The last time real GDP declined was in the fourth quarter of 2007 at a 0.2 percent pace. (Unless otherwise noted, data in the GDP report mentioned here are seasonally-adjusted annualized rates.)  Consumer spending, business investment and investment in housing declined in the third quarter from the second quarter. Trade, government and inventory investment were positives for growth.

Consumers pulled back significantly in the third quarter. Real personal consumption expenditures dropped by 3.1 percent, the first decline since 1991 and the biggest since 1980. Real spending declined for both durable and nondurable goods. The drop in real spending on nondurable goods of 6.4 percent was the largest since 1950 while the 14.1 percent drop in real spending on durable goods was the largest since 1987.  Real spending on services remained slightly positive. Real PCE subtracted 2.3 percentage points from growth—the biggest drag since the second quarter of 1980—surpassing housing, which had been the biggest drag on the economy. 

Real residential investment declined by 19.1 percent in the third quarter—accelerating from a 13.3 percent decline in the second quarter—and subtracted 0.8 percentage points from growth. Real residential investment has fallen for 11 consecutive quarters, tying the mid-1950s for the longest streak of decline.

Real nonresidential investment fell by 1.0 percent as a result of a decline in equipment and software investment. This was the first drop in total nonresidential investment since the fourth quarter of 2006. 

The trade sector, which has been a positive influence on economic growth over the past year, continued to add to growth as imports fell while exports rose. Net exports of goods and services boosted growth for the sixth consecutive quarter, adding 1.1 percentage points to growth in the third quarter, after adding 2.9 percentage points in the previous quarter. 

The report showed a jump in inflation in the third quarter, which has moderated since then. The overall GDP price index rose at a 4.2 percent pace last quarter, accelerating from a 1.1 percent pace in the prior quarter. Price tied to the consumer spending or the PCE deflator was up by 4.3 percent. Excluding food and energy, the core PCE increased by 2.9 percent, compared with a 2.2 percent increase in the second quarter.

In the statement following the Federal Open Market Committee on Wednesday, the committee said that the economy has “slowed markedly,” citing declining consumer spending and weaknesses in business spending and potentially soft exports as global growth slows. The committee added that the “downside risks to growth remain.” 

More recent data suggest a more pronounced decline in real GDP for the current quarter. Speaking at a UCLA symposium, San Francisco Federal Reserve Bank President Janet Yellen said that it is likely that the economy “is contracting significantly” in the fourth quarter. Yellen urged serious considerations for additional programs that provide direct assistant to homeowners and the housing market. 

These programs include FDIC Chairwoman Sheila Bair’s proposal to use loan guarantees authorized by the Emergency Economic Stabilization Act as an incentive for servicers to lower mortgage payments. Other proposals modeling after the Homeowners’ Loan Corp. instituted in the Great Depression would allow the government to buy under-water loans from lenders and refinance a new mortgage for qualifying homeowners at a lower rate.

Yellen said that these programs targeted directly at homeowners should help mitigate foreclosure sales at fire-sale prices, which should help support housing prices and limit the credit losses. In addition, these plans should provide debt relief to households and help spur consumer spending and economic growth.

(Orawin Velz is associate vice president of economic forecasting with the Mortgage Bankers Association. She can be reached at ovelz@mortgagebankers.org.)
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Additionally, the First American CoreLogic Negative Equity Report found an additional 2.1 million mortgages that are “approaching” negative equity, defined as mortgages within 5 percent of being in a negative equity position. Negative-equity and near-negative equity mortgages combined account for more than 23 percent of all properties with a mortgage, the report said.

The CoreLogic report comes on the heels of another report this week, from the Center for Economic and Policy Research and the National Low Income Housing Coalition, that found homes in 64 of 100 large metropolitan U.S. markets have seen declines in equity and are not likely to improve before 2012.

The CoreLogic report said distribution of negative equity heavily skews to a small number of familiar states. Nevada and Michigan have the highest percentages of negative equity, with Nevada leading the nation at 48 percent and Michigan second at 39 percent. Five other states have negative equity shares in excess of 20 percent: Florida (29 percent), Arizona (29 percent), California (27 percent), Georgia (23 percent) and Ohio (22 percent).

