the analysts at Standard & Poor’s (S&P).

State HFAs issue tax-exempt bonds to finance loans for borrowers and first-time buyers purchasing a home at a reduced interest rate. A recent study by S&P has revealed that delinquent HFA loans have exceeded state averages for the first time since the agency began tracking loans in single-family bond programs in 2006.

Valerie White, a senior director at S&P, describes the results as a “troubling trend for HFA loan performance.” During the third quarter of 2010, delinquencies for loans owned by HFAs increased to their highest level and performed worse than state loan portfolios.

For HFAs, the delinquency rate — the percentage of loans delinquent at least 60 days or in foreclosure — reached 7.12 percent. In 2006, the HFA delinquency rate was 3.14 percent. By comparison, among state portfolios of similar loans, the delinquency rate decreased in the third quarter of 2010 to 6.97 percent, down from 7.24 percent in the second quarter of last year. “In our view, the increase in HFA delinquencies is not surprising given the continued high unemployment rates,” S&P said in its report. “Until the job market improves, we believe that loans will continue to perform worse than their historical record. Based on Standard & Poor’s economic outlook, high delinquency could affect HFAs for a few more years.”

In the third quarter of 2010, the Kentucky Housing Corp. posted the highest delinquency rate at 17.86 percent, compared to the state average of 9.68 percent. Other housing finance agencies with delinquency rate among the five highest were in California, Georgia, Michigan, and New Jersey. However, Georgia and New Jersey’s rates were both lower than their state averages.

While HFA delinquency rates have been “stubbornly high,” S&P said, it could be the cast that HFA loss mitigation efforts, which keep delinquent loans active for a longer period, have contributed to the recent increases.

S&P notes that while the most recent quarter interrupts the historical relationship of lower HFA delinquency compared with states in which the bond programs are located, the year-over-year change in the third quarter of 2010 was not as great as in the second quarter, which in turn was not as high as that in the first quarter

Did you like this? Share it:

Super Bowl Winner? Jones Lang LaSalle Says It’s All in the CRE Stats

February 7, 2011

By: Carrie Bay                                                                                                                                    02/03/2011

Forget win-loss records, quarterback ratings, and total yardage tallies — the winner of Sunday’s Super Bowl XLV showdown can be predicted most accurately by analyzing the prevailing commercial real estate (CRE) climate in the opposing teams’ hometowns, according to Jones Lang LaSalle, a financial and professional services firm specializing in real estate. Based on historical analysis of recent Super Bowls, the company found that teams from cities with a higher percentage of vacant office space have won the Lombardi Trophy nearly two-thirds of the time since 2000.

In 2006, office vacancy rates stood at 15.9 percent in Pittsburgh and only 10.5 percent in Seattle as the Steelers outscored the Seahawks 21-10 in Super Bowl XL. The same held true in 2005 when New England (18.9 percent vacancy rate in Boston) bested Philadelphia (16.1 percent) and also in 2004, 2003, 2002, 2001, and 2000. While the last four Super Bowls have been more difficult to predict, Jones Lang LaSalle’s executive chairman, two-time Super Bowl champion Roger Staubach, said he is confident that the theory will prove true once again this weekend.

“As a student of both football and commercial real estate, I can tell you that this vacancy rate hypothesis is absolutely the real deal,” Staubach said. “When it comes to picking a winner, you can throw everything else out the window.” So what about this year’s matchup? As of January 1, the office vacancy rate in Pittsburgh held steady at 12.1 percent — one of the lowest rates in any city around the country — while Green Bay reported vacancy of 18.9 percent. The numbers are pointing toward the likelihood of the first Packers Super Bowl title since 1997. “You can mark my word: the Packers will prevail,” said Staubach, who led his Dallas Cowboy teams to victories in Super Bowl VI and Super Bowl XII. Staubach, whom some in the industry may remember as one of the featured speakers at the 2010 Five Star Default Servicing Conference and Expo, denied that his endorsement of this year’s prediction was at all related to the fact that he lost two Super Bowls at the hands of the Steelers in the 1970s. “I have nothing but the utmost respect and admiration for the Steelers and the city of Pittsburgh,” Staubach said. “But the numbers don’t lie. The Lombardi Trophy is going back to TitleTown USA.”

