SOURCE: The Motley Fool

In the first quarter of 2006 speculation was truly out of control. Twenty-six percent of loans were of the interest-only or negative amortization variety... The statistics are damning. In 2005 and 2006, 20% of all mortgages were subprime, and a further 12% to 13% were low-documentation Alt-A loans.

The turmoil in a bear market can make for some astounding investment opportunities. The challenge is to find those substantial opportunities that are to be had at this time. Some stocks are believed to be trading at a 60% discount from their fair value. This could work out to a 150% return if these stocks appreciate to what it's felt they're worth.

Even though these returns won't happen overnight and are contingent on the economy picking up over the next few years, if an investor has the ability to work with a longer-term time frame, it could be well worth their while to take a hard look at some of the deals out there.

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SOURCE: The Wall Street Journal

Commercial-Mortgage-Backed-Securities (CMBS) had become the most popular form of debt in the U.S. as of late. Today, investor demand for these securities has become so low that there have been very few new issues this year. This is a dramatic change over previous years and a further drop expected this year.

With this tremendous drop in investors looking to buy CMBS and the securitization lenders slowing down their new loan originations, this has forced owners and buyers of commercial property to scramble to find other forms of financing. The reduction in sales activity can be attributed in a large part to the increasing cost and declining availability of all forms of debt.

"There is no question that the CMBS market is challenging," says Jeff Altabef, co-head of European CMBS at Credit Suisse. "The deal pipeline is low and banks are looking at alternative ways of syndicating existing positions based upon risk and return profiles, but there is low investor appetite at the moment." Unlike the subprime loans, though, the default rate on the commercial-real-estate mortgages underlying the issues has been low but they have been dragged down by the subprime mortgage crisis.

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SOURCE: The New York Times

Commercial-Mortgage-Backed-Securities (CMBS) had become the most popular form of debt in the U.S. as of late. Today, investor demand for these securities has become so low that there have been very few new issues this year. This is a dramatic change over previous years and a further drop expected this year.

With this tremendous drop in investors looking to buy CMBS and the securitization lenders slowing down their new loan originations, this has forced owners and buyers of commercial property to scramble to find other forms of financing. The reduction in sales activity can be attributed in a large part to the increasing cost and declining availability of all forms of debt.

"There is no question that the CMBS market is challenging," says Jeff Altabef, co-head of European CMBS at Credit Suisse. "The deal pipeline is low and banks are looking at alternative ways of syndicating existing positions based upon risk and return profiles, but there is low investor appetite at the moment." Unlike the subprime loans, though, the default rate on the commercial-real-estate mortgages underlying the issues has been low but they have been dragged down by the subprime mortgage crisis.

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SOURCE: USA Today

The fall of Bear Stearns is a sign of the larger problems facing the U.S. economy. The crisis in the subprime mortgages infected the credit markets. Then, home prices started sinking. After that, mortgage defaults started rising and with all this, the economy started to sputter. The Federal Reserve is trying to stabilize the credit market before the entire U.S. financial system is poisoned.

The best-case scenario that the financial markets
can expect is that the Feds can lead them to a recovery in the housing market. No one wins if this economic breakdown spreads to other banks and beyond. "It's a really dicey moment we've come to." says Seattle-based money manager William Fleckenstein.

Bear Stearns failed because its investors didn't believe that they would be able to repay their loans. There were so many complex agreements intertwined with other banks, investment houses, and corporations that the investors concluded that the bank couldn't stand behind them either.

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SOURCE: The Wall Street Journal

Most commercial real-estate sectors have seen their cap rates rise in recent months. The only exception to this has been apartment buildings which has stayed steady at 6.08% from January.

The cap rates for office properties located in central-business districts have risen from 5.42% to 5.96%. The cap rate is a calculation of the rental income that would be earned in the first year of ownership which is then divided by the purchase price.

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SOURCE: Reuters

As restrictions are being eased for both Fannie Mae and Freddie Mac, they will be able to take on a bigger role in settling the queasy mortgage markets. About $2 trillion will be guaranteed in mortgages this year. The Office of Federal Housing and Enterprise Oversight said the restrictions would be relaxed immediately.

Even though the markets have not been calmed by the latest moves which will allow Fannie Mae and Freddie Mac to buy up even more mortgages, it is felt that this will help considerably. More relief is in the works as well which may help the Federal Home Loan Bank System to double their mortgage holdings to around $300 billion.

With these large influxes of money available, the market liquidity should improve dramatically. Although in recent weeks, investors have dumped some loans to meet margin requirements. This has undercut the Fed's attempts to spur on the economy by lowering the overnight interest rates.