“The top six states in terms of negative equity account for more than 58 percent of all negative equity mortgages, although they only account for 36 percent of all mortgages,” the report said. “The average negative equity share among the top six states is 29 percent compared to 18 percent for the U.S. overall.”

Excluding the top six states, the average negative equity in the remaining 44 states was just 12 percent, well below the national average. New York showed the lowest share of mortgages in negative equity at 7 percent, followed closely by Hawaii (8 percent), Pennsylvania (9 percent) and Montana (10 percent).

Mark Fleming, chief economist at CoreLogic, said states with high negative equity shares tend to fall in three groups.

“The first group is composed of states that experienced a rapid housing-price boom and speculative investments and are now experiencing rapid price depreciation. These states include Nevada, Arizona, California and Florida,” Fleming said. “The second group is made up Midwestern states, such as Michigan and Ohio, that have experienced manufacturing-driven economic stagnation and have had distressed housing markets for some time. A third group is emerging: Southern states that did not necessarily experience a large housing boom, but have higher negative equity rates than the majority of states. These include Texas, Georgia, Arkansas and Tennessee.”

The CEPR/NLIHC report said that though prospects have improved, most homeowners would continue to have negative equity through 2012.

The CoreLogic data include nearly 42 million properties that have a first and/or second mortgage, which account for more than 80 percent of all mortgages in the U.S. The report updates quarterly.
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More than two-thirds of commercial real estate lenders—70 percent —said the buyer and seller gap did not close enough to underwrite loans with confidence.

“The pessimistic attitude currently gripping the commercial real estate markets shows no signs of abating as we head into 2009,” said Boston-based Property and Portfolio Research in its third quarter report. “Though some metros will experience pain due to overbuilding, plummeting demand will be the primary cause of market turmoil."

More than 37 percentof lenders were less active in 2009;  30 percent said they would lend at the same volume. Nearly one-fourth of commercial real estate lenders said deal volume dropped by  100 percent in the past six months while nearly half said it declined 50 percent, PPR reported.

PPR forecasts values dropping 15 percent to 20 percent by the end of 2009—from fourth quarter 2007 levels—as capital market turmoil and weak fundamentals further erode commercial real estate properties. However, it added that commercial real estate would pull out of this “vicious cycle” by 2010—following an economic recovery—as demand overtakes new supply and fewer markets have vacancies.

“A 2010 recovery in market fundamentals and improved liquidity in the credit markets should finally spur value appreciation by early 2011 [in 54 markets covered by PPR]. However, there will be large differences in both the timing and magnitude of the value drop and recovery,” PPR said.

PPR expects tenancy losses to intensify in the coming year while construction activity stalls and vacancies rise from the supply/demand imbalance.

“By the end of 2008, unfavorable fundamentals will culminate in cumulative net rent losses in all property types except apartment,” the report said. “Not surprisingly, given the dismal demand outlook, retail landlords are being hit the hardest on rent in 2008, with projected losses of 3.6 percent by year's end. Even in the apartment market, where year-end rent growth will remain positive, concessions are rising to the point where landlords will face diminishing effective rents.”

If this year is not bad enough, the outlooks appears grim for landlords in 2009. PPR forecasts apartment and warehouse properties with 2 percent rent losses for the year, while rent losses in the office and retail sectors exceed 5 percent.

Markets experiencing severe high numbers in residential foreclosures, particularly Florida, will experience the largest “peak-to-trough rent losses,” the report said.

While Florida office construction was nearly as heated as condo construction, PPR forecasts financial hubs—even the New York office market—to experience rent loss.

Prime Manhattan towers of more than $100 per square foot have “the dubious distinction of posting the largest percentage loss in rents” for the 54 markets and four property types covered by PPR.

Standard & Poor’s/GRA/Charles Schwab Investment Management Commercial Real Estate Indices showed commercial real estate prices nationwide were flat in July versus July of last year.

“The national composite has the lowest annual return in the history of the index," said David Blitzer, managing director and chairman of the index committee at Standard & Poor’s. “Its value is virtually unchanged from July 2007. In the property sector, all indices recorded negative monthly returns. Warehouse recorded the lowest 12 month return in its history, while the other property sectors were relatively flat over the past year. The regions had mixed results."

