Newcastle, one of the USA’s biggest commercial RE investors, posts gigantic loss and decline in book value

NCT is organized as a REIT, but unlike most REITs does not purchase actual buildings, but instead invests in mortgage loans and securities, primarily backed by subprime commercial (the majority of assets), residential, and mobile-home loans and loan securities. They just reported a whopping Q4 loss of $106.2 million, or $2.01 per share. Their stock price has dropped from $31 in April 2007 to about $11 today.

Book value per share fell between Q3 and Q4 from $12.66 to $5.59, a decline of $7.07 per share. NCT says Generally Accepted Accounting Practices (GAAP) understates their book value because it does not allow them to write down their limited-recourse liabilities at the same pace as the assets securing them.

That argument isn’t entirely without merit, but strikes me as a very fine one to make. If GAAP book value drops another $7.07 a share in Q1 2008 it would fall to -$1.48 per share.

Would you invest in such a company, or offer it loans, given (1) a negative book value, (2) rapidly depreciating assets, (3) regular massive losses, based on the assurance that essentially amounts to “don’t worry, while we may be insolvent according to the standards of most US accountants, but once we default on debt we owe to other people we’ll have plenty of assets to pay the loan we want from you.”?

Also, many lenders use GAAP accounting in making loan decisions, and even if NCT’s more creative non-GAAP accounting were used, their books still look weak and getting weaker, and there are plenty of prime borrowers out there who are having trouble getting loans.

But wait, it gets worse! The biggest part of NCT’s huge writedowns have come from its subprime portfolio.

It also owns $542 million in mobile home loans. How well do you think those will do in a recession? A writedown of 30% of the value of the that portfolio would create a loss of $162.6 million. And remember, GAAP book value is a mere $295.1 million as of 12/31/07. Mobile home loans were the downfall of Conseco, once a giant financial company. They are especially vulnerable to foreclosure, since they retain their value very poorly in foreclosure auctions, and because they are usually low-value units, the fixed costs of foreclosure take a much larger bite from their value that SFHs and condos.

UPDATE

Commenter David Free notes that NCT paid off much of its short term debt in so far in Q1 2008, and wonders if that is a good sign. I say no. Given the market situation I am not sure that NCT had the ability to roll over this short term debt. And it didn’t pay off the debt with earnings, it has lost tons of money in 2007 and so far in 2008.

Instead, NCT sold one of the few assets that anyone would want to buy, namely its AAA-rated GSE securities, which made up 60% of its Q1 asset sales. The remaining 40% of the assets it sold in Q1 ‘08 were lower quality RE loans/securities that nonetheless were rated higher than its overall portfolio. The other two big sales were $254M of REIT debt rated BBB, and $248M of CMBS rated A-. By contrast, the remaining REIT debt and CMBS are both rated an average of BBB-. So it dumped (at a loss) its A- and BBB assets, while keeping the BBB- assets. NCT is thus taking on more credit risk at a time when defaults are rapidly increasing.

So how are BBB–rated CMBS that are still on NCT’s books doing these days? Compare the chart at the end of Q4, when spreads were at 950bps, to today they are at 1,650bps. (Remember, on this chart up is down.)

The Impotent Federal Reserve: Mortgage rates are going up

See the story here on Housing Wire. Conforming rates are averaging 6.37% and jumbos 7.55%. Not only are rates high, the requirements for getting a mortgage are also getting tighter, especially with higher down payment requirements, not just by the banks, but also by the mortgage insurance companies.

Corporate borrowing rates too, for both prime and non-prime corporate borrowers, have also refused to fall in response to the Fed’s rate cuts. Here is a graph that Princeton University economist and NY Times writer Paul Krugman put up on his blog:

So what is happening is that the Fed is making cheap money available to the banks, but the banks are refusing to lend it out cheaply, to neither big businesses nor home buyers, and instead are hoarding it to cover the losses they know they are going to face over the next few years.

