Real Estate Law Blog

The Texas Residential Construction Commission Begins its Wind-down

This from a press release on the Commision's website: At its June 11, 2009 meeting, the Texas Residential Construction Commission announced a general timeline and action plan related to the implementation of the State’s sunset provisions.

Under provisions of Texas Government Code 325.017, the commission will not be accepting new inspection requests after August 31, 2009. In other action taken, the commission approved the following:

• All new homes and projects completed by August 31, 2009 must be registered

• All new builder registrations and timely renewal registration applications will be accepted through August 31, 2009

• All new builder registrations and timely renewal registration applications will be prorated, please see prorated chart here

• Inspection requests will be accepted through August 31, 2009

• Inspection requests will be scheduled for inspection as soon as possible following commission rules, policies and procedures

• Ombudsmen will actively process complaints and post-inspection actions through August 31, 2010

The Web site will be updated as more information becomes available. For more information about any commission-related issues, go to www.TexasRCC.org.

Maturing Debt and Bad Loans Continue to Dampen Commercial Real Estate Lending

The commercial real estate ("CRE") industry continues to struggle as financing sources remain slim. The Mortgage Bankers Association ("MBA") reported that a survey of multiple US regions found low volume in real estate transactions, driven by tight credit. Several sources seem to agree that credit will not become more available in the near future because, despite signs of improvement in overall bank health, the banks remain burdened by bad debt and the prospect of more as billions of dollars in CRE-secured debt matures in the coming months.

This issue is a prime concern for many industry professionals. The Commercial Lease Law Insider recently reported on a study released earlier this month by Ernst & Young LLP that looked at this issue. EY talked to 40+ major funds; the results of their study indicated that the biggest concern in today's market is the large amount of commercial mortgage debt that will mature in 2010 and 2011, and the dearth of refinancing options available to cover that debt. 92% of those funds surveyed by EY believe that the US economy will not recover until after 2009. (A copy of the EY study can be accessed at their website through the link above in this paragraph.)

Mixed messages abound with respect to the lending industry. Treasury Secretary Timothy F. Geithner told the press at a recent briefing that there are "early signs of repair and improvement" in the banking industry. Those signs include rising profits and bank share prices, success in raising more than $200 billion in additional capital, and government approval for ten banks to repay $70 billion in bailout funds (see, e.g., a June 10 Wall Street Journal article). Despite the positive signs, though, the banks still face the pressure of the bad loans on their books. According to a June 11 Business Week article (citing a recent Deutsche Bank report), US banks hold around $1 trillion in commercial real estate loans, many of which will mature in the next twelve to eighteen months. With few refinancing options currently available, it's reasonable to assume that number of loans-in-default on bank books will swell in the months to come. In fact, the Business Week article mentioned the skepticism of some regarding the recent encouraging stress test results, pointing out that those results may have been premised on faulty assumptions about the state of the economy, including unemployment numbers, and the extent of losses the banks can expect to suffer in coming months. Some lawmakers are calling for the stress tests to be run again, with tougher "worst-case-scenario" assumptions, in an attempt to get a more realistic picture of the banks' condition. (See Dow Jones Newswire article.)

The Business Week article estimated bank losses at nearly $500 billion if the current recession plays out as projected. Those numbers don't bode well for the lending climate; if banks have to use profits to deal with losses well into the future, those moneys will not be available for funding future real estate projects that are needed to help the CRE industry get back on track. The MBA recently reported on this issue, talking to various industry insiders about their ongoing concerns.

Monday Roundup

Trouble with the Legacy Loans Program?

Late last week, both The Washington Post and The Wall Street Journal reported on problems with the "Legacy Loans" component of the administration's plan to get credit flowing again (see previous postings 5/22 & 5/26). Reporting on a press conference held last week by Sheila C. Bair, chair of the Federal Deposit Insurance Corp., the Post noted concerns expressed by potential participants in the program about a possible requirement that they divulge private information about their business operations. The Journal indicated that some administration officials are suggesting that the program might not be as crucial as formerly thought, noting that banks have been able to raise significant capital even before purging their balance sheets of the troubled loans.

Administration Overhaul of Financial Markets

Friday's Wall Street Journal reported a debate within the Obama administration about whether to scale back the scope of its planned revamping of financial markets oversight. The question under discussion apparently is whether to continue to pursue ideas such as the creation of new agencies (i.e., to oversee banks) and a merger of the Securities and Exchange Commission with the Commodity Futures Trading Commission. According to the WSJ, "At issue is whether officials want to reorganize the basic structure of oversight, or whether they will settle for new rules at existing agencies that would accomplish the same goal." Concern about the possibility of "turf wars" among various agencies may have been a factor in the administration's reconsideration of its ambitious overhaul plans. The article indicates that administration officials are, at this point, concerned with establishing what rules will apply (e.g., regarding capital requirements for banks) and will defer decisions regarding which agency will take what role. The administration expects to finalize and present a plan to Congress in several weeks with a goal of Congressional passage in 2009.

Rising Capitalization Rates in Commercial Properties

In follow-up to a mention in the April 17, 2009, posting in this blog, we note a report this morning from the Mortgage Bankers Association regarding rising capitalization rates in U.S. office, apartment, and retail properties. Based on a recent discussion among real estate professionals, the report notes few commercial transactions in most central business district markets, positing that this "light activity . . . reflected an absence of a commercial mortgage-backed securities market, and tighter credit markets for commercial real estate." Another interesting item from the MBA report: a 59% increase in CMBS loans going into special servicing during the last quarter, with hotel loans representing a large percentage.

Industry Analyst Anticipates Six-Month Wait for Capital Flow

A recent report from the International Council of Shopping Centers included a prediction from Marcus & Millichap that measurable improvements in the credit flow are about six months away. Placing the major blame on the toxic assets that burden bank balance sheets, Marcus & Millichap nevertheless expects the government's recent efforts, inluding the January stimulus package and the Public-Private Investment Program, to "help jump-start the capital markets." Readers can sign up for news alerts from ICSC by clicking here.