Thoughts from a Commercial Mortgage Broker: Eight Ways to Help Close Your Deal

Doug Marshall, CCIM
Market Assessment


In today’s commercial real estate environment it is imperative that we do everything we can to get the few deals that are out there closed.

We certainly don’t want to be the cause for a sales transaction going sideways and yet many times we can inadvertently put a deal at risk.

Shown below are eight ways a real estate broker can help his chances of his deal closing.

1. Listing brokers, use realistic pro forma numbers in your marketing packages. Good, solid numbers that can be supported by the historical operating statements makes everyone’s job (buyer’s broker, appraiser, mortgage broker and lender) that much easier.
   
   
2. Listing brokers, accept the responsibility of getting property documentation from the seller into a format that is acceptable to the buyer. Without good property documentation the decision to buy is put at risk.
   
   The goal should be to make it as easy as possible for the buyer to agree to buy the property.
   
   Once the deal is accepted by the buyer, the property documentation used to get the buyer to say “yes” then helps the appraiser and the lender do their jobs.
   
   
3. Buyer’s broker, get involved in assisting the client with choosing the mortgage broker/lender. As a broker, you are perceived as knowledgeable when you can recommend a competent mortgage broker to assist your client. It also increases your probability of getting paid.
   
   
4. Buyer’s broker, communicate regularly with the other real estate professionals (mortgage broker, lender, escrow officer, appraiser, etc.) that are working to close the transaction. We are all on the same team. The buyer’s broker should consider himself the “quarterback” leading his team to the finish line.
   
   
5. Use realistic deadlines in the sales agreement. A good mortgage broker can assist you in determining reasonable timelines for when the loan will be approved and when it will close.
   
   
6. Be proactive about the issues, not reactive. A good real estate broker anticipates what the issues are going to be and then presents his rationale with sound documentation that mitigates these issues.
   
   
7. Buyer’s broker, encourage the borrower to get his personal loan documentation into the lender quickly, thoroughly and accurately. Again, the goal should be to make the loan process as easy as possible so that the lender can get it approved.
   
   
8. Don’t violate the “Golden Rule” of lending which is, “He who has the gold makes the rules.” Accept that the lender has a process they must follow. Your job is to help the mortgage broker/lender get the loan approved so we can all get paid.

A special thanks to Jerry Aalfs, Tom Bradley, Tom Fischer and Liz Tilbury who gave valuable input on this article.

Potiowsky’s View of the Oregon Economy

Doug Marshall, CCIM
Market Assessment

Tom Potiowsky, the State of Oregon Economist, recently presented his most current status of the Oregon economy to the Oregon SW Washington CCIM chapter.

His presentation, titled “Oregon Economy: Up the Long, Long, Long Road to Recovery”, aptly summarized his findings.

The good news: the economy, which bottomed out last fall, is now growing again, although ever so slowly. Shown below are the top 10 facts I gleaned from Mr. Potiowsky’s presentation:

1. As of April 2010 the state’s unemployment rate is 10.6% compared to 9.9% nationally.

2. Job growth (-1.7%) ranks 41^st for all states for April 2010 over April 2009.

3. Total nonfarm employment dropped -3.0% year-over-year for the 1^st quarter of 2010.

4. The rate of decline in job losses has slowed from 10,000 a month for the first six months of 2009 to 875 per month for the first four months of 2010. Job losses are anticipated to continue through this quarter with only mild job growth the rest of the year.

5. Oregon exports increased 41% in the 1^st quarter of 2010 compared to the same period last year but declined 23% when compared to 2008.

6. Personal income growth has almost stabilized at -0.1% for 4^th quarter of 2009 over 4^th quarter of 2008.

7. When compared to other states our unemployment rate is significantly better than Nevada and Arizona, about the same as Idaho and California and significantly worse than Utah and Washington.

8. From Oregon’s peak employment (which occurred in March 2008) it is estimated that it will take around 76 months (about 6+ years) to get state employment back to the same level. Only the 1980-82 recession took longer to recover from, that taking about 7 years.

9. U.S. employment is projected to take about 60 months to recover to the level it was prior to the recession. This is predicted to be the longest recovery period of the 10 recessions (by a wide margin) that has occurred since WWII.

10. Oregon’s Index of Leading Indicators is in positive territory for the first time since late 2007. The six-month annualized percent change is 3.3%. Nine of the
11 leading economic indicators are positive.

So where we go from here depends on many factors. For example, on the upside other parts of the world could recover more quickly increasing the demand for our exports.