Given that banks aren’t lending and consumers aren’t spending (auto sales are down 16% so far this month), the best way to stimulate the economy and create jobs right now would be investment in public infrastructure, including schools, roads, bridges, sewers, and public transportation. This would provide jobs to many of the construction workers who are being laid off or having their hours cuts because of the housing crisis. We also need more public investment in clean energy and fuel-efficient vehicles. Unfortunately President Bush and his economic advisers seem to favor more tax cuts for the wealthy + government bailouts for the banks that got the economy into its current mess.

Escondido, CA market in freefall, many many examples of 40%+ price drops

Escondido is has a population of 133,000, making it the 4th largest city in San Diego County and 178th largest city in the USA. As you can see from the examples below, price drops of 40% or more are getting very common. And remember these aren’t even 40%+ drops from the absolute peak of the bubble, but from sales in 2004. So these losses may be excluding 2nd mortgages written off due to short sales or banks deciding to eat losses rather than pursue deficiency judgments.

Pepperwood Unit #10x

Sold 6/04 $240K

Bank owned foreclosure for sale now at $125K

-$115,100 (-48%) loss

 

Pepperwood Condos Unit #9x

Sold 5/04 $225K

Resold 1/08 $126K

-$119,000 (-44%) loss

 

Pepperwood Condos Unit #3x

Sold 9/05 $245K

For sale @ $118K

-$127,000 (-52%) loss

 

2566 White Oak Place #x

Sold 9/06 $309K

Bank owned foreclosure for sale now at $150K

-$159,100 (-51%) loss

 

31xx Sycamore Crest Place

Sold 2/05 $735K

Bank has approved short sale $450K

-$285,000 (-39%) loss

 

2012 E. Mission Ave #xx

Sold 6/05 $231K

For sale @ $120K

-$110,700 (-48%) loss

 

16xx Hawk Ridge Pl (5 bed 2.5 bath 2820 SF on cul-de-sac!)

Sold 8/06 $588K

For sale @ $320K

-$268,000 (-46%) loss

 

475 N Midway #2xx

Sold 5/04 $225K

Bank owned foreclosure for sale now at $125K

-$100,000 (-44%) loss

 

Sun Mountain Springs Condos – 520 Sandalwood #1x

Sold 10/05 $318K

Bank owned foreclosure for sale now at $175K

-$142,500 (-45%) loss

 

7xx Goldenrod St. (3 bed 2 bath single family with big yard)

Sold 9/06 $488K

For sale @ $220

-$267,000 (-55%) loss

 

24xx Hawthorn Glenn

Sold 8/06 $365K

Bank owned foreclosure for sale now at $200K

-$165,100 (-45%) loss

 

2912 E Valley Parkway #x

Sold 5/05 $355K

For sale @ $180

-$175,000 (-49%) loss

 

1xx Foxdale Place (2/1 bungalow with small garage)

Sold 5/05 $331K

Bank owned foreclosure for sale now at $180K

-$151,100 (-46%) loss

 

915 N Fig St #x

Sold 9/06 $275K

For sale @ $120K

-$155,000 (-56%) loss

 

1xx Espanas Glenn

Sold 10/05 $320K

Bank owned foreclosure for sale at $149K

-$171,500 (-54%) loss

 

1405 N Broadway #x

Sold 6/06 $386K

For sale at $195K

-$191,000 (-49%) loss

 

8xx Daisy St

Sold 1/06 $480K

Resold 1/08 $283K

-$197,000 (-41%) loss

 

10xx Nightingale Place

Sold 8/04 $560K

Resold 12/07 $322K

-$238,000 (-43%) loss

 

280xx Glenmeade Way

Sold 2/07 880K

Listed for sale 12/07 by foreclosing bank @ 570K

-$310,000 (-35%) loss (bank lost 300K+ on this loan in less than 10 months! Likely a first payment default)

Bond Market Indices Also in Freefall, Most at All-Time Lows

First, here is the ABX series 2007-2, tracking mortgage bonds issued mostly in the first half of 2007. It hit an all-time low of 64.83 Friday. The index was started in July 2007 at 100.

