Situs Newswatch 8/25/2017

Situs Conducts Comprehensive Risk Analysis on Multifamily Loan Portfolio

Situs was recently selected to conduct a comprehensive risk analysis on a community bank’s multifamily loan portfolio to determine and assess variables contributing to higher-than-expected loan loss rates. Situs’ Financial Institutions Group analyzed the portfolio, consisting of 1,972 loans with an aggregate Unpaid Principal Balance (UPB) of approximately $2.4 billion, to provide the client with a better understanding of its multifamily loan portfolio loss-severity situation, and to justify the bank’s significant concentration in multifamily lending.

Situs analyzed the expected loss rates from 1992 through 2014 to determine expected loss rates for that portfolio, as a whole, going forward.

The loss rate analysis began with determining the historical  Probability of Default (PD) and the Loss Given Default (LGD) for each year of the analysis. Once  determined, the PD and LGD were used as the basis for estimating the Expected Loss (EL) rates to be used for future loans.

Situs’ analysis provided the client with loan-level data, including geographic data on loss rates, to enhance pricing accuracy in future business. Incorporating the new risk-based loss rate methodology into a business model involves maintaining historical credit risk ratings by loan and market and detailing each loan based on its performance.

As part of the due diligence review, Situs provided a summary of high-, medium-  and low-risk loans to the client. This summary included detailed data about pricing — outlining the percentage of the full financial institution’s total multifamily loan portfolio by each associated sub-category, and providing weighted average LTVs, DSCRs, NOIs, PDs, LGDs and total EL for each as a historic guide. Situs explained, in detail, the performances of each area within the multifamily portfolio and provided clarity in realizing more accurate loan-loss estimates.

In conjunction with this analysis, Situs also completed a quality-control review on loan policy and guidelines to ensure internal compliance with the new pricing model.

For more information, please contact Ed Robertson. To download the PDF version of this case study, please click here.

New-home Sales Drop in July …

New U.S. single-family home sales unexpectedly fell in July, dropping to their lowest in seven months, which could raise concerns of a slowdown in the housing market recovery.

The Commerce Department said on Wednesday new home sales tumbled 9.4 percent to a seasonally adjusted annual rate of 571,000 units last month, the lowest level since December 2016. The percentage drop was the largest since August 2016 and confounded economists’ expectations for a 0.3 percent gain.

June’s sales pace was revised up to 630,000 units from the previously reported 610,000 units. Home sales in May also were not as weak as previously reported, taking some of the sting from July’s report.

New-home sales, which account for 9.4 percent of overall housing sales, are volatile month-to-month and are drawn from building permits. Still, sales declined 8.9 percent on a year-on-year basis.

read more: Reuters

…  And So Do Existing-Home Sales

Sales of previously owned homes unexpectedly fell in July, declining for the second straight month — the longest streak of back-to-back declines since November 2015 — as tight inventory and high prices curbed activity.

Existing-home sales fell 1.3 percent month-on-month to an annualized pace of 5.44 million units in July, the National Association of Realtors said on Thursday, missing economists’ estimates for a 0.5 percent gain. The data cover completed transactions that include single-family homes, townhomes, condominiums and co-ops.

July’s decline also followed a downwardly revised 2 percent drop in existing-home sales to 5.51 million units in June.

Despite strength in the US labour market which has helped demand, home prices have been rising above incomes in many markets.

read more: Financial Times

Changing mortgage deduction would discourage homeownership, CEO says 

Making changes to the popular mortgage interest rate deduction would be “very bad policy,” Toll Brothers CEO Doug Yearley told CNBC on Tuesday.

Industry sources told CNBC reducing the deduction is on the negotiating table as Republicans work to hammer out a tax reform package.

“It would discourage homeownership,” Yearley said in an interview with “Closing Bell.”

“This country has prided itself on encouraging homeownership, and mortgage interest deduction has been around for decades. It’s worked very well.”