On the downside, the potential for a real estate bubble in China or the affect of the Greek crisis on the Euro could adversely impact us and the rest of the world. Who knows?

We can focus on the unknowns or those things out of our control or we can roll up our sleeves and focus on those things we can change. This reminds me of an old African proverb:

Every morning in Africa, a gazelle wakes up.
It knows it must run faster than the fastest lion or it will be killed.
Every morning a lion wakes up.
It knows it must outrun the slowest gazelle or it will starve to death.
It doesn’t matter whether you are a lion or a gazelle.
When the sun comes up, you better start running.

Let’s all run in these difficult times as best we can to see another day!

Much Ado About Fannie and Freddie

Doug Marshall, CCIM
Market Assessment

From time to time I quote a well-written article verbatim. This is one of those times.

I found this insightful article on the Globe St. com blog discussing what’s currently happening with Fannie Mae and Freddie Mac. It was written by Sule Aygoren Carranza who is the New York City-based editor of the Real Estate Forum and multifamily editor for GlobeSt.com.

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Earlier this week, Senate Democrats voted down a bill that would have essentially dissolved Fannie Mae and Freddie Mac after their conservatorship period was over.

Introduced by Senate Republicans John McCain (AZ), Judd Gregg (NH) and Richard Shelby (AL), the amendment to the financial regulatory reform package would have taken the GSEs off of taxpayer support and mapped out a plan to wind down and dissolve them over 15 years.

At the same time, both GSEs in the past few days have reported substantial first-quarter losses due to continued weakness in the market. Freddie Mac posted a $6.7-billion net loss, up $2 billion from the prior quarter and down from $10 billion the same period a year ago.

Fannie Mae’s first-quarter loss came in at $11.5 billion, down from $15.2 billion in the final three months of 2009 and $23.2 billion in the first quarter. The losses were attributed to credit-related expenses and the impact of new accounting standards.

These losses resulted in a net worth deficit of $10.5 billion for Freddie and $8.4 billion for Fannie, for which the companies requested a combined $19 billion in additional funding from the Treasury in order to continue operations. If accepted, that would bring the GSEs’ total federal bailout to some $140 billion.

The good news for multifamily, though, is that the agencies’ losses were primarily on the single-family and guarantee segments of their business.

On the multifamily end, Freddie earned $221 million in the first quarter and Fannie earned $99 million. Those figures are minuscule in comparison to the billion in losses, but they’re better than nothing.

Another bright spot is that the delinquency rate for both firms. Freddie’s monthly delinquency rate fell for the first time in three years, to 4.13% in March (down from 4.2% in February) for single-family homes and 0.24% for multifamily, down one basis point from February.

Meanwhile, Fannie’s serious delinquency rate (that is, loans that were more than 90 days late) rose from 5.38% in the final quarter of 2009 to 5.47% in Q1. Although it registered an increase, Fannie officials said the figures show a slowing growth rate of delinquencies.

The improvement reflects the willingness of lenders to do workouts with borrowers, but with the continued weakness in the economy and the number of underwater mortgages out there growing, I don’t see how this could be a long-lasting trend.

It’s safe to say Congress is stuck between a rock and a hard place. On one hand, the mortgage giants played a large role in the housing market’s downturn and the bailouts, which have been sharply criticized, seem to be growing.

On the other hand, it’s no question that financial support from both Fannie and Freddie is also the primary—if not sole—reason the housing market hasn’t completely imploded.

Source:
Much Ado About Fannie & Freddie, Globe St.com Blog by Sule Aygoren Carranza, May 14, 2010.

Greece: Standing Alone?

Doug Marshall, CCIM
Market Assessment
Published May 4, 2010

On April 27, Greece had their bond status cut by Standard and Poor’s, downgraded to ‘junk’ status, which set off a chain reaction in stock markets throughout the world.

On the same day Portugal, too, had their bond rating reduced. A day later, Spain’s debt got classed lower, from AA+ to AA. Who’s next?

The critical question is whether the proposed bailout action being worked up now going to be sufficient to keep Greece out of default on its European Union obligations?

The approach to Greece seems to be attempting to redress two rather co-dependent issues: 1) how to keep the “contagion” from spreading, through a massive combined bailout effort and a drastic tightening of the Greek belt through austerity measures, and 2) how to infuse confidence in euro debt-holders around the world who have dropped European debt like they were holding hot coals.

Jean-Claude Trichet, European Central Bank president, said a Greek default was “out of the question”. But several market analysts with MarketWatch.com, of the Wall Street Journal, suggest that the EU go ahead and cut Greece loose.