The 2007-1 AAA series also hit an all-time low on Friday. The AAA series are the most important to track simply because most subprime bonds were rated AAA when they were issued.

TV coverage of my condo deposit class action lawsuit in Miami

Jim Sutta of CBS 4 Miami broke the story of the class action I filed on behalf of large numbers of Miami condo investors who are owed refunds on their purchase deposits. Watch our client and my co-counsel on the case Jared Beck and Elizabeth Lee Beck being interviewed about the case.

San Diego real estate market in freefall; Banks dumping REOs 30-60% below bubble prices

Earlier posts here have given examples of a house in trendy Mission Hills falling 44% in price, and a condo in Cortez Hill selling at 58% below its 2006 price.

These are not just extreme examples, 30-60% losses are becoming the norm in many San Diego neighborhoods. Here are examples from Downtown, Imperial Beach, Chula Vista, and Spring Valley. These neighborhoods represent a good cross section: an urban area, a beach town, a big suburb, and a big exurb.

Spring Valley (A big exurb)

1034 Leland St #2x
sold 1/05 $275
Bank owned foreclosure, for sale at $135K
-$140,000 (-51%) loss

3557 Kenora Dr #5x
sold 7/05 $285K
Bank owned foreclosure, for sale at $120K
-$165,000 (-58%) loss

6xx La Presa Ave
sold 5/06 380K
resold 1/08 220K
-$160,000 (-42%) loss

102xx Madrid Way
sold 1/06 $240K
resold 1/08 $130K
-$110,000 (-46%) loss

 

Imperial Beach (a beach town south of San Diego)

5xx 7th Street
sold 5/06 $475K
resold 1/08 $275K
-$200,000 (-42%) loss

832 13th Street #x
sold 6/056 $326K
resold 11/07 $200K
-$136,000 (-39%) loss

 

Downtown (an urban area with lots of condo towers)

AcquaVista Condo Tower #170x
sold 6/05 $983K
resold 12/07 $595K
-$343,000 (-39%) loss

Trellis Gaslap District Condo #20x
sold 7/05 $445K
resold 12/07 $309K
-$136,000 (-31%) loss

Discovery Cortez Hill Unit 21x
sold 7/04 $699K
resold 12/07 $470K
-$229,000 (-33%) loss

Union Square #240x
sold 9/04 $385K
resold 12/07 $270K
-$125K (-30%) loss

Laurel Bay on Banker’s Hill #11x
sold 9/05 $407K
resold 12/07 $280K
-$127,000 (-31%) loss

 

Chula Vista (San Diego’s biggest suburb)

289 Tiburon Dr #18x
sold 11/05 $410K
listed as a shortsale for $245
-$165,000 (-40%) loss

710 Eastshore Terrace #1x
sold 7/05 $316K
resold 12/07 $207K
$109,000 (-34%) loss

13xx Silver Hawk Way
sold 12/05 $936K
resold 1/08 $608K
$328,000 (-35%) loss

If you are a bank or happen to own mortgage-backed securities, this is what is happening to your collateral. With losses like these, plus holding costs (maintenance and repairs, monthly HOA fees, property taxes) plus foreclosure costs, plus commissions to Realtors and/or auctioneers, I wonder if loss severities of 50-70% will become the norm in the many foreclosures in this area.

Since California is a non-recourse state, there are vast numbers of new suburban subdivisions, apartment to condo conversions, and new condo towers that were built here in San Diego in the past few years where virtually every buyer is underwater and has a financial incentive to walk away. The combination of record foreclosures and record loss severities suggest the huge 4th quarter write downs by all the banks that are long mortgage debt are just the beginning.

Jingle Mail and 2nd Mortgages

I’ve discussed Jingle Mail several times, which is when a borrower owes more on his mortgage than his residential property is worth, and makes the rational decision to give the house back to the bank by mailing back the keys of the house to the bank.

I’ve been e-mailed and asked via blog comments on what the law is for jingle mail and second mortgages in California. The key question is “Can the banks come after me for the difference between the mortgage price and the market price of the house.”