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SOURCE: Bloomberg

Real estate deals are coming apart at the fastest pace since September 2001, when the U.S. economy was shrinking, because banks are tightening standards for loans, said Robert White, president of Real Capital Analytics, a New York-based research firm. About $15 billion of commercial property transactions of $10 million or more are under contract in the U.S., compared with about $70 billion at mid-year, White said. That's unusual because the number usually rises at year-end, he said.

The past seven years have seen a rally in office and retail property sales. Since September 2007 this seems to have ended. Prices of commercial properties have reflected this by an average drop in price of 1.2%. Potential purchasers have to work harder at buying these reduced properties due to the tightened rules.

Even though defaults on commercial loans are only running at 0.4% in the U.S., the market traders seem to be overreacting according to some mortgage brokers. The decline in prices of the safest types of commercial mortgage-backed securities is caused mostly due to a slump in credit markets, not expectations of defaults on the loans backing the securities.

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SOURCE: Bloomberg

The decline in starts was led by a 6.7 percent slump in construction of single-family homes. February's 707,000 pace was the weakest since January 1991. Work on multifamily homes, such as townhouses and apartment buildings, increased 14 percent to an annual rate of 358,000 in February.

Some areas of the housing market are still doing well or holding even though. The Northeast saw total housing starts drop 28%. Single family home starts in the West increased by 5.1%. Total construction rose by 3.9% in the South and remained unchanged in the Midwest.

The Feds are continuing to lower interest rates. They are putting inflation aside and focusing on stimulating the economy. It is felt that with the Feds reducing the overnight loan rate to banks to 2.25% that will help to spur the economy.

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SOURCE: Wall Street Journal Online

GE, who has been one of the U.S.'s largest real estate investors for years, is planning to begin investing money belonging to others. Even though this is a difficult time to get into the fund-raising business, they feel they have some assets that will help them face the challenges of a falling market.

One advantage GE believes it has is hundreds of local agents scoping out commercial real-estate markets. The funds will get a first look at any potential properties that fit the profile they are hoping to take advantage of. Joe Parsons, chief executive of GE Real Estate's newly formed global investment-management division, said that GE's investment strategy is different from funds focused on distressed situations. Instead of waiting for fire sales, or those properties down about 50% in price, GE is looking at properties discounted in the 10% to 15% range.

As GE is hoping to become one of the big players in real estate asset management firms within five years, they know that entering the market at this time could be difficult. They feel that a first-time fund with no track record would find it much harder than themselves with their proven ability to invest well.

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SOURCE: Forbes

The first half of 2008 may see real estate investors hoard their cash and wait for the moment to strike when values achieve something like a bottom. That moment will likely not come until at least the first quarter of 2009. It is unlikely that the early 2007 levels will return anytime soon.

Some commercial property owners have been banking on the typical strong fundamentals in rent and occupancy. The only difficulty with this is that some of these buildings were bought using high rent projections along with steep debt. As rent growth and occupancy slow, the potential for difficulty rises. But, some industrial properties that are less leveraged and have long leases should be able to handle the slowdown.

It is felt that the rental housing market will not be hit too severely as homeowners who have been foreclosed on will be pushed into the rental market. The multi-family owners should be able to fill their units with these renters.

One bold prediction to note is that by the time the bottom is hit in the real estate market, there will be a large amount of capital waiting to be invested. It is felt that any bargains that come along will be quickly snapped up.

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SOURCE: The Motley Fool

There is a strong worry afoot surrounding the failing housing market. Some borrowers who have negative equity in their homes are starting to walk away from their houses and their mortgages. By deliberately pursuing foreclosure, these borrowers are actually contributing to the vicious cycle.

Lenders are generally highly leveraged yet they can manage a 1-2% default rate. If this escalates to a 5-6% default rate a reduction in the mortgage liquidity market will make it harder for housing sales to improve.

If there is a 15% estimated decline in the housing market that will translate into 21% of people with mortgages who owe more than their house is actually worth. If a recession develops and the housing market falls 30%, then nearly two of every five mortgages will be underwater.

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SOURCE: The Wall Street Journal

Commercial-property downturn isn't expected to be nearly as bad as the current slump in the housing market.

The lack of over building in recent years in commercial real estate has tempered the losses to commercial building owners, lenders, and investors. This as well as most office buildings and other commercial ventures keep current on their mortgages.

Since commercial properties typically produce income, most buildings are generating enough cash to pay off their loans.

"Fundamentally the markets are in pretty good shape," says James Duca, managing director of Moody's Investors Service.

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SOURCE: Reuters

With the deepening of the credit crunch commercial property financing has turned from banks like Morgan Stanley and JPMorgan Chase & Co to being funded by the "agencies."

Fannie and Freddie are the largest sources of funding for U.S. residential mortgages, can still tap credit markets given their implicit government backing.

