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The Federal Reserve warned that prices in the commercial real-estate market may have run up too far too fast, Bloomberg News reported yesterday. Valuations in commercial real estate “appear increasingly vulnerable to negative shocks, as CRE prices have continued to outpace rental income,” the Fed said in its semiannual Monetary Policy Report to Congress. The Fed noted that prices exceed their pre-crisis peaks by some measures. The Fed included a special section on financial stability risks in the report, which accompanies Chair Janet Yellen’s testimony. The report said that even given “moderate” financial vulnerabilities, risks of external shocks, such as the U.K.’s possible exit from the European Union, pose stability risks. The report also highlighted issues related to credit exposures to the energy sector, money-market mutual funds and stock valuations.

An appeals court dealt the Obama administration a major setback in its efforts to levy tough fines on corporations and executives, overturning a civil mortgage-fraud case against Bank of America Corp. tied to the financial crisis, the Wall Street Journal reported today. The court yesterday also tossed out a $1 million civil penalty against Rebecca Mairone, a former executive at Countrywide Financial Corp., who was one of the few individuals fined for alleged misdeeds during the crisis.The ruling by the U.S. Court of Appeals for the Second Circuit raises the bar for the government to prove fraud against companies and individuals, weakening a weapon the Justice Department has used to push Wall Street to agree to big mortgage settlements. If it stands, the three-judge panel’s unanimous decision could affect the remaining investigations into crisis-era mortgage securities, some observers said, including those into European lenders Royal Bank of Scotland Group PLC and UBS Group AG. The decision also could encourage other firms to push back against prosecutions. The original verdict in the Bank of America case helped pave the way for the government to reach multibillion-dollar settlements with large banks for alleged financial-crisis misdeeds. The ruling won’t alter the nearly $45 billion in mortgage-securities settlements the Justice Department already has reached with the biggest U.S. banks, including J.P. Morgan Chase & Co. and Citigroup Inc.

For more than a year, the biggest names at the shopping mall have cast a hopeful eye on the declining jobless rate and low gas prices, betting that it was only a matter of time before consumers snapped out of a cycle of tepid spending that has left many retailers grappling with weak sales and declining store traffic, according to a Washington Post commentary today. But, with the likes of Gap, Macy’s and Kohl’s reporting this week that they rang up surprisingly dismal sales this spring, retailers — especially apparel chains and department stores — are facing a troubling reckoning. The economy is bouncing back, and customers just aren’t hitting stores or filling up digital carts like the shopping giants thought they would. “There seems to be some more macro issue, given both performance of ourselves and our competition,” said Wes McDonald, chief financial officer at Kohl’s, on a conference call with investors Thursday. “There seems to be some change in consumer behavior.” The uncertainty is lending fresh urgency to the challenges facing old-school stores, whether it is adjusting to the reality of online commerce or watching their customer base shift from big-spending baby boomers to the more cautious millennials. The industry is suddenly awash in talk about being “overstored,” too many physical outlets chasing too few shoppers. “My personal view of the retail real estate industry in the U.S. is that it is over-retailed,” Sandeep Mathrani, chief executive of General Growth Properties, told analysts this month. “The primary reason retail properties have closed and will close is obsolescence.”

A small but growing slice of the mortgage market has shifted from mainstream banks to an informal, loosely regulated corner of property finance, the Wall Street Journal reported today. These lenders can earn 8 percent and more on their money — the catch is they must stomach the risk of lending their savings to borrowers rejected by banks. “It’s the Wild West out here,” said Corey Kohnke, who spends his days driving around Orange County, Calif., matching borrowers with investors looking to make loans, a job that pays commissions of 2 to 8 percent. Private lenders charge annual interest rates as high as triple those of a conventional 30-year fixed-rate mortgage. Some issue loans from personal fortunes and collect monthly interest payments. Others make loans and sell the note to investors. There also are private mortgage funds that pool investor money. “We can’t make loans fast enough to sell them to our investors,” said Michelle Rodriguez, general counsel for R.C. Temme Corp., and its affiliate, private lender Woodland Hills Mortgage Corp. in Los Angeles. When the firm’s salespeople call investors to market the loans, she said, “they’re snapped up within minutes. Literally, 15 minutes and they’re gone.” Read more. (Subscription required.) 

Don’t miss the “Real Estate Values Are Climbing (Again): Debtor, Watch Your Back!” session at the Southeast Bankruptcy Workshop on July 21-24 at the Ritz-Carlton in Amelia Island, Fla. Click here to register. 

Shelter Growth Capital Partners has been buying homes that were foreclosed on during the financial crisis and later resold to buyers under long-term installment contracts, the New York Times reported today. The firm has bought just over 200 homes from Harbour Portfolio Advisors, a Dallas investment firm that has specialized in selling homes to lower-income buyers through what is known as a contract for deed. In these deals, a seller provides the buyer with a long-term, high-interest loan, with the promise of actually owning the home at the end of it. These contracts, a form of seller financing, have ballooned in recent years as low-income families unable to get traditional mortgages have turned to alternate ways to buy homes. The homes are often sold “as is,” in need of costly repairs and renovations, and many of the transactions end in eviction when buyers fall behind on payments. The market is growing in part because so many would-be home buyers with damaged credit histories cannot get loans. Banks are unwilling to write mortgages to riskier clients after being fined billions of dollars for pushing borrowers into unaffordable subprime mortgages before the crisis.

A Houston homebuilder and remodeler operating in the Midtown area has filed for bankruptcy, the Houston Business Journal reported yesterday. Casa Villarreal Builders LLC filed for chapter 7 bankruptcy on April 5 in the U.S. Bankruptcy Court for the Southern District of Texas in Houston, according to public records. Casa Villarreal Builders’ bankruptcy filing states it has between one and 49 creditors, estimated assets of up to $50,000 and estimated liabilities of up to $50,000. The filing states there there would be no funds available for distribution to creditors after any administrative expenses are paid. Owner Jose Villarreal said that his company was hit hard during the Great Recession and could not recover.

The regulator of Fannie Mae and Freddie Mac said yesterday that it would allow the government-controlled mortgage finance companies to cut loan balances for thousands of U.S. borrowers who owe more than their homes are worth, Reuters reported. The Federal Housing Finance Agency said the principal reduction program would be a one-time offering for seriously delinquent borrowers to help them with what the agency director said "could well be their final opportunity to avoid foreclosure." About 33,000 borrowers are expected to be eligible for the relief, the agency said. Homeowners have to meet certain criteria to qualify, including having an outstanding principal balance of more than $250,000 and being more than 90 days delinquent on mortgage payments as of March 1. The agency on Thursday unveiled other changes designed to minimize foreclosures, including modifying rules for Fannie Mae and Freddie Mac to sell defaulted loans. The companies must now instruct their debt buyers to evaluate borrowers for loan forgiveness or principal reduction options. Also, debt purchasers can no longer release and walk away from possessed, vacant properties.