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	“Just adopt the XML standards.” — William Frazer, managing director and chief financial officer of L.J. Melody & Co., Houston, discussing the potential liquidity a single XML standard for the commercial real estate industry could provide.

Top National News
U.S. Construction Spending Is Expected to Grow 1 Percent in 2002 (Wall Street Journal)
HUD Covers Terrorist Acts on Multifamily Loans (GlobeSt.com)
Environmental Risk Is Drawing Closer Scrutiny (Wall Street Journal)
Race Almost Over for RESPA Reform (Inman News Features)
Dividends, a Major Prop for REIT Shares, Look Shaky (Wall Street Journal)
Pulte Leads Way as Home Builders Post Strong Profits (Wall Street Journal)
Borrowers Arm Themselves With Adjustable Rates (Boston Globe)
Of Housing and Helium (U.S. Banker)

Residential Finance News
Rates Up, Applications Down in MBA Weekly Mortgage Application Survey
Residential Briefs

Commercial/Multifamily Finance News
XML Standardizes a New Way in Commercial Real Estate

MBA News
Path To Diversity Announces New Scholars

U.S. Construction Spending Is Expected to Grow 1 Percent in 2002
Wall Street Journal (10/23/02) P. A2; Smith, Ray A.
A strong single-family home market will help bump total construction activity up 1 percent this year to a total value of $498.9 billion from $496.2 billion in 2001, according to a new report from McGraw-Hill Construction. Commercial space fell out of favor this year because of the weak economy, and building construction in this segment is projected to decline 10 percent in 2002. As for 2003, McGraw-Hill projects a 1-percent decline in total construction, as single-family housing starts fall 3 percent to 1.2 million units and fall flat in dollar terms to $203.3 billion--in part because of a potential rise in interest rates. Continued softness in the commercial sector--as well as reduced tax revenue for cities, states, and municipalities--also is expected to contribute to the projected slowdown.
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HUD Covers Terrorist Acts on Multifamily Loans
GlobeSt.com (10/22/02) ; Ruda, Mark
At the Mortgage Bankers Association convention yesterday, Department of Housing and Urban Development (HUD) Secretary Mel Martinez stated that terrorism coverage will no longer be required on Federal Housing Authority (FHA) multifamily mortgage insurance. Instead, Martinez said, "HUD will now pay the claims to the lender." The concession removes a major obstacle to affordable multifamily housing investment and development. The FHA's role in that property sector has almost doubled in the current fiscal year, according to Martinez, to $2.8 billion in loans.
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Environmental Risk Is Drawing Closer Scrutiny
Wall Street Journal (10/23/02) P. B8; Rich, Motoko
An increasing number of real estate deals are falling through because companies are trying to avoid purchasing properties that may carry environmental risks at a time when the government is showing more interest in regulation and financial scrutiny. According to a new Chubb Environmental Solutions survey, more than half of the 140 companies that responded had refused to proceed with a real estate transaction because of concern about environmental damage to the property. The deals ultimately failed--in order of greatest frequency--because the buyer or seller did not want to assume the cost of cleaning up the property, because the seller did not disclose the level of contamination, or because the parties could not obtain environmental insurance. Chubb sells environmental insurance to lenders, real estate buyers, and manufacturers that operate sites.
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Race Almost Over for RESPA Reform
Inman News Features (10/22/02)
With the public comment period ending next week on the Department of Housing and Urban Development's Real Estate Settlement Procedures Act (RESPA) reform, Secretary Mel Martinez says the agency is close to revising the mortgage origination process. The Cabinet official insists that revamping mortgage brokers' compensation disclosures; improving the good faith estimate of settlement costs; and allowing lenders to create settlement packages would save borrowers about $700 each at closing and as much as $8 billion annually. Though Martinez concedes that many mortgage industry insiders are unhappy with the proposed changes, he believes the revisions will further the Bush administration's plans to boost minority homeownership and guard against predatory lending.
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Dividends, a Major Prop for REIT Shares, Look Shaky
Wall Street Journal (10/23/02) P. B10; Starkman, Dean
A newly released Lehman Brothers Holdings Inc. study of 30 real estate investment trusts found that REITs generated $1.14 in cash for every dollar needed to cover their dividend in the second quarter--not very much padding considering that most economic indicators point to a tough ride over the next 18 or so. Meanwhile, a recent Merrill Lynch & Co. study found that some office REITs can stand to lose only a few more tenants by 2004 before they are left with just enough cash to cover their dividend payouts. Crescent Real Estate Equities Co., for instance, would reach that point if its building occupancies fell from their current mark of 93.9 percent to 90.6 percent. Green Street Advisors Inc. analyst Mike Kirby states that when a REIT slashes its dividend, it "sends a signal that 'We're in a hole today, and we're going to be in a hole in the future.'"
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Pulte Leads Way as Home Builders Post Strong Profits
Wall Street Journal (10/23/02) P. A2; Perez, Evan
Low mortgage rates, enhanced efficiency, and ever-growing demand from baby boomers and immigrants have resulted in strong earnings for the second quarter at residential builders Pulte Homes Inc., Centex Corp., and Ryland Group Inc. Centex's net income jumped 24 percent from $93.4 million to $115.6 million, while Pulte's and Ryland's net soared 49 percent from $82.8 million to $123.5 million and 27 percent from $37.2 million to $47.4 million, respectively. Meanwhile, Pulte President and CEO Mark O'Brien said he does not see any evidence of a housing bubble and believes the mortgage industry will continue to fuel new-home construction. In fact, the company saw a 48-percent rise in new-home orders during the third quarter; while Centex's second-quarter orders were up 38 percent, and Ryland's climbed 30 percent during the period.
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Borrowers Arm Themselves With Adjustable Rates
Boston Globe (10/20/02) P. H1; Grillo, Thomas
With interest on adjustable-rate mortgages (ARMs) hovering around 4 percent, one in five borrowers today are abandoning the security of a fixed rate to save money--especially those who plan to move or refinance before the interest rate begins to change annually after a set period of one, five, seven, or 10 years. In fact, the Federal Housing Finance Board reports that ARMs accounted for 20.5 percent of all home financings in January through August of this year, compared to just 13.6 percent during the same eight months of 2001. Mortgage Bankers Association of America chief economist Douglas Duncan says that jumbo-loan borrowers can save a bundle with ARMs by refinancing annually, and Wells Fargo Home Mortgage Vice President Thomas Gemache adds that the flexible underwriting of these products makes them a good choice for borrowers who do not qualify for conventional mortgages. However, Bankrate.com analyst Greg McBride urges those who cannot easily make the introductory rate to avoid ARMs because they could land in serious financial trouble when rates rise or if the home value collapses.
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Of Housing and Helium
U.S. Banker (10/02) Vol. 112, No. 10, P. 62; Adams, John
Historically low mortgage interest rates and a shift from stocks to real estate boosted home prices by as much as 10 percent or more in many areas this year and sparked a refinance frenzy, leading some experts to worry about a potential market collapse to follow. These naysayers believe that such rapid appreciation cannot be sustained in an market colored by weak economic recovery, rising unemployment, and slow wage growth cannot sustain such rapid appreciation--which ultimately could trigger a plunge in residential values and tip the economy into another recession. Others, like Federal Reserve Chairman Alan Greenspan, do not believe a bursting housing bubble is on the horizon--especially since inventory is fairly low and keeping pace with demand, interest rates are expected to remain low and continue to spur demand, and unemployment should remain relatively low for an economic downturn. Meanwhile, though some experts are concerned about price deflation due to deteriorating credit quality, Lenders Service CEO Bill Griffin insists that automated underwriting and electronic pricing and risk assessments have minimized delinquency and default risk.
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MBA (10/23/02) Sorohan, Mike
Remember the good old days of mortgage banking, when interest rates were below 6 percent and refinancings were off the chart—say, two weeks ago?