Blitzer said the Midwest and Mid-Atlantic South reported highest monthly and one-year returns, the Desert Mountain West, Pacific West and Northeast all had negative returns for both the month and year and the Pacific West’s return of  less than 3 percent for the July/June period was the lowest monthly return it ever recorded.

"Overall, there are few positive takeaways from this month’s commercial real estate numbers,” Blitzer said.
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In a cooperative effort by the New Jersey and Minneapolis NorthMarq regional offices, a Midwest-based hotel developer received a $13.062 million construction loan for 136-room, select service aloft Hotel—a new brand of Starwood Hotels Worldwide.

“Our challenge was overcoming the turmoil of the lending environment as well as the difficult Florida hotel market and the unproven record of the new hotel brand,” said Dimpesh Darjee, vice president in the New Jersey office. He said the two offices enabled the lender to get comfortable with the borrower’s successful track record.

“On the strength of our long-standing lender relationship, we secured a loan in the height of the credit crunch with favorable terms and a very timely closing date,” said Michael Padilla, assistant vice president in the Minneapolis office.

Todd Crouse, senior vice president in NorthMarq Capital’s Raleigh regional office, represented Byrd Six Forks Square LLC, using 1031 Exchange funds, for its acquisition of Perry Pointe Plaza in Apex, N.C.

Crouse arranged for the buyer to modify and assume existing limited recourse debt of $3.1 million with Paragon Commercial Bank, Raleigh, N.C.

The loan carries a five-year term and 25-year amortization schedule and included a “modest interest-only period,” Crouse said.
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Last month, the Federal Reserve released 2007 HMDA data, which provides important insights into industry performance and the performance of individual lenders. Join top experts from the Federal Reserve, law firm Skadden Arps, Slate, Meagher and Flom LLP and the MBA from the comfort of your office learn more about these data and what they means to your company.

During this LIVE Online Conference, Federal Reserve senior economist Robert Avery will review recent HMDA data. Experts from Skadden Arps, including Andrew Sandler and Anand Raman, as well as MBA’s Ken Markison, will discuss how your company can use the data and otherwise comply with fair lending laws.

In addition, the program covers Federal Reserve revisions to its HMDA reporting rules (Regulation C) to redefine a “triggered” or “higher priced” mortgage loan requiring “rate spread” reporting. The rule begins to take effect October 1, 2009. Compliance is mandatory for loan applications take on or after that date and loans that close after January 1, 2010, regardless of their application date.

Register for this LIVE Online Conference and receive a FREE electronic copy of MBA's new publication on fair lending, developed with assistance from Skadden Arps, to manage regulatory, litigation and reputational risks associated with data reported under HMDA. The publication illustrates the manner in which HMDA data can be used in enforcement actions or litigation involving discrimination in loan pricing and underwriting, as well as related claims, such as “redlining,” “steering” and “predatory lending.” It also provides background information describing the fair lending laws, including the Fair Housing Act and the Equal Credit Opportunity Act.

This LIVE Online Conference is an excellent opportunity to ask questions of experts on how to protect your company and comply with fair lending laws in today’s challenging market. Please note that this program was originally scheduled for September and was rescheduled for this date.

Register Now
If you are interested in participating in this LIVE Online Conference, you must register. The fee is $175 per site for MBA members and $225 per site for nonmembers. To register online, click http://www.campusmba.org/products/default.aspx?product_code=E2801716AF/REGIS&wt.mc_id=CMBAHMDAE1 or call (800) 348-8653.

MBA's FHA Special LIVE Online Conference is part of a regularly scheduled series with senior FHA staff. The next regular installation of this online conference will take place on Wednesday, November 20 from 2:00-3:30 p.m.

MBA's LIVE Online Conferences are powered by CampusMBA, the education division of MBA. This interactive format enables participants to easily view presentations, download articles and analyses and interact with experts through their desktop or laptop computers. All that is needed to participate in this convenient and inexpensive format is a computer with an Internet connection and a phone. This saves both travel expenses and time away from the workplace.

To learn more about LIVE Online Conference Policies, visit http://www.campusmba.org/AboutCampusMBA/CampusMBAPolicies.

Designation Credit
Participants receive one half point toward the MBA Certified Mortgage Banker (CMB) designation. To learn more, visit http://www.campusmba.org/IndustryDesignations/CertifiedMortgageBanker?wt.mc_id=LOCFCRA or call (202) 557-2873.