Did you like this? Share it:

Administation Creates Portal to Connect Energy Technologies to the Marketplace

February 4, 2011

On February 02, 2011 the administration released a notification regarding the U.S. Department of Energy’s (DOE’s) Energy Innovation Portal. This website now has more than 300 business-friendly marketing summaries available to help investors and companies identify and license leading-edge energy efficiency and renewable energy technologies. The Portal is an online tool that links available DOE innovations to the entrepreneurs who can successfully license and commercialize them. By helping to move these innovations from the laboratory to the market, the Portal facilitates an integral step in supporting growing America’s clean energy industries and meeting the Administration’s clean energy goals.

There are those that believe that government should not be “picking winners and losers.” However, as Secretary Chu states, “Our National Laboratories are a major driver of innovation in this country. By connecting American entrepreneurs with cutting-edge, ready-to-commercialize technologies from the National Labs, the DOE Innovation Portal is helping to grow our economy and create the next generation of American jobs.”

The National Science Foundation, National Institutes of Health, NASA and the Department of Defense have, under both Republican and Democratic administrations, contributed to the technology advancement of this country. In this highly politicised environment, reductions in applied research and the programs that support them like this Portal would be short sighted and not in the long term security interest of this nation.

Did you like this? Share it:

2-3-11 Why suspend the FHA 90-day Rule

February 3, 2011

The FHA 90-day rule regulation (24 CFR 203.37a(b)(2)) typically prohibit insuring a mortgage on a home owned by the seller for less than 90 days. Last year, FHA  waived the regulation through January 31, 2011. This rule, fashioned to work in raising housing markets is now inappropriate given existing market conditions. It is counter to the goals of stabilizing home values, creating employment and relieving financial institutions of troubled assets.

Most single family distressed properties are purchased by small businesses. The more projects a company can do, the more jobs and economic activity can be created. Waiving this rule frees up an investor’s capital as well as credit by reducing the holding period.  This will now allow for continued economic activity. These jobs are created in the private sector without subsidy, government intervention and created by small businesses. To the extent that there is a desire to support small businesses, put local people to work in there community, the suspension of 24 CFR 203.37a(b)(2) accomplishes these goals.

This waiver also makes it possible for the banks to dispose of their assets in an expeditious manner as investors can turn over their money quicker. Taking these distressed assets off the bank’s books strengthens the bank’s financial position and allows for the expansion of available credit.

Typically these properties are rehabilitated. This improves the housing stock and raises the mean sale price of homes in the community. This in turn stabilizes existing home values and provides both sellers and buyers with comparables for properties in the existing home market.

Did you like this? Share it:

2-1-11 FHA Extends ‘Anti-Flipping Waiver’ to Speed Sales of REO Homes

February 2, 2011

By: Carrie Bay

The Federal Housing Administration (FHA) announced Friday, January 28, that it was extending the suspension of its ‘anti-flipping rule’ through the remainder of 2011.

FHA Commissioner David Stevens says the temporary waiver will accelerate the resale of foreclosed homes in neighborhoods that are overrun with abandoned properties and blight. The move is intended to help stabilize home values and improve conditions in communities experiencing high foreclosure activity.

FHA regulations typically prohibit insuring a mortgage on a home owned by the seller for less than 90 days, but in February of last year, FHA temporarily waived this regulation through January 31, 2011, noting that in today’s foreclosure-ravaged marketplace, the agency’s research has shown that acquiring, rehabilitating, and reselling distressed properties often takes less than 90 days.

With the sunset date for that first extension just days away, FHA posted a notice on Friday extending the waiver through December 31, 2011. This action will permit buyers to continue to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales.

“As I noted when we first announced this policy change early last year, because of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers,” Stevens said. “Today I can report that this policy change has been effective.”

Stevens says since the original waiver went into effect, FHA has insured more than 21,000 mortgages worth over $3.6 billion on properties resold within 90 days.

FHA said it the notice that prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days would adversely impact the willingness of sellers to consider offers from potential FHA buyers, because the seller must also factor in holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.

“Because of past restrictions, FHA borrowers have often been shut out from buying affordable properties,” Stevens added. “This action enables our borrowers, especially first-time buyers, to take advantage of this opportunity and buy a home that has recently been rehabilitated. It will also help to move more foreclosed properties off the market and reduce the number of vacant homes in neighborhoods throughout this country.”

The waiver contains strict conditions and guidelines to protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated prices. The agency’s anti-flipping waiver is limited to those sales meeting the following criteria:

  • All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
  • In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
  • The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.
Did you like this? Share it: