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	“Some of these [subprime] companies that put these loans on the books put people in houses that they probably couldn’t afford. The economy is weak now and that also contributes to it.” — Gerald Alt, chief operating officer of LOGS Financial Services, discussing the rise in defaults on mortgage loans, particularly subprime loans.

Top National News
Pitfalls in Interest-Only Mortgages (Wall Street Journal)
American Economy as a Whole Is Likely to Share Texas' Pain (Wall Street Journal)
U.S. Luxury Home Sales Slip, A Sign the Housing Boom May Fizzle (Bloomberg)
HUD Speeds Claims Process (Inman News Features)
Crazy for Condos (Copley News Service)
Mayors, Counties Campaign With Realtors (Inman News Features)
Capital Infusion (Urban Land Magazine)
Voice Solution Is Money in the Bank (Communications News)

News Alert
Sources tell MBA NewsLink that the Senate will vote today on H.R. 3210, the “Terrorism Risk Insurance Act,” which provides for a federal backstop for the private insurance market in the event of another terrorist attack. The vote is tentatively scheduled to take place today after the Senate votes on a proposed Homeland Security bill. MBA NewsLink will have details and specifications on the final legislation in tomorrow's edition.

Residential Finance News
GAO Report: HUD Acquisition Management Improves, but Still Faces Challenges
Residential Briefs

Commercial/Multifamily Finance News
Possible Kmart Closings Could Cause Mixed Shakeup in Retail
Industrial DealMaker of the Day
Commercial Briefs

Spotlight: Residential
Servicers Save Costs, Time on Mortgage Defaults

Pitfalls in Interest-Only Mortgages
Wall Street Journal (11/19/02) P. C13; Crane, Agnes T.
Interest-only loans are completely tax deductible, provide borrowers with lower monthly payments for a period of five to 15 years, free up cash for other expenses, and allow consumers to purchase homes they otherwise could not afford; however, the initial payments do not effectively chip away at the principal, and borrowers subsequently could be forced to refinance later at a higher interest rate. Though these loans were initially designed for wealthier clients interested in lower monthly payments, lenders have eased credit standards and are now offering interest-only products to subprime borrowers as demand for this brand of financing has increased in recent years--particularly in areas where residential prices have skyrocketed. However, Myvesta.org President Steve Rhode says consumers are accumulating loads of credit debt and take on interest-only mortgages when it may make more sense to rent. Moody's Investors Service analyst Mark DiRienz, meanwhile, says it is not clear whether lenders are targeting subprime borrowers to boost volume or if more educated borrowers are simply seeking the tax advantages of these loans.
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American Economy as a Whole Is Likely to Share Texas' Pain
Wall Street Journal (11/18/02) P. A2
Experts believe the nation's economy could soon duplicate the troubles faced by Texas, which has been plagued by high unemployment rates and a deflating housing market. With layoffs continuing and hiring freezes in effect, observers speculate that the American thirst for homebuying could be finally be quenched. Even rock-bottom interest rates will not save Texas and the nation as a whole, predicts Texas A&M University Real Estate Center research economist Jack Harris, who notes that affordability is second in importance to homebuyers, after economic confidence. The Texas economy--which through a decade of diversification has come to closely mirror the overall U.S. economy--is already feeling the impact; though both home sales and prices continue to climb in the Lone Star State, sales growth was limited to a mere 0.8 percent from January to September compared with a nationwide gain of 3.4 percent.
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U.S. Luxury Home Sales Slip, A Sign the Housing Boom May Fizzle
Bloomberg (11/02) ; Howley, Kathleen M.
After soaring 68 percent in the second quarter, sales of high-end homes priced a $1 million or more dipped 10 percent to 4,890 in the third quarter, leading many experts to predict that the housing market as a whole will follow suit. Slower luxury sales can be attributed to the recent 40 percent plunge in the Standard & Poor's 500 index and massive job cuts at financial companies, which have prompted wealthier buyers--who buy out of choice, not necessity--to hold off. Though low mortgage rates have fueled a record 5.36 million sales of lower-end homes, demand may already be on the decline, with appreciation slowing from 8.1 percent in the first quarter and 7.5 percent in the second to 7.2 percent in the third. Meanwhile, Manhattan-based Halstead Property Co. sales director Stephen Kliegerman says luxury homesellers have not yet acknowledged the down market and continue to set "unrealistic" asking prices.
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HUD Speeds Claims Process
Inman News Features (11/18/02)
At its first single-family loan sale, the U.S. Department of Housing and Urban Development used its Accelerated Claim Disposition (ACD) demonstration project to sell 5,100 mortgages representing $468.4 million in unpaid principal. The chief aim of the ACD project, which was authorized in the agency's appropriations bill for fiscal year 1999, is to improve financial recoveries to the FHA insurance fund and potentially save the federal government millions of dollars in the process. The demonstration calls for loans that are headed for foreclosure to be sold to a joint venture partnership that is to be managed by a private-sector entity. HUD officials have chosen a specified number of FHA servicers, including Countrywide Home Loans and Wells Fargo Home Mortgage, to submit defaulted single-family loans to the agency for payment of an accelerated claim.
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Crazy for Condos
Copley News Service (11/18/02) ; Woodard, James M.
National Association of Realtors chief economist David Lereah reports that condominium sales are running at about 826,000 units so far this year, well beyond 2001's annual record of 746,000. While the current high price of housing makes condos--which cost about 13 percent less on average than a single-family home--the only choice for many first-time buyers and other consumers, the market is expanding to include luxury units. The result has been to inflate the median price of attached housing at about twice the rate of growth for detached properties. Even still, the biggest homebuying group for condos continues to be singles, who represent 40 percent of this country's over-20 population.
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Mayors, Counties Campaign With Realtors
Inman News Features (11/15/02)
The National Association of Realtors (NAR) has signed on two new partners under its new Housing Opportunities Program--which is intended to provide members with useful resources, from training and research to communications activities and opportunities to work in collaboration with other interests. Under its alliance with NAR, the National Association of Counties has pledged to cooperate with the trade organization to reach common goals in homeownership opportunities. Under its partnership with NAR, meanwhile, the U.S. Conference of Mayors will seek dialogue between national realty leaders and the nation's mayors on critical federal legislative issues. The groups also will aim to identify areas of cooperation on the local level to promote investment and affordable housing initiatives.
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Capital Infusion
Urban Land Magazine (10/02) Vol. 61, No. 10, P. 118; Mattson-Teig, Beth
Though funding was limited in the past, recent years have seen banks, commercial lenders, investors, developers, government entities, and pension funds increasingly gravitating toward urban real estate--especially amid growing discontentment with suburban sprawl and long commutes. Inner cities have their perks, such as public transportation, an existing workforce, colleges, and hospitals, among other benefits; and they have been growing in popularity as people move back from the suburbs to live near employment, entertainment, and culture. Governments have been working to attract the private sector to urban redevelopment via public-private partnerships and other incentives such as the Community Reinvestment Act (CRA), the Low Income Housing Tax Credit Program, and the New Markets Tax Credit program. Banks, meanwhile, are stepping up their inner-city investments as well as they find that this strategy not only helps them meet CRA requirements but also provide community support and turn a profit.
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Voice Solution Is Money in the Bank
Communications News (10/02) Vol. 39, No. 10, P. 8
ABN AMRO Mortgage Group Inc. (AAMG) implemented an interactive loan qualification-and-application system to handle a flood of phone calls--which soared 400 percent from 7,000 in 2000 to 30,000 at the start of this year--sparked by the recent refinance frenzy. The conversational system can ask and reply to questions; find loan information, Social Security numbers, and telephone numbers when necessary; and direct customers to the appropriate department or representative. The company increased efficiency without hiring new staff and is now able to calculate a borrower's refinance savings in just 30 seconds and immediately start the refinance process for qualified customers. According to AAMG customer relations and e-commerce Senior Vice President Garth Graham, the voice-enabled solution has doubled agent productivity and will likely boost revenue by $4 million to $5 million this year.
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MBA (11/19/02) Royse, Matthew
A new General Accounting Office (GAO) study found that HUD has “undertaken correct actions to improve” its acquisition management systems. But the GAO said HUD “still faces significant challenges” in monitoring contractor performance, managing its acquisition workforce and ensuring the quality of data in its management systems.

