%1

Banks say a rule change on commercial real-estate lending will help the economy, but so far it is mostly helping the banks, the Wall Street Journal reported. Enacted in May, the complex change narrows the definition of which construction and development loans should be deemed as “high-volatility commercial real-estate” (HVCRE) loans. The change, little noted outside the banking and real-estate industries, makes it harder for regulators to classify such loans as particularly risky. That is important to banks because they must hold extra capital against those loans. Congress revised the standards for HVCRE loans as part of a new law easing bank regulations, and banks pushed for the change, arguing it would spur more lending. Yet the change hasn’t increased lending broadly thus far. Still, banks already are reaping the benefits: easier compliance, a boost to capital ratios, better returns on existing loans. Wells Fargo & Co., for example, has cut its HVCRE exposure by two-thirds, lifting a key capital ratio. Banks say the old rules were so onerous they curtailed legitimate lending. The change “will help out a lot of the small underserved communities, because they’ll be able to go to the local bank and get financing where they couldn’t before,” said James Kendrick, an executive for the Independent Community Bankers of America. Advocates of stricter financial regulation fear relaxing the standards could encourage banks to return to riskier lending practices of the financial-crisis era.

U.S. public pension funds are taking on more real estate, and at times some of the riskiest types of property investments, as they try to close their funding gaps, the Wall Street Journal reported. American public plans with more than 20,000 members had an average 7 percent of their assets in real-estate investments at the end of 2017, according to a Wall Street Journal analysis of Boston College’s Public Plans Data, which contains the most recent numbers available. That is up from 4 percent in 2006, representing more than $120 billion in additional pension money flowing into real estate. Some of this increase is due to the construction of new properties designed to be sold later for a profit. These so-called opportunistic investments by pensions grew nearly sixfold between 2006 and 2016 even as allocations to “core” existing properties remained flat, according to an analysis by CEM Benchmarking.

A decade after the financial crisis, there is a new breed of risk-takers in the U.S. housing market. During the boom before the bust, lenders made mortgage loans to countless buyers who couldn’t afford them. Lenders later wrote off many of the loans, but borrowers’ obligation to pay remained. Today, in an improved economy, a group of individual investors, plus some Wall Street giants, is buying these old loans and trying to tease value out of them, the Wall Street Journal reported. The investors buy non-performing mortgages available for very low prices. The investors then track down borrowers, let them know they have a new creditor and tell them they need to resume payments, at least at a partial level, perhaps offering to modify terms. If necessary, the investors threaten foreclosure, but if all goes well, they collect on the debt or resell the mortgage as a now “reperforming” loan. The process marks a new chapter for hundreds of thousands of crisis-era borrowers who often had heard nothing about their unpaid loans for years and thought the debt had been disposed of. For investors, legal wrangling with such borrowers is common.

U.S. home builder sentiment recorded its steepest one-month drop in over 4-1/2 years in November as rising mortgage rates and tight home inventory squeezed the real estate sector, the National Association of Home Builders said yesterday, according to Reuters. The NAHB and Wells Fargo housing market index fell to 60 points in November, which was the lowest level since the 59 recorded in August 2016. That compared with a reading of 68 in October and a consensus reading of 67 among analysts polled by Reuters. The index’s eight-point drop was the biggest monthly decline since a 10-point decrease in February 2014. The index’s seasonally-adjusted component on current single-family home sales decreased to 67, the lowest since August 2016, from 74 in the prior month.

Sears Holdings Corp. won court approval to pursue a sale of its best stores, a process that would be the retailer’s only hope of avoiding liquidation, WSJ Pro Bankruptcy reported. Bankruptcy Judge Robert Drain yesterday signed off on the company’s sale timeline to sell at least 400 of its best-performing stores. The company must find a so-called stalking horse, or lead bidder, by Dec. 15, which would set the floor price for other offers. If there is more than one qualifying bid for the stores, an auction would be held in mid-January. Sears has pegged its future to the sale of these stores since its Oct. 15 bankruptcy filing. Chairman Edward Lampert’s hedge fund, ESL Investments Inc., is expected to make a stalking-horse offer. Through ESL, Lampert is Sears’s largest shareholder and creditor, and his position in the company is being placed under the microscope. Before the bankruptcy filing, he was also chief executive. The company has appointed a special committee to investigate prior transactions between ESL and Sears. In addition, the committee of unsecured creditors has taken aim at ESL, and will be performing its own investigation. Judge Drain approved this secondary investigation yesterday as well.

Mall operators, eyeing defaults caused or made more likely by shuttered stores such as Sears Holdings Corp., are handing over their keys to lenders even before leases end, Bloomberg reported. That’s forcing loan-servicing companies to either take a shot at running the properties or sell them cheap. And if they’re unable to salvage the debt payments, investors in commercial mortgage-backed securities will take a hit. Last month, Washington Prime Group, a REIT, said that it gave up on two malls in Kansas whose loans had either defaulted or were headed for default, according to Deutsche Bank AG. And this month, Pennsylvania REIT announced it fled a mall in Wilkes Barre that had a loan headed for default, and it may abandon another in La Crosse, Wisconsin for the same reason. Read more. 

Occupancy issues are at the heart of many significant retail cases, as detailed in the ABI publication Retail and Office Bankruptcy: Landlord/Tenant Rights, available at the ABI Store. 

UBS Group AG, Switzerland’s largest bank, faces another potentially costly legal battle as the U.S. Department of Justice draws up civil charges over the sale of mortgage-backed securities in the run-up to the 2008 financial crisis, Reuters reported. UBS said yesterday that it expected to be sued by the Justice Department as early as today. The bank said that the claims were not supported by the facts or the law and it would contest any complaint vigorously. Analysts at Zuercher Kantonalbank said that it was unclear how long the U.S. legal case might last and that it was hard to estimate what size fine UBS might face. The analysts said that they thought more than half of the 1.2 billion Swiss francs ($1.20 billion) UBS has set aside for non-core legal risks was dedicated to the U.S. case. UBS said in its statement yesterday that it expected the DOJ to seek unspecified monetary penalties stemming from mortgage securities which date back to 2006 and 2007.

The construction workforce, estimated at roughly 33,000 before Hurricane Maria, will need to double to keep up with demand to rebuild roads, houses and other infrastructure damaged in last year’s storm season, said Emilio Colon-Zavala, president of the Puerto Rico Builders Association, the Wall Street Journal reported. Cement sales, a proxy for construction activity, increased for eight months straight after Hurricane Maria to 33 percent above pre-storm levels. Puerto Rico’s building industry is booming, fueled by federal disaster-relief dollars and insurance proceeds together projected to total $82 billion over time. The influx has turned construction into a bright spot for an island economy racked by population loss, a declining manufacturing base and the largest municipal bankruptcy in U.S. history. Since the hurricane, federal agencies have obligated $4.8 billion for recovery work in Puerto Rico through last August, according to the Center for a New Economy, a San Juan-based think tank. While financial planners don’t know the exact scale of federal assistance over the next decade, the U.S. government has made some firm commitments already, including an $18.5 billion grant for rebuilding housing stock and other infrastructure. Meantime, the construction industry is reckoning with rising costs. Not only have wages increased, but material costs have risen since the Trump administration imposed tariffs on steel and aluminum from Canada, Mexico and the European Union and on Chinese products like home appliances, electrical equipment and other materials critical to Puerto Rico’s rebuilding efforts.