Ancient history.

Well, not really. The Weekly Application Survey from the Mortgage Bankers Association for the week ending October 18 did indicate that record-high interest rates—and the subsequent refinance blast it has produced—could be waning a bit. The contract rate for fixed-rate 30-year mortgages shot up 25 basis points, to 6.21 percent, from last week’s rate of 5.96 percent. And that rate is 36 basis points higher than the record 5.85 percent rate set four weeks ago.

“Treasury rates have shot up in the past two weeks, and mortgage rates have followed suit,” said MBA Senior Economist Phil Colling. “On average, the 30-year Treasury has went up 25 basis points last week, and the 15-year Treasury went up by 30 basis points.”

The rates for fixed-rate 15-year mortgages also went up sharply, from 5.31 percent last week to 5.63 percent in this week’s survey. The rates for 7-year balloon mortgages also went up, to 5.46 this week from 5.25 the previous week.

Corresponding with the two-week surge in rates, refinancing activity also fell. The seasonally adjusted Refinance Index fell to 5588.7 in this week’s survey, compared to a stratospheric 6793.8 a week ago and the record 6926.9 set two weeks ago. The percentage of refinancings remained fairly constant, at 73.4 percent.

Still, Colling said not to write off the boom, noting that all Survey measures are up significantly from the same period a year ago. “By historical standards, this is still very strong,” he said. “By any measure, an index figure above 5000 is a refinancing boom.”