Congress asked GAO to conduct these studies beginning in the 1990s, when HUD dramatically downsized its staff and began to rely more heavily on private contractors. GAO was asked to determine if HUD had the correct processes in place to keep the private contractors accountable for their work.

GAO found in this study, requested by Senate Banking Committee Chairman Paul Sarbanes, D-Md., and Sens. Jack Reed, D-R.I., and Wayne Allard, R-Colo., that HUD’s contracting had “increased dramatically” over the past several years. According to HUD, its commitments for contract work increased by about 62 percent between fiscal year of 1997 and 2000. HUD, the report said, expects this contracting work to increase even more because of President George W. Bush’s initiative to increase competition between private and public sectors for work currently done by federal employees.

As a result of the increase, GAO said HUD had taken the “correct and necessary steps” in ensuring that this increase in private contracting could be controlled and monitored effectively. GAO noted that HUD had hired a chief procurement officer and created a Contract Management Review Board to improve contract planning. In addition, GAO said “HUD has instituted a full-time contract monitoring positions, a certification training program for HUD staff filing those positions and a contracting information system to improve consolidation of contracting data and its integration with HUD’s financial system.”

However, GAO noted that HUD’s growing pains include “identifying and correcting contractor performance issues and making sure that the contractors are held accountable for their results.” In particular, GAO said that HUD’s multifamily housing program is still “ironing out the process” of how to monitor contractors’ accountability.

HUD, in response, acknowledged that “these challenges could require years to resolve.”
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Users can submit applications for the program online using one form rather than the three forms through fax, the National Charity Alliance Organization said. The gift money can be used towards a downpayment, closing costs and other funds needed in purchasing a home. NetLogis Caritas will provide a gift of up to 50 percent of the purchase price.

