U.S. Mortgage Applications Slip, Loan Rates Dip

NEW YORK (Reuters) - U.S. mortgage applications slid last week even as mortgage rates edged lower, with requests for loans to buy homes declining for the first time since early July, an industry group said on Wednesday.
The Mortgage Bankers Association's applications index fell by a seasonally adjusted 2.2 percent in the week ended August 28, as demand for both purchase and refinance loans slipped.

Fixed 30-year mortgage rates averaged 5.15 percent last week, down 0.09 percentage point. This was still above the record low of 4.61 percent set in March yet a year ago this borrowing cost was 6.39 percent.

For a related chart of mortgage rates, right click on the code: and select "Related Graph."

Stability has seemingly returned to the three-year housing market that has endured the deepest crash since the Great Depression. The view that the worst may have passed is gaining traction.

Pending home sales, based on contracts signed in July, jumped 3.2 percent to a two-year high, the National Association of Realtors reported on Tuesday.

Economic stimulus that has boosted consumer optimism, signs that home prices have neared a bottom, and federal programs such as a soon-expiring first-time home buyers tax credit have turned more fence-sitters into house purchasers, industry experts said.

The NAR estimates that as many as 2 million first-time buyers will use the tax credit this year, and about 350,000 sales would not have occurred without it. Buyers need to close their loans by November 30 to qualify.

Sherry Chris, president and chief executive of Better Homes and Gardens Real Estate in Parsippany, New Jersey, expects a rush of applications in the waning weeks of the tax credit.

Once that phase passes, "if we see the continuation of the slight upturn that we're experiencing now, that to me will indicate that the market has in fact turned and we'll begin to see an upswing," she said. "We have a couple months of waiting to see if we've truly turned the corner."
The first-time buyer's market has been robust, but not the move-up market -- or the market for existing homeowners looking to trade up to a larger home. It will take consistent news of rising home prices to lure the move-up buyer, most realtors agree.

"There are a lot of people talking about the worst being behind us," said Chris, who calls herself cautiously optimistic. "There are so many other factors involved: the economic conditions, unemployment, consumer confidence."

The U.S. unemployment rate is expected to have risen to 9.5 percent in August, after declining in July for the first time since April 2008, according to a Reuters poll. The jobless rate had reached a high last seen nearly 26 years earlier.

The Mortgage Bankers Association said its purchase loan applications index dipped 1 percent to 277.6 last week. The last time this measure fell was in the July 10 week, when it was about 7 percent lower at 258.8.

The industry group's refinance index fell 3.1 percent last week to 2,164.1 after rising two straight weeks. Still, this measure of refinance demand was around three times stronger in the spring when mortgage rates toppled to a record low.

Only the government purchase index rose last week, the MBA said. The 0.5 percent rise put the seasonally adjusted index up for the seventh straight week.

The government-insured share of mortgage purchase applications rose to 40.4 percent in August, the highest since February 1991, the group said in a release.

Loans insured by the government typically require lower down payments than other mortgages.

Source:


The first-time buyers are many but the  move-up market or the homeowners looking for a larger home is low, will lost cost refinancing plays a role on this?

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Refinance? Firtst, see whether you will save

When mortgage rates fell below 5 percent last month, broker Jeff Perdue's phone lines lighted up as dozens of people tried to join the latest refinance boom. When the ringing stopped, only five were approved.

The rest had good credit, good income and "decent equity" in their homes, but that wasn't enough, said Perdue, owner of Orlando Home Mortgage.

"The value of their homes killed the deal," he said. "I had to call them and tell them, 'I'm sorry. If your house had been worth what it was when you bought it, this would have been a piece of cake. Now the numbers don't make sense for you.' "

Perdue's story is a cautionary tale for many who hope to refinance their mortgages and take advantage of some of the lowest rates in history. For the lucky ones, refinancing can wipe way thousands of dollars a year in mortgage payments -- a bright spot in an otherwise dim economic picture.

But if Perdue's report is any indication, the approval rate may be fractional in this re-fi "boomlet."

"It's not such a bright spot if you're upside down in your mortgage," said Philip van Doorn, analyst for TheStreet.com Ratings. "Some will indeed benefit from the low rates, but not as many as you'd think."

There is no surefire formula to determine whether you should refinance. First of all, focus on your potential savings, not whether your new rate will be a point or two lower than your current one.

Divide the total cost of the loan by the monthly savings from refinancing. That gives you a break-even point: the number of months before it pays off. You should live in the house at least that long for it to be worthwhile.

Beyond that, it gets more complicated. What is your credit score, and what interest rate will it fetch? What are your closing costs? Have you shopped around for the best deal? What is your home's appraised value and subsequent loan-to-value ratio? That last item alone that can scuttle refinancing these days even if other planets are aligned.