Let’s have a look at how the law plays out under several typical situations.

In the following examples I use the shorthand “H” for homeowner and “B1, B2″ for Bank 1, Bank 2, and so on.

Scenario 1

In 2006 H purchases his residence for $1,000,000. He pays for the house using funds from three sources: (1) a traditional first mortgage for $800,000 from B1; (2) an additional 5-year-ARM for $150,000 from B2; (3) a $50,000 down payment from H’s savings.

The value of H’s house, however, has now dropped in 2008 to $700,000, and he still owes $920,000 on his two mortgages. He decides to stop paying both of them, and the two lenders foreclose, and sell the house for $700,000 at auction.

Can either B1 or B2 go after H for their shared $220,000 loss on the mortgage?

Answer:

No. In this simplest scenario, the borrower is completely protected. He can walk away from his house, and the banks have no remedy other than foreclosing on the house. They cannot sue the borrower, and cannot go after his other assets. California provides no remedy for banks other than foreclosure on purchase money mortgages on residential real estate when the borrower lives in the house.

Scenario 2

H has two mortgages:

- 1st mortgage from B1 that he used to buy his house

- 2nd mortgage from B2 he took out a few months later.

H stops paying first mortgage to B1, which responds with a  non-judicial foreclosure of H’s house. After H moves out and the house is taken by B1, H stops paying his second mortgage to B2. Can B2 go after H’s assets in a judicial foreclosure?

Answer:

Maybe. It was B1’s decision, not B2’s, to proceed with a non-judicial foreclosure for the obvious reason that the slower and more costly judicial foreclosure process would not get it any better a result because the first mortgage was a purchase money mortgage.

But the 2nd mortgage was not for purchase money, so B2 does have a reason to prefer a judicial foreclosure because it could obtain a deficiency judgment. As the California Court of Appeal noted in In re the Marriage of Anthony and Charlotte Oropallo:

It is true that when the security of a second deed of trust is rendered valueless by a prior foreclosure, through no fault or action of the second lender, that lender for equitable reasons will ordinarily be permitted an action against the debtor on the second obligation.

Note, however, the qualifications the Court uses. It does not say “always” but instead says “ordinarily” may a 2nd non-purchase-money lender pursue a deficiency judgment against a borrower. Note also that the Court says a deficiency action “ordinarily” is allowed when the mortgage is rendered valueless “through no fault or action of the second lender.” The remedy is allowed not as a matter of law, but as a matter of equity, and a bank cannot receive the benefits of equity unless its own behavior was equitable.

H, however, might be able to argue that B2 was at least in part (if not mostly or entirely) for the foreclosure. Is B2 known for seeking out and writing mortgages based on inflated appraisals? Did the B2 target homeowners with poor credit, knowing that it could charge such homeowners higher interest rates and more fees? Did B2 actually verify the buyer’s income, or was it a no-doc loan that it bought from one of the dozens of now-bankrupt subprime brokers? Was B2 already equitably compensated for H’s default by charging and receiving above-market interest rates and a host of fees?

Scenario 2 is winnable by either party, or the decision could be split, with B2 being awarded a judgment for a substantial sum, but less than its full loss. In practice, if H puts up a spirited defense to B2’s lawsuit, H will probably either win the case early by

(1) showing a procedural defect in the foreclosure or B2’s pleadings

(2) or proving inequitable conduct on B2’s part.

Failing that, H will probably be able to convince B2’s attorneys to settle for a smaller sum than the amount he defaulted on.

Scenario 3

H buys his house with a mortgage from B1. Some time later, he takes out a second mortgage, again from B1. He then stops paying both mortgages and B1 forecloses on the house in a nonjudicial foreclosure. The sale of the house does not bring enough to pay off the first mortgage, much less the second.

Since the 2nd mortgage was not a purchase money mortgage subject to the protections of Cal. C.C.P. 580b, can B1 obtain a deficiency judgment for the second mortgage in a judicial foreclosure?