The measure enables homeowners to deduct the interest paid on their home loans from their income taxes. It is currently capped at loans up to $1 million for married couples filing jointly. The cap is $500,000 for those filing separately.

read more: CNBC

Think Rates Are Going Up? Banks Don’t …

After years of waiting for interest rates to rise, some banks are lending as if that day will never come, loading up on a record amount of loans and securities that carry low rates for long periods.

The percentage of bank assets that won’t mature or change rates for more than five years reached a new high in the second quarter, according to Federal Deposit Insurance Corp data released Tuesday. That means banks are allowing more borrowers to lock in low rates for long periods, a potential risk should rates move sharply higher.

“The interest-rate environment and competitive lending conditions continue to pose challenges for many institutions. Some banks have responded to this environment by ’reaching for yield’ through higher-risk and longer-term assets,” FDIC Chairman Martin Gruenberg said in remarks accompanying the data.

Banks largely make money in two ways: from lending and fees. Midsize and smaller lenders tend to rely more on lending profits than bigger banks that have fee businesses like wealth management. Lending profits typically come from the difference between what banks pay out on deposits and what they earn on loans and securities.

But rock-bottom interest rates following the financial crisis eroded those margins across the industry, leading some banks to lend for longer so they can capture more yield. Growing their volume of loans also helped them compensate.

read more: Wall St Journal

… And 30-Year Mortgage Rates Went Down Last Week
Long-term U.S. mortgage rates were unchanged to lower this week, with the benchmark 30-year rate marking a new low for the year and its lowest point since last November.

Mortgage buyer Freddie Mac says the rate on 30-year, fixed-rate mortgages fell to 3.86 percent from 3.89 percent last week. It was the fourth straight weekly decline for the key rate, bringing it to its lowest level since Nov. 10, 2016. A year ago, the rate stood at 3.43 percent; it averaged 3.65 percent for all of last year.

read more: Associated Press

Amazon Won’t Waste Any Time Slashing Whole Foods’ Prices  Inc. said it would begin slashing prices on grocery staples at Whole Foods Markets Inc. on Monday, the first changes the online retailer plans for its $13.7 billion acquisition.

Amazon also said it would introduce a customer-rewards program at Whole Foodsand new deals through its Prime membership program. Amazon added that it plans to close its acquisition of Whole Foods on Monday.

“We’re determined to make healthy and organic food affordable for everyone,” said Jeff Wilke, CEO of Amazon Worldwide Consumer.

Shares of grocery store companies fell in response to Amazon’s planned price cuts, which will affect a range of items from bananas to beef. Kroger Co., Wal-Mart Stores Inc. and Costco Whole Corp. were all trading lower. Grocers and analysts say they are concerned that Amazon’s move might start a price war as the e-commerce giant works to broaden the food seller’s reach.

Amazon on Wednesday received Federal Trade Commission approval of the deal, and Whole Foods shareholders voted in favor of it.

read more: Wall St Journal

Wal-Mart, Google Find Voice to Partner in Challenge Against Amazon 
Google and Wal-Mart Stores Inc. are joining forces in a partnership that includes enabling voice-ordered purchases from the retail giant on Google’s virtual assistant, challenging rival Inc.’s grip on the next wave of e-commerce.

Wal-Mart said Wednesday that next month it will join Google’s online-shopping marketplace, Google Express. While the deal will add hundreds of thousands of Wal-Mart items to Google Express, it will also give Wal-Mart access to voice ordering. The deal won’t alter how consumers receive their orders, because Wal-Mart will fulfill purchases made through Google Express.

Consumers will be able to order Wal-Mart goods from the retailer’s stores by speaking to Google’s virtual assistant, which sits in phones, Google’s voice-controlled speakers and soon other devices. Wal-Mart said it will share consumers’ purchase history with Google to enable users to quickly reorder items, a primary function of voice-controlled orders for commodity shopping.

“How do you help people who are going to be interacting more and more with devices get their weekly shopping tasks taken care of?” Google Express chief Brian Elliott said in an interview, citing a key reason for the partnership.