It is being argued that expulsion from the EU is not a terrible or irresponsible idea, in that the contagion spreads no further and Greece learns a lesson over the next few years while it gets its collective house in order.

It’s clear that one whisper of default causes many debt-holders to run for the door. But people seem to question whether this situation should be seen as an emergency encompassing the entire EU, simply because EU confidence and influence create domino-like effects. Or should it be considered as Greece problem and spare the rest of the EU shares in its drama?

But while these analysts suggest that the Greek situation and its long-term effect on the euro and world stock markets may be exaggerated, there is no exaggerating the way in which institutional investors have responded to Greece’s financial woes.

The euro has dropped to a new one year low compared when compared to the dollar and is continuing to fall in value. Since mid-2008 the euro has lost a whopping 16 percent of its value when compared to the dollar.

More importantly, from our view point as Americans, investors around the world are buying U.S. Treasuries, which is the typical “flight to quality” that occurs during times of crisis. This increase in demand of U.S. Treasuries has caused interest rates to drop significantly during the past few weeks.

The 10 year treasury was recently above 4.0% and at the time of this writing is now at 3.59%. This bodes well in the short run for our economic recovery as the crisis in Greece will keep our interest rates lower than they would otherwise be.

One thing is certain: comparisons are easy, but the reality is harsh. Barring a removal from the EU by the governing body, a numbing idea, Greece and other nations will have no choice but to issue more and more debt holdings in order to survive.

And who is buying those these days?

Sources:
David Oakley, Alan Beattie, Kerin Hope; “IMF Looks At Offering Greece More Cash”, FT.com April 27 2010
Jon Markman, “Let Greece Default On Its Debts”, MarketWatch.com April 28 2010
Nicholas Kulish, “Europe Looks To Aid Package As Spain’s Debt Rating Is Cut”, The New York Times April 28 2010

We Have A Heartbeat!

by Doug Marshall, CCIM
Market Assessment


It’s become a cliché: “The economy is recovering! The rebound is here!”

But after reading many reports like this, sometimes based on spotty evidence and flimsy source material, it’s still a large and looming question. Are we seeing real growth, and if so, is a recovery happening in the Pacific Northwest?

If growth, wouldn’t that be encouraging for those of us who’ve been waiting for something to cling our hopes on? The $800 billion government stimulus package, encouraging spending and protecting business, is beginning to show some positive results.

Consumer spending has increased around 4 percent in the first quarter of this year; new home sales increased 27 percent; and exports jumped in the first two months of the year by 15 percent, as compared with the previous year. All this has occurred as household debt has declined by $600 billion since the fall of 2008.

Surely this means that we’re seeing recovery, optimists say. And that would be a very, very good thing for a commercial real estate market facing billions of dollars in loans requiring refinancing, or at least major modification.

Where is it going to come from? This very important question is still left unanswered with no apparent solution in sight.

But it appears that this is a real, sustainable recovery we’re seeing. Consumer spending is a great indicator of economic recovery. Any indicator that comprises 70 percent of American economic activity is sure to be that.

But that still doesn’t answer the question: What is the health of the commercial real estate market while people shop Amazon for iPads or go shopping for a new car?

Even the real estate market is showing positive indicators that we’ve gone through the worst of it and are coming out the other side as evidenced by:

· Citigroup, who recently put together a $222 million AAA-rated RMBS pool to Wall Street. That’s very modest in terms of the size of the mortgage pool when compared to just a few years ago, but it’s progress nonetheless.

· REITs have had a robust increase in the value of their stock over the past year as they have taken advantage of acquiring real estate at depressed prices.

· The CMBS market, such as it is, is eking out more substantial packages. They remain low in dollar amount by comparison with previous years, but the trend upward is a positive sign.

There are qualifications to the reported activity, of course. The CMBS process still remains, according to some REITs in the mix, “laborious and painful, hardly worth the effort”. But it’s a market that has gotten slowly to its feet.

The question now is whether employment and income, other indicators required to round out the “recovery” rally, are making the same effort or experiencing the same improvement.

Ah, there’s the rub.

Sources:
Peter S. Goodman, The New York Times, April 25 2010;
Erika Murphy, GlobeSt.Com Beltway Buzz, “Another Win For CMBS – and REITs,” March 24 2010;
Erika Murphy, GlobeSt.Com Beltway Buzz, “Four Signs Of Life In The Past Week,” April 22 2010