Answer:

No. In Simon v. Superior Court, 4 Cal. App. 4th 63 (1992), a bank tried to go after a borrower in a judicial foreclosure on the second non-purchase-money mortgage after it had already taken the property in a non-judicial foreclosure after a default on the first mortgage.

This is good news for homeowners who have a 2nd mortgage they took out later from the same bank they used for their first mortgage. In many cases a bank may not know the size of a deficiency until after it has already proceeded with a non-judicial foreclosure of the first mortgage. At that point, it is out of luck and will have to eat the loss with the 2nd mortgage (or, quite commonly, a HELOC on top of the first mortgage).

—

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

Residential Real Estate Purchase Contract Cancellation in California: Several relevant laws apply

California Civil Code 1675 is not the only arrow in the canceling house or condo buyer’s legal quiver, just the surest. As I discussed here and here, C.C. 1675 allows the buyers to get all but 3% of the purchase price back from their deposit, but other rules may allow them to recover their entire deposit.

Under California Civil Code 3275, a plaintiff suing a developer for a return of a purchase deposit can argue that even more of his deposit should be returned than the “all-but-3%” of C.C. 1675. To survive a buyer’s motion for summary judgment, the defendant is burdened with producing evidence that it has been damaged by at least as much of the deposit it wants to keep. For example, in Timney v. Lin, 106 Cal. App. 4th 1121 (1st Dist. 2003) a buyer who was unable to obtain financing and had to cancel his purchase agreement demanded and received his entire deposit of $31,250 returned. Judge Stevens of the California Court of Appeal wrote that because the defendants “produced no evidence in the trial court demonstrating they suffered any cognizable damages” or that “it was impracticable to estimate the amount of any damages” that California law requires judges to “assume there were no such damages.” With no damages shown, the court awarded the buyer his entire $31,250 deposit back.

Had the buyer only relied upon C.C. 1675 he would have been entitled to $20,281.25 of his $31,250 back, with the seller keeping $10,968.75, or 3% of the purchase price of $365,625. Thus two different laws allowed him to recover his deposit back, one a partial refund, one a full refund.

 

—

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

Allen v. Smith: A San Diego home buyer gets a big deposit refund

In my last post I explained that California has a strict rule that in most circumstances people who have put down a deposit on a house or a condo in the state are entitled to a refund of all but 3% of the purchase price from their deposit. Thus, for a million dollar condo with a 100,000 deposit, in California the buyer presumptively entitled to a refund of $70,000 from his $30,000 deposit.

This general rule has exceptions however. First, the buyer may have cause to rescind the house/condo purchase agreement, and receive a complete refund of his deposit. Or the seller may try to convince a court that it suffered damages in excess of 3% of the purchase price, though this is typically a difficult task. For the most part, however, when a buyer decides not to follow through and close on a condo purchase agreement, the seller may not keep any more deposit money than 3% of the purchase price.

One interesting example of a California buyer successfully suing to get most of her purchase price back involves a mansion right here in San Diego, in the Rancho Santa Fe neighborhood. The case is Allen v. Smith, 94 Cal. App. 4th 1270 (4th Dist. 2002).

In March 1999 Plaintiff Barbara Allen agreed to pay $1.775 million of the house of Defendants Frank and Jeri Smith. Allen put down an initial deposit of $20,000, and about two weeks later paid a second deposit of $80,000, just as the purchase agreement specified.

In May 1999 Ms. Allen told the Smiths that she was backing out of the purchase, and asked for a return of her second deposit of $80,000. The Smiths refused to return any money, so Ms. Allen sued.

So the position of Ms. Allen is that she should get $80,000 of her $100,000 deposit back because the second payment really wasn’t a purchase deposit. The Smiths’ position was that they should get to keep all of the deposit because the plain words of the purchase agreement that Ms. Allen signed said the deposit was “nonrefundable.”

The California Court of Appeals, however, give neither side exactly what it wanted, but instead followed both the spirit and the letter of California law, and let the Smiths keep 3% of the purchase price from the deposit, and ordered them to return the rest of the money to Ms. Allen. Ms. Allen’s $100,000 deposit was 5.6% of the purchase price, so the Smiths had to return 2.6% back, or $46,750.

