Hot off the New York Times presses is an amazing article penned by Shaila Dewan entitled, Needy States Use Housing Aid Cash to Plug Budgets. If this weren’t true (and sad), it would comical.

Talk about governments running so far in the red these days that they are acting more like crack addicts trying to secure their next fix (a revenue influx), rather than helping those citizens (and constituents) that need help the most.

We all know of the perils associated with the housing crisis these days. Whether you agree with the settlement or not, the settlement funds, provided by the banks, certainly would have helped alleviate some pressure in the housing market.

• Let’s dig a bit deeper. Remember the $25 billion that was negotiated from the five largest banks over abuses in their mortgage and foreclosure processes.
• Remember, this was “intended” to help homeowners and mitigate the effects of the foreclosure surge.
• RIGHT?

Get a load of this one. The lead paragraph really says it all:

Hundreds of millions of dollars meant to provide a little relief to the nation’s struggling homeowners is being diverted to plug state budget gaps. 

WHAT? What does a states budget have to do with the settlement?

Incredibly, only 27 states have devoted all their funds from the banks to housing programs, according to a report by Enterprise Community Partners, a national affordable housing group. So … get a load of this one:

 The $2.5 billion was intended to be under the control of the state attorneys general, who negotiated the settlement with the five banks — Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally. But there is enough wiggle room in the agreement, as well as in separate terms agreed to by each state, to give legislatures and governors wide latitude. The money can, for example, be counted as a “civil penalty” won by the state, and some leaders have argued that states are entitled to the money because the housing crash decimated tax collections.

ONLY ONE QUESTION REMAINS … WHAT’S NEXT?

The Maryland Senate is expected to give final approval today to a package of tax hikes that will raise more than $300 million a year, with the bulk of it coming from increases of 5% to 15% on incomes of taxpayers making more than $100,000 per year.

Buried in the legislation is a little noticed provision that will also raise $36 million in new taxes from companies that back mortgages on commercial development and homebuilding.

• The proposed tax hikes will require businesses to pay county governments a recording tax on “indemnity mortgages,” in which third parties guarantee to pay a mortgage if a builder or developer fails to pay a construction loan or other debt.

“This is just another impediment to put in front of business,” said Sen. Allan Kittleman, R-Howard, offering an amendment to strip the new tax from the bill.

All the money in the additional recording tax will go to local governments, partially offsetting a shift in the cost of the teacher pensions to county governments.

Sen. James Robey, D-Howard, floor manager of the tax hikes for the Budget and Taxation Committee, resisted the change, saying there was a provision in the bill to study the impact on business and report before the next session.

Kittleman’s amendment failed, as did every Republican attempt to stop each of the tax and fee increases in the revenue act. The dozen GOP senators were often joined by a few Democrats opposing the tax hikes.

Let the taxing games continue …

When is the bleeding going to stop? Frankly, it’s hard to know. One bit of advice is to hold your powder before you pull the trigger on making distressed property investments. Although it’s true that this “may” be the time, sharpen your pencil and measure twice before moving forward. Here’s some data to support that conclusion.

Ooops. Turns out that US home prices have once again made a post-bubble low in spite of all the artificial intervention and massive bailouts to financial institutions. 

The bottom line unfortunately is that US household incomes have been strained for well over a decade. And, as we’ve seen, you can’t pay for a house, if you don’t have a well paying job! 

Keep in mind there is a massive pipeline of problems still in the housing market with over 5.5 million mortgage holders in some stage of foreclosure or simply not paying on their mortgage.  This is more than a housing crisis but a crisis of quality job growth.  At the core, that is truly the problem.  

When looking at the hardest hit areas, it is interesting to see a mix of low price metros and two very expensive metros taking the biggest annual declines:

• Atlanta was absolutely slammed in the last year.  Home prices have fallen by 17 percent only in the last year driving home values back to 1997 levels!  This is for a very large metro area plagued with massive numbers of foreclosures.
• The second biggest hit came to Las Vegas.  The market has fallen another 8.5 percent in the last year bringing the total decline from the peak to a whopping 61 percent without even adjusting for inflation.
• You also see a handful of large mid-tier markets with Chicago, Los Angeles (including Orange County), and San Francisco falling yet again in the last year.

SO WHY ALL THE SHORT SALES, IF THE MARKET HAS BOTTOMED?

• The weakness is being driven by the large number of distressed properties being sold.
• Even though foreclosure sales are trending lower, this is being over shadowed by a larger number of short sales being ushered through by lenders.  In other words, properties are exiting quicker from the system but they are still distressed.
• Lenders have a front row seat to what is going on and essentially what they are saying with a swarm of short sales is they believe home prices in the intern will be going down.  Why else would you want to exit at this moment if you believed home prices would be soaring shortly?  
• Bank balance sheets are still inflated with poor performing properties and what the Case-Shiller report shows is there is likely to be little support for higher prices anytime soon.

Take a look at the nationwide data here:

Source:  Zero Hedge

If you look at the chart above, what is the major impetus to rush out and buy in 2012?

