The possibility of a sharp reduction in mortgage capital has lenders, home builders and Wall Street on the edge of their shares. Comments relating to the mispricing of risk in the mortgage markets are ironical in that those who are making the most noise are those who have always priced mortgage risk….Wall Street securitization groups. It is these securitizers who made billions of dollars in fees on the trillions of mortgage backed bonds that have been issued over the past thirty years. It is Wall Street who created the subprime market by generating an unlimited appetite for misnamed “Home Equity” asset backed bonds. Now that housing prices are falling in most parts of the country it is a mathematical certainty that foreclosures will rise, particularly on poorly underwritten and over leveraged loans.
This doesn’t mean, however, that mortgages are a bad investment. Higher credit quality mortgages continue to perform well. It means that, like always, when prices go too far in one direction they correct sharply back in the other direction. Sensible underwriting guidelines will bring a return of rationality to the mortgage markets. As when Michael Milken and others pushed the junk bond market too far, there was a painful correction……but the high yield bond market came back strong and much of the economic success of the past decade can be attributed to the availability of highyield/leveraged finance.
Likewise some condo hotel projects are being hurt by the same forces. As we have consistently argued a successful condo hotel transaction requires two things – strong hotel performance and unit owners who place a value on their personal use of the property. Many of the early buyers of condo hotel units weren’t buying for private use of their property or even long term investment, but were speculators gambling on continued real estate appreciation. Many of these speculators bought multiple units and planned to flip them. Unfortunately for them, prices have declined in some markets. If the hotel is not performing well the negative monthly cash flow is greater than expected. So, many of these speculators are threatening to not close. But like in Las Vegas, gamblers don’t get their money back. The 20% deposits are kept by the developer.
This chain of events has nothing to do with the viability of the condo hotel concept. It has to do with poor business decisions by lenders, developers and real estate speculators. There have been and will continue to be successful condo hotel projects where the developer delivers a very high quality product which works as a hotel and the unit owners receive a second home for a fraction of the cost of owning a similarly appointed private residence.
Jon Pedersen Vacation Finance
Post a Comment