The increasing importance of voice shopping suggests Wal-Mart and Google, part of Alphabet Inc., need each other to compete against Amazon. Voice-controlled ordering is a small but rapidly growing share of online sales, analysts say, and one of the top reasons to use Amazon’s virtual assistant Alexa and its Echo speakers.
read more: Wall St Journal

Lowe’s Earnings, Sales Lower Than Expected …
Lowe’s second-quarter profit got a boost from the sales of an Australian joint venture, but its performance was weak by most measures in a vibrant housing market, and its profit outlook for the year was well below the expectations of industry analysts.

For the period ended Aug. 4, Lowe’s Cos. earned $1.42 billion, or $1.68 per share. A year ago the Mooresville, North Carolina, company earned $1.17 billion, or $1.31 per share.

The current quarter included a $96 million gain related to the sale of its interest in the Australian joint venture.

Earnings, adjusted for one-time gains, were $1.57 per share. That’s below the $1.62 per share that analysts polled by Zacks Investment Research predicted.

Revenue rose to $19.5 billion from $18.26 billion. It fell short of the $19.52 billion in revenue analysts surveyed by Zacks expected.

Lowe’s doesn’t appear to be catching the same housing market tail wind of rival Home Depot Inc. Last week, it dazzled investors with its strongest quarterly sales ever and the richest profit in its history.

read more: Associated Press

… And Sears Keeps Struggling
Sears Holdings Corp.’s  brick-and-mortar stores continued to lose ground in a tough retail environment, despite the company’s cost-cutting efforts.

Sales at stores open at least a year declined 11.5% in the fiscal second quarter as the company scaled back the number of pharmacies and electronic products in its stores. Kmart’s same-store sales fell 9.4%, compared with 3.3% over the same period and Sears same-store sales declined 12.3% compared with a 7% drop last year.

The declines come as the company has closed about 180 underperforming stores so far this year. Sears says it is on track to close 150 more stores by the end of the third quarter and announced the closure of an additional 28 Kmart stores.

Sears’s results follow those of fellow department-store chains Macy’s Inc., Kohl’s Corp., and J.C. Penney  Co., which all posted declines in same-store sales, though the drops weren’t as steep as in quarters past. Retailers across the U.S., particularly department stores, are contending with weak foot traffic as shopping moves online.

The big-box retailer said it would experiment with specialized smaller-format stores in the coming quarters in an attempt to make its stores more effective

read more: Wall St Journal

Kohl’s Cutting Retail Space in Move Toward Digital

Department store chain Kohl’s said Tuesday that it is overhauling almost half of its stores to reduce floor space for products and bolster its digital offerings as the sector reels in competition with Amazon and nimble fast-fashion retailers.

Kohl’s, based in Menomonee Falls, Wis., said nearly half its locations would be “operationally smaller” by the end of the year. The company said it would reduce the number of products available in store, as part of an ongoing plan to shrink.

Unlike competitors Macy’s and J.C. Penney, Kohl’s has avoided major rounds of closures in recent years despite struggles for department stores. Shifting products into backroom space can boost profits because it’s cheaper to maintain.

read more: USA Today

Macy’s names new president, cuts about 100 jobs
Beleaguered mall stalwart Macy’s is eliminating about 100 jobs as it consolidates its merchandising, planning and private brands operations into one department.

It has also named a former eBay executive, Hal Lawton, as its new president.

The consolidation will save the company an estimated $30 million a year, including approximately $5 million, or 1 cent per share, for the the fourth quarter of 2017. According to Macy’s, the change will mean one-time costs of approximately $20 million to $25 million, mostly in the third quarter.

Retailers from J.C. Penney and Sears, to Gander Mountain and The Limited are closing locations, so stores that are still around are rushing to find away to stay in the game.

The new Macy’s president, Lawton, was most recently senior vice president at eBay North America and previously worked for The Home Depot and McKinsey & Co. He starts on Sept. 8.

read more: MSN

Have a prosperous day and a great weekend!

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