NACO began the NetLogis Caritas program for low-to-moderate income homebuyers with credit scores of at least 600 or higher. Qualified applicants do not have to be first-time homebuyers, but gross debt service and total debt service must be 30 percent and 40 percent, respectively.

There is no lien recorded against the home and no expectation of repayment of the money, according to NetLogis officials, except for the gift funds that are not used.
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MBA (11/19/02) Murray, Michael
Published reports suggest that Kmart could close more stores after the holiday season. And if the closings are anything like they were last year, it could have a somewhat mixed impact on the commercial mortgage backed securities (CMBS) market, analysts said.

Last year, Kmart closed a number of big-box retail stores, sending serious concern into the CMBS retail market that some shopping centers were going to have a major anchor go dark. At ratings agencies, the results included downgrades to a number of pools, but not all were necessarily affected.

In 2003, a repeat appears to be in the making. The Atlanta Business Chronicle received a list of stores that Kmart is looking at as possible closings following the holidays, but Kmart officials say that there have been no definitive decisions on the closings.

“The list we published was a list of stores that Kmart is looking at,” said David Allison, editor of Atlanta Business Chronicle. “What they actually will close could change. Our source is saying [that]. [Kmart] denies it.”

Allison said that the numbers could change in January or February but, according to the list, 565 stores, or more than 30 percent of the retail chain properties, are going to have a closer look. However, the company could still change its plans.

“Communities can step forward [with] tax breaks and other incentives,” Allison said.

Tad Philipp, managing director of Moody's Investors Service, New York City, said that some of the closings from the 2002 Moody’s pools had a “wide range of outcomes” with some pools performing with no problems and others becoming greater concerns depending on the situation. Overall, however, he did not believe that Kmart closings had a huge impact on the retail CMBS market.

For 2003, Philipp pointed out that Moody’s would want to look at the pools on a case-by-case basis.

“Ultimately, it becomes a real estate deal,” Philipp said. “If you have a lower Kmart rent in an infill location, you’re probably fine. If you have a higher rent in a more remote location, you might have some problems.”
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MBA (11/19/02) Murray, Michael
Tom Melody, executive managing director at the Houston headquarters of L.J. Melody & Co., and Paul House, the group’s director, have arranged financing on a $125 million regional shopping mall in West Houston’s Memorial area. The Memorial City Mall, with financing provided by New York State Teachers Retirement Services (NYSTRS) on behalf of MetroNational, will undergo renovation and expansion.

Financing is a line of credit with a two-year forward commitment and an interest rate already locked in at the time the loan becomes permanent. The mall will be built out to approximately 1.72 million square feet of total gross leasable area after two years of construction.

Upon its completion, Foley’s, Dillard’s, Lord & Taylor, Sears, Mervyn’s and Target will anchor the Memorial City Mall. The permanent loan will be a 10-year term, 30-year amortization but the interest rate could not be disclosed.

“We have already locked the rate in,” House said. “Two years from now, they fund it, but they have locked in a two-year forward.”

The borrower, Metronational, is familiar with the property and its West Houston location, having owned Memorial City Mall for the past 25 years. L.J. Melody & Co. has helped the borrower in financing four office towers, four multifamily complexes, a golf course and retail property mostly within the Houston area.

“[Metronational] really likes where rates are and two years out, they do not want to go out to the market and lock the rate in when rates will probably be higher than where they are now,” House said.

House added that “borrower likes where rates are but the property is not stabilized yet and it won’t be for another two years. “He wants to lock the interest rate in today. If the rates go up 200 basis points on $125 million, that’s a lot of debt that cuts into your cash flow.”

In the West Houston area, average residential home prices have grown in price to more than $225,000 making it a high end, upscale area that enhances the retail market.

House also pointed out that West Houston is a good area for most commercial real estate based on its demographics and location north and south along the I-10 corridor.

“There is a great opportunity for this particular market in Houston,” House said. “All the significant growth in Houston has been to the West.”
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MBA (11/19/02) Murray, Michael
Some analysts say that terrorism insurance legislation might not have as strong an impact on commercial real estate this year as it will in 2003, but it could cause a reversal for ratings agencies that have downgraded some pools based on problem loans that have been sent to special servicers.

Tad Philipp, managing director with Moody’s Investors Service of New York City, the most aggressive ratings agency toward terrorism insurance, said that the first step is for the insurance industry to find the legislation useful and effective, and then offer more widely available and affordable insurance for landlords.

He noted, however, that the legislation would not necessarily change any downgraded ratings on its own but it would be more of a “chain reaction” that would ideally bring the insurance for property closer to its previous state that was once seen on September 10, 2001.

“To the extent that the legislation is effective and the insurers act accordingly, and the property owners go and buy the hopefully more plentiful and cheaper insurance, that will set the stage for us to take another look at the rating actions that we took,” Philipp said.
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