The seasonally Purchase Index increased again, to 361.5 from 341.9 the previous week. But the Market Index dropped sharply, to 1128.3 after hitting a near-record 1288.4 the previous week.

The seasonally adjusted Conventional Index fell by nearly 13 percent, from 1868.3 last week to 1631.6 this week. The Government Index was off 10 percent, dropping to 288.4 from 320.6 the previous week. The share of ARM activity rose to 13.9 percent, up from 12.5 percent the previous week.

Points on fixed-rate 30-year mortgages stood at 1.37 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. Points on 15-year fixed-rate loans stood at 1.36 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The average points for balloon 7-year rates was 1.47.

The average loan size, based on total dollar volume, was $181,500; the average conventional loan was $187,400 and the average FHA/VA loan rose to $124,900.
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MBA (10/23/02) Sorohan, Mike
CHICAGO—The Mortgage Bankers Association of America’s 89th Annual Convention and Expo gives a number of industry companies the opportunity to make major announcements about new products, mergers, acquisitions and key appointments. Here are a few:

United Guaranty Corp., Greensboro, N.C., has made a game out of mortgage financing principles. Literally.

The company has developed two board games “Deception Detection,” covering the basics of fraud detection, and “The Big Score!” which addresses detection fraud.

Chris Hagan, United Guaranty’s assistant vice president, said the games enhance the learning environment for beginning loan originators, underwriters and loan processors. “When people are having a good time and there’s a spontaneous trading of ideas and information, they will learn more and retain the information longer,” she said. “The games seemed like a logical way to create this type of atmosphere.”

Basis100 announced a new strategy to deliver loan processing utilities to small and mid-sized mortgage lenders. The company is converging its three core technologies—BasisXpress, a processing platform for loan fulfillment and closing; BasisXchange, used to trade and manage mortgage pools to Wall Street; and Data Warehousing and Analytics to provide real-time decision support to the mortgage process.

The technology will be offered to small- and mid-sized lenders through joint ventures targeting consortiums, associations and cooperatives forming in the U.S. mortgage market. “To offer any degree of cost savings, scale and speed to the process, these technologies are a minimum requirement,” said Basis100 Chairman and CEO Gary Bartholomew.
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MBA 10/23/02 Murray, Michael
CHICAGO—The Mortgage Industry Standards Maintenance Organization’s (MISMO) effort to develop a commercial complement for its residential data standards is akin to a family’s acceptance of a precocious younger sibling, who can learn from previous experiences and events, take on some of the same characteristics but also stay independent and live in a different environment.

Here at the MBA Annual Convention, commercial real estate professionals are getting more education on MISMO’s standards effort using XML (extensible markup language) that can lower costs and speed the commercial mortgage process. MISMO provides a data architecture that is expected to lead residential real estate closer to a paperless environment and possibly a 100 percent e-mortgage process.

“XML allows different databases to talk [with each other],” said Dan Szparaga, a director in the Commercial/Multifamily Business Group at the Mortgage Bankers Association of America.

A critical aspect of XML is the security associated with transferred data. Public Key Infrastructure (PKI) is a critical part of data security by encrypting a document with a private key and providing a public key to only the people that will be allowed to view a document. A “public key” might be a code number linked with appropriate software. Without the key, the data would be garbled.

Meanwhile, MBA is preparing to launch an effort to create interoperability between different digital signature and PKI programs that would be used by industry participants. Even still, the security offered from PKI is strong.

“The chances of an encrypted document being opened is slim,” said William Frazer, managing director and chief financial officer of L.J. Melody & Co., Houston.

Frazer has found that the “new way” of doing business using technology saves on costs, six to eight days in the origination process and one to two days of transferring information to servicing. But the “new, new way” of XML technology can increase costs on a much more significant level.

Digital imaging systems at one company’s loan servicing saves $45 per loan by eliminating files, copy and mail time.

“The cost savings have been tremendous,” Frazer said.

But there are likely to be more than 7,000 different data elements to describe a loan and the data elements can be transferred when applicable. Still, new computer upgrades are not necessary to accept XML and different systems can describe many data elements.

“[Data elements] are constant and they’re the same for everyone,” Frazer said.

MISMO will be an ongoing process, constantly evolving like its residential counterpart. However, the data tags are not the same with the different property types in commercial real estate and those standards will need to be set for each property type. It is an aspect of MISMO that the residential side does not have to face.

Still, Fannie Mae and Freddie Mac are on board with MISMO for the multifamily properties and the lower transfer costs and opportunities of an XML standard in the commercial real estate industry could provide greater liquidity.

“Just adopt the XML standards,” Frazer said.
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