—

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

Condo Buyers Need to Hire a Lawyer to Get Refunds of Their Condo Deposits

California Condo Buyers Who Decide Not to Close On Their Units Are Usually Entitled to a Partial Refund of Their Condo Deposit. A Smart Investor Who Wants to Cancel His Condo Contract Should Hire a Lawyer to Protect His Rights, Guide Him Through the Process, and Secure a Favorable Settlement

There was a flurry of litigation between condo buyers and sellers in 2007, and there will much more in 2008. My fellow condo contract lawyer Jared Beck covered many such suits filed in Florida over on his blog.

Most of the litigation boils down to three types of disputes: the developer not opening the building on time, the developer not building the same building that it promised to buyers, and the developer illegally keeping an excessive amount of the deposits in collecting from potential buyers.

The focus of this post is on this last type. Increasingly people who have put down large deposits on pre-construction condominium units are deciding they do not want to close. These defaulting purchasers are in most cases entitled to some of their deposit back, but frequently the developer refuses to follow the law.

Developers have obvious reasons for not following the terms of their own contracts as well as state and federal law, all of which usually require a partial refund of a buyer’s deposit if the buyer decides not to close. First, most buyers don’t know their rights, and won’t even try to get the refund they are entitled to.

Second, the developers themselves may not even realize that state and federal law usually require them to give partial refunds of deposits to buyers.

Third, even if the developers do know that they are supposed to give partial deposit refunds, they often simply make the business decision to refuse to follow the law until the buyer forces them by filing a lawsuit. If only 20% of buyers sue, then the developer has to give 20% of its canceling condo buyers refunds, but keeps the full deposits on the other 80%.

Even when buyers do know their rights and demand a partial refund, sometimes the developer simply ignores their letters and phone calls demanding the partial refund. Every major developer has its own army of lawyers, and until the buyer hires his or her own lawyer, the developer can usually get away with ignoring letters from buyers threatening to sue. The developers know from experience that when a buyer threatens to sue but hasn’t hired a lawyer, it is usually an empty and idle threat that will never be followed up on.

California Condo Contract Cancellation Law

People who purchase condos in California usually put 10% to 20% of the purchase price down as a deposit. However, if they decide not to close, in most circumstances they are entitled to get all but 3% of the purchase price back under California’s laws protecting buyers of new condo units. So someone who puts down a $90,000 deposit (15%) on a $600,000 condo and then decides not to close is probably entitled to get $72,000 of his $90,000 deposit back, while only losing $18,000 (3%) to the developer.

The buyer must be careful, however, that he properly gives notice that he does not intend to close. Usually the buyer should inform the seller and the escrow company as soon as possible of his intention not to close, and make a properly formatted demand for most of his deposit back.

At this point the clock starts ticking for the developer. If the developer follows the proper procedure and proves the buyer’s default is more than 3% it might be able to keep more than the standard 3%, but the developer must first send the defaulting buyer certain financial documents showing why it is entitled to more than 3%. The deadline for the developer to do this is fairly tight.

A smart buyer with a good lawyer will then review these documents if the developer does try to keep more of the deposit, challenge the documents if necessary, and then file a response disputing the developer’s calculations if their are any flaws or questionable assumptions. The buyer’s lawyer will also demand through the litigation discovery process the developer’s internal financial data to dispute/verify the developer’s information, as well as file subpoenas demanding employees of the developer submit to depositions.

The best case for a buyer is if the developer does not file any documents on time, and then right after the deadlines expire file suit against the developer for the deposit refund. You’d surprised at how often a developer will fail to properly respond to a buyer’s demand for a partial refund out of sheer negligence. But again, if you are going to be able to take advantage of the developer’s mistakes, you will need a lawyer who is able to recognize and jump all over them. Being represented by counsel also allows you to negotiate a settlement with the developer from a position of strength, sometimes before even filing suit, getting you most of the deposit refund you’re entitled to sometimes in a matter of weeks.

—

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.