The trend to the contrary is showing weaker prices and lenders are openly discussing that more shadow inventory will be leaked into the market.

Certainly short sales are not going to prop prices up.

So what’s the state of the commercial lending marketplace?

Although large projects over $2.5MM have shown signs of picking up some momentum in 2011 & 2012, a major portion of small commercial-property deals in the U.S. have fallen through because of stricter lending standards, according to a National Association of Realtors survey.

While the commercial real estate market showed signs of recovery in 2011, credit tightened in the past year for small businesses. Here are the stats to back that up:

• 2/3’s of the agents helping clients buy properties for less than $2 million said the purchases were scuttled because of a lack of capital, according to the survey.
• Small-business transactions relied heavily on regional and local banks, and 30 percent of the purchases of properties such as apartments, offices, warehouses, land, shopping centers and restaurants were made with cash, according to the survey.
• 50%+ of respondents said lending is just as stringent as a year ago, while 23 % said it was tighter. Only 20 % said it was easier to obtain financing.

Stay tuned. We’ve been at this watch for the past four (4) years and it just doesn’t seem to be picking up any time soon.

The amount of commercial real estate backed by troubled loans in the United States continues to fall from a high of $191.5 billion set in March 2010.

So-called distressed real estate, which included properties in default or foreclosure and real estate taken over by lenders, totaled $166.9 billion in January 2012, down $4.7 billion since October 2011, according to data from Real Capital Analytics. 

The steady decline might be because lenders are extending debt obligations, and commercial property values are stabilizing. And with property values rising in select areas, some deals are no longer worth less than their loans.

THE FUTURE: Experts believe that property loan picture will continue to improve in a meaningful way throughout 2012 and beyond if interest rates remain low and the economic expansion picks up pace. The real test of the decline in the level of distressed assets will come in 2012 and 2013, with about $300 billion in loans coming due each year.

• Nationally, the office sector represents the largest share of distressed commercial real estate at $41 billion. This is a decrease of $829 million, or 2 percent, since October 2011.
• Apartment properties continue to have the second-highest level of distress, with $35.2 billion of distress — a $0.3 billion, or 0.9 percent, drop since October.
• Unbuilt land and other properties constitute the third-highest level of distress with $29.5 billion in distressed assets, a decline of $300 million.
• Retail has the fourth-most distressed assets at $27.9 billion, down from $28.6 billion in October.
• Hotels have the fifth-highest level of distressed assets currently, falling $3.1 billion since October, to $21.1 billion.
• Although industrial has by far the lowest volume of distressed real estate, it rose $435 million to $12 billion, an increase of 3.8 percent.

‘Stressed’ real estate

While the volume of distressed commercial real estate properties is significant, so is the looming volume of stressed property.

These properties have characteristics of concern in the short term — maturing loans, bankrupt tenants, under-performance, financially troubled owners or other significant obstacles that could potentially lead to distress in the future.

THE COASTS:

• The Los Angeles-Orange County area has the highest total volume of distress, followed closely by Manhattan. L.A.-Orange County also has the highest volume of potentially distressed (what we call “stressed”) real estate at $4.5 billion. Manhattan has the second highest level with $4 billion.
• South Florida has $996 in distressed real estate value per capita, the largest amount per capita after Manhattan, which has $2,455.
• Houston has the lowest amount among the markets we track, at $147 per capita. Houston also had the largest increase since October 2011, growing from $111 to $147 per capita, or 32.4 percent.

Washington and Baltimore

Of 10 key markets tracked, the Washington area has the fourth-lowest level overall of distressed assets (excluding stressed) at $1.6 billion, while Baltimore has the lowest, at $430 million. Stressed assets are much higher in Washington, at $3.7 billion, third-highest among the 10 surveyed cities.

Distressed real estate per capita is $289 per person for the Washington area, which is fourth-lowest among the 10 markets, while Baltimore has $157 per capita, which is the second-lowest of the 10 cities surveyed.

LIMITED INVESTOR OPPORTUNITIES: Chances to snap up distressed assets in the region have been limited. Washington’s assets have largely been held by strong, institutional ownership, and have benefited from the region’s steady economic performance and employment growth.

Led by the commercial sector, the Architecture Billings Index(ABI) — a true economic indicator — has now remained in positive territory four months in a row.

• The American Institute of Architects (AIA) said the February ABI score was 51.0, following a mark of 50.9 in January.
• SEE: AIA Billings Index Shows Third Straight Month of Positive Growth (2/22/12)
• The new projects inquiry index was 63.4, up from mark of 61.2 the previous month and its highest reading since July 2007.

Key February ABI highlights:

• Regional averages:
• Midwest (56.0)
• South (51.3)
• Northeast (51.0)
• West (45.6)

Sector index breakdown:

• commercial / industrial (55.1)
• multi-family residential (53.3)
• institutional (50.3)
• mixed practice (46.3)

Here is a very interesting, and potentially scary, Maryland real estate issue, astutely identified by DLA Piper’s Jack Machen.