"Right now the agencies are the only game in town," said Yuri Kletsman, a vice president in the commercial real estate group at Centerline Holding Co.

Ken Bowen, chief underwriter at Red Mortgage Capital Inc, a unit of National City Corp states "We sold $1.35 billion in loans to Fannie Mae last year," Bowen said. "On Monday, we sold $1.35 billion in loans to Fannie Mae in one transaction."

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SOURCE: Seeking Alpha

REITs are relatively outperforming other major market benchmarks, says the National Association of Real Estate Investment Trusts (NAREIT) in its latest monthly update.

NAREIT also argues that REITs provide a comparatively attractive investment for those "looking for income with relatively low risk", particularly when taking into account leverage and yield spreads.

With the credit market being more challenging investors worry about companies being overleveraged, most REITs continue to be conservatively leveraged.

David Gaffen of WSJ.com's marketbeat blog "The creditworthiness of this debt is extremely strong," notes Guy Lebas, but of course, that doesn't matter in this environment.

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SOURCE: SF Gate

The housing crash domino affect has started to reflect in consumer spending and thus in turn has weakened the retail store industry.

David Solomon, president and CEO of ReStore, NAI Global's retail division, believes vacancy rates may drop 10 percent by the end of the year. Still, Solomon doesn't think the situation will be as dire as in 1991.

Suzanne Mulvee, senior economist at Property & Portfolio Research, thinks that vacancies could rise as high as 12.5 percent this year. Part of the problem, according to Mulvee, is that more retail space is coming to the market just as consumer demand is falling.

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SOURCE: NPR

Loss mitigation techniques have been scaled up by lenders and servicers for homeowners facing foreclosure. More can and should be done according to Ben Bernake, chairman of the Federal Reserve.

Rising foreclosures threaten the wider economy so Bernake is recommending changes. Part of these includes giving broader powers to the Federal Housing Administration as well as to the Department of Housing and Development.

These additional powers would enable the FHA some flexibility to offer refinancing products to more borrowers. It is felt that this will help reduce preventable mortgage foreclosures.

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SOURCE: The Street.com

"There is a big disconnect with what is going on in commercial real estate and what the market thinks is going on in commercial real estate," says Rich Moore, a REIT analyst with RBC Capital Markets.

REIT stocks are continuing to suffer from high volatility and the US MSCI REIT index has fallen 24% over the past year. This includes dividend returns. Some feel that the fear created among many investors is due to the almost daily stories about how the commercial real estate market is likely to implode.

Many of these fears are unfounded as the fundamentals remain relatively strong in the commercial real estate market. The two main fears are that both rentals and financing may see trouble.

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SOURCE: The New York Sun

Last year's record level of residential rental building sales is unlikely to take place in 2008. Because the only financing available is from either balance sheet lenders or federal agency programs, it inhibits the sale of many units.

While some markets are still experiencing growth and rental rates have risen quite well, the difficulties in getting financing, even in these hot markets, has become a real difficulty. Most feel that during this next year, smaller projects with long-term value will have more availability for financing.

A senior broker at Besen Associates, Adelaide Polsinelli, said the market now is one "of contradictions. Lenders are tightening their loan commitments, yet interest rates are at all-time lows. Supply is tight, yet demand is down. Developers are sitting on the sidelines, yet the need for housing has never been greater. Fundamentals are strong, yet we are supposed to be in a recession."

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SOURCE: Courant.com

Even though the delinquency rates on commercial mortgages remain very low and the risks aren't the same as with residential loans, market pricing is showing a lot of fear. Things aren't as ominous as some investors feel.

There are good reasons to think that the commercial mortgage crisis will not materialize. Actual delinquencies on commercial mortgage bonds were only 0.28% at the end of 2007. Even if that rates toes up, as it's expected to, it is nowhere close to the near double-digit default rates seen on subprime loans

Not only that, the loans backing commercial properties are felt to be less risky than the subprime mortgages which often didn't require borrowers to show documentation or were given with low credit scores. Because commercial loans are underwritten based on financial statements, rent rolls and site visits, there is considerably more due diligence done.

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SOURCE: Reuters

"Everything is focused on Asia as the new darling of the 2008 investment world" said Steve Williams, Real Capital Analytics firm's international consultant. Real Capital Analytics is a real estate research firm which has just released a report on commercial transactions for 2008.

The Global Capital Trend report covers 32,000 transactions in over 75 countries. One of the items of note in the report is that "The mobility of capital and a rise in cross-border acquisitions is resulting in a convergence of property prices across markets."

The potential for US and UK commercial real estate sales to be hobbled due to the lack of capital could put Asia in the number one spot for transactions this year.

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