To learn more about CampusMBA and its programs, visit http://www.campusmba.org/.
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CampusMBA will hold SOMB I and II courses at its new headquarters in Washington, D.C., November 18-21. Register today and enter save an extra $500 off registration fees for SOMB I.

SOMB Course I: Introduction to the Real Estate Finance Industry
The course presents an overview of associated disciplines essential to a complete understanding of mortgage banking, loss mitigation, predatory lending, capital markets, real estate law and regulation and real estate mathematics.

NEW Registration for SOMB I (with $500 off SOMBSAVE code): MBA Member: $1,745; Nonmember: $2,306. Be sure to mention promo code SOMBSAVE online or on the phone to receive the discounted price.

SOMB Course II: Managing Profitability and Risk
Managing Profitability and Risk emphasizes organization and management of the production, servicing and secondary marketing departments for the purpose of controlling risks and maximizing bottom-line profits. This course covers new market development, production management, servicing portfolio management and valuation, marketing risk management, pricing strategy and commercial lending.

Registration for SOMB II: MBA Member: $2,245; Nonmember: $2,806

To learn more about MBA’s School of Mortgage Banking and see other course offerings, visit http://www.campusmba.org/Tools/ProductLists.aspx. To register by phone, call (800) 348-8653.
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“In a time of limited resources, we must ensure that MBA is focusing its efforts on [members] top priorities,” said MBA Chief Operating Officer John Courson. “Only by knowing what you value most can we ensure that MBA is best supporting your company during these turbulent times.”

The survey takes less than 15 minutes to complete. It asks questions about why members choose to belong to MBA; which products, services and issues are of most importance to members, and where MBA can improve.

Respondents are asked to submit their surveys by the end of today.
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“Companies should appreciate technology needs that bear upon them,” Margrett said here recently at the Mortgage Bankers Association's Annual Convention & Expo. “If a company has any sense of the future, it has to look at technology; smarter companies look for smarter solutions.”

Margrett said opportunities particularly exist in areas of marketing and sales, because these areas tend to be poorly structured and are often haphazard. “Reducing costs through efficiency in technology is one thing,” he said. “But it’s different, however, from technology in sales and marketing processes.”

“The conversation has shifted from generating new business to reducing the wrongs,” Margrett said.

Sharon Matthews, president and CEO of eLynx, Cincinnati, Ohio, said the current mortgage industry is focusing on short-term needs. “Companies are struggling with cash and many changes to pieces of business as they are sold and bought,” she said. “They are looking for solutions to preserve cash and also generate revenue.”

However, “it’s the right time for sales and opportunity,” Matthews said. “There is extraordinary activity and software-as-a-service helps such initiatives. As a result, acquiring technology comes at a lower cost and the need and drive to use technology results in improved workflows.”

Greg Crosby, director of secondary marketing at Associated Software Consultants, Middelburg Heights, Ohio, said those companies that survive the current market will have taken advantage of partnerships, linking technology to bring together different components.

Brian Uffelman, owner and president of iMortgage Services, Pittsburgh, Pa., said partnerships result in strategic relationships and also cross-sell opportunities. “It’s hard to be in the business and not have that philosophy,” he said.

From a security and compliance perspective, Matthews said it is good for business.

“We have more technology review in today’s business environment than we ever expected,” said Laura MacIntyre, COO of FIS Desktop at Lender Processing Services, Jacksonville, Fla. “We have had to comply and have a dedicated team. The investment has been significant and has been worth it. It involves following procedures for security, business continuity and disaster recovery.”

“The internet as never intended to be a completely secure world,” Crosby said. “The natural tendency of the mechanism is unsecure. Different compliance measures like SAS 70 provide security, however. The costs of compliance, however, concern some because it can lock down what actually needs to be done.”

Uffelman said servicers and mortgage insurance companies are busy trying to figure out the present situation. “Volumes have picked up significantly,” he said. “On the originations side of the business, there are deficiencies but we are doing more FHA appraisals.”

MacIntyre said volumes have increased because of foreclosures and bankruptcies. “Scaling and maintaining services has been important,” she said. “Bundling technology, clients can benefit from products and services.”
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