Given the potential exposure of this ruling to most who follow our Maryland Commercial Title Blog, and operate in this arena daily, I thought I’d post this immediately. 

In Maddox v Cohn, the Maryland Court of Appeals, on January 24, 2012, held a foreclosure sale invalid because the ad required the purchaser to pay a stipulated fee to the trustee’s attorney. 

THE HOLDING >> The court found that the unilateral imposition of such a fee (the legal fee) is not authorized by statute and operates contrary to the duties of the trustee to maximize the sums bid at sales (that is, a purchaser will bid less knowing that these additional fees are tacked on).

THE RULINGS APPLICATION >> Even though the case talks only about legal fees, the Circuit Court for Montgomery County takes the position that the case prohibits imposing any closing costs at all on the purchaser, including recordation and transfer taxes. 

OTHER IMPLICATIONS >> This broad reading of the case would have the effect of invalidating any foreclosure sale where the advertisement requires the purchaser to pay closing costs. 

What are your thoughts on the matter?

A Maryland real estate investment trust that invests in mortgage-backed securities is planning to raise up to $1.8 billion in a stock sale.

American Capital Agency in Bethesda said in a news release that it intends to use the proceeds from the secondary offering to buy up additional securities, as well as for general corporate purposes.

The stock sale, expected to close Monday, would be at the least the REIT’s seventh secondary offering since going public in 2008. Its most recent secondary offering was in October 2011, when it raised $1 billion.

American Capital Agency invests only in securities backed by government-sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae.

DO YOU AGREE: Speaking a conference in New York last week, President and Chief Investment Officer Gary Kain told investors and analysts that now is agood time to invest in the securities because yields are likely to increase as the economy improves. Even if conditions worsen and the Federal Reserve Board has to stimulate the economy with another round of bond purchases, American Capital could see a “big pop” in its book value by selling securities to the Fed, Kain said.

“The Fed is going to buy hundreds of billions of dollars worth of agency mortgages, which is what we own,” said Kain at the conference hosted by Citgroup Inc.

The U.S. government has started selling off its stock of homes in foreclosure, as first reported in our article, Sell Government-owned Foreclosures, as Rentals, back on January 9, 2012.

The Federal Housing Finance Agency (FHFA) said Monday that a group of investors purchased the first of 2,500 homes being sold as part of a foreclosure-to-rental program.

The government has control over roughly 250,000 foreclosed homes owned by Fannie Mae, 1 percent of which will be sold and converted into rentals through the pilot program.

Investors can submit applications to purchase properties owned by Fannie in some of the nation’s hardest hit metro areas — Atlanta, Chicago, Las Vegas, Phoenix and parts of Florida.

Highlighting the NATIONAL ASSOCIATION OF REALTORS predictions are: The National Association of Realtors‘ quarterly forecast shows all commercial sectors are experiencing improved fundamentals, with the multifamily market commanding the largest rent hikes. 

Likewise, a notable gain has been recorded by the Society of Industrial and Office Realtors (SIOR). The SIOR Index, measuring the impact of 10 variables, spiked 8.3 percent to 63.8 percent in the Q4 2011. The previous quarter experienced a 0.6 percent uptick. However, 100 represents a balanced market, which was last seen in Q3 2007.

• Office vacancy will drop to 16 percent from 16.4 percent in Q1 2013.
• Washington, DC, currently has the lowest rate, 9.5 percent,
• New York City in second place at 10 percent
• New Orleans, 12.4 percent.

Office rents will climb 1.9 percent this year and 2.4 percent in 2013, with the U.S.’ net absorption on track to hit 20.1 million this year and 28.1 million next year.

• Industrial vacancy will be 10.9 percent by Q1 2013 versus the current 22.7 percent. The lowest rates are found in Orange County, Calif., 4.8 percent; Los Angeles, 4.9 percent; and Miami, 7.6 percent.
• Industrial rents are expected to tick up 1.8 percent this year and 2.3 percent next year. Net absorption is 40.6 million in 2012 and 57.7 million in 2013.
• Retail vacancy will fall to 11 percent in Q1 2013 from the current 11.9 percent. Cities with the lowest vacancies are San Francisco, 3.6 percent; Fairfield County, Conn., 5.1 percent; and Long Island, NY, 5.4 percent.
• Retail rent, on average, should climb 0.7 percent this year and 1.2 percent next year. Net absorption is expected to be 9.9 million square feet in 2012 and 23.9 million square feet in 2013.
• Multifamily vacancy will be 4.5 percent in Q1 2013; it’s 4.7 percent in this quarter. The lowest rates exist in New York, 1.8 percent; Minneapolis and Portland, Ore., 2.5 percent; and San Jose, Calif., 2.7 percent.
• Multifamily rents are predicted to jump 3.8 percent this year and 4 percent in 2013. Absorption is forecast at 209,900 units in 2012 and 223,600 in 2013.