If the refinanced loan amount is more than 80 percent of the home's value, borrowers must pay a mortgage-insurance premium, which can dramatically reduce any savings. If it goes over 90 percent, you would have to bring money to the table, which could make the deal cost-prohibitive.

Plummeting housing prices will turn many homeowners into bystanders in this refinancing wave.

"Many who don't have much or any equity are not invited to the refinance party," said Greg McBride, senior financial analyst for Bankrate.com.

However, if you are among those who are in good shape with your home equity, credit score and debt level, you have a nearly unprecedented opportunity to lock in the best rates in more than four decades.

"These must be considered the lowest rates we might see in our lifetime, and they are unlikely to stay this way," said Jason Chepenik, a financial planner and managing partner of Chepenik Financial in Orlando. "If you do qualify, you should consider paying the extra point or so to buy your 30-year mortgage rate to the low 4-percent range."

Even if you are creditworthy, however, don't expect easy credit this time around.

"Only good borrowers need apply," said Andrew Orr, a financial planner with OrrGroup Financial. "We are back to the 1950s, so to speak, when people wanted a home for shelter, not for an investment. So, it's actually a good situation now, even though it makes it difficult for people to get a mortgage."

Richard Burnett can be reached at rburnett@orlandosentinel.com or 407-420-5256.

By:
Richard Burnett Sentinel Staff Writer

Source:

 It is a good tip for everyone that before considering refinancing
one should focus on potential savings.

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Homeowners Rescue Program Shows Slim Benefits

Last summer, after several months of negotiations and debate, Congress passed a housing bill aimed at easing the mortgage foreclosure crisis. One part of the sweeping bill was designed to help homeowners who were having trouble with their high-rate mortgages refinance with lower-cost, government-backed loans.

But the program, called Hope for Homeowners, has gone largely unused, and a House committee on Tuesday holds a hearing to find out why.

The issue serves as a cautionary tale on the limits of government's ability to deal with the complex subprime lending crisis.

When the Senate began debating the Hope for Homeowners program last spring, Senate Banking Committee Chairman Chris Dodd (D-CT) was, well, full of hope for the program.

"This Hope for Homeowners Act, I believe, will give us a positive confidence-building measure that will allow people to remain in their homes where appropriate and, secondly, allow us to get to a bottom I hope and a floor where capital will flow again," Dodd said at the time.

Low Expectations, Tough Rules

By the time the measure was approved last summer, the expectations were already modest. Congressional analysts forecast that just 400,000 mortgage owners would be served by the program. But even those low expectations proved optimistic.

There have been only 451 applications, and only 25 loans have closed since the program started in October, says Meg Burns of the Federal Housing Administration, which is in charge of implementing the program.

There are several reasons that the numbers of participants are low. It's not a great deal for homeowners. Loan fees and interest rates are high. Borrowers have to provide two years' worth of financial records and certify they did not provide misleading information to bankers. Lenders, meantime, have to be willing to take a loss on their existing loans. And if the value of a house increases, homeowners have to share that equity with the government.

John Taylor heads the National Community Reinvestment Coalition, a housing advocacy group.

"You have to give 50 percent of all you've earned even though you've paid off the loan at high rates to the federal government, so you can see why I say I think they sat down with Tony Soprano to design the original program," Taylor says.

A Product Of Compromises

While no loan sharks are believed to have taken part in drafting Hope for Homeowners, the bill was a product of compromises between Democrats in Congress and the Republican Bush administration. There were many political trade-offs between conservatives who wanted tough safeguards and liberals who wanted greater access to the program.

Rep. Barney Frank of Massachusetts (D-MA), who helped draft the original bill, admits it has its flaws.

"What is says is if you have problems of unprecedented magnitude and difficulty, human beings don't always get it right the first time. Is that a surprise to anybody?" Frank says.

Frank says that while the government may have mishandled its first approach to the problem, the subprime crisis was brought on by decisions in the private sector. Frank, who chairs the House Financial Services Committee, is unveiling a proposal Tuesday to rework parts of Hope for Homeowners to relax some provisions that were aimed at preventing abuse.

Frank's bill would lower the program's fees and interest rates. He's optimistic that this time, the government will get it right.

by Brian Naylor

Source

It's great that Congress passed a housing bill aimed at easing the mortgage foreclosure crisis. This would be helpful to people who want low cost refinancing for their mortgage. Im thankful that they have finally created the Hope for Homeowners Act.

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Rudd lends life to sick market

Jennifer Hewett, National affairs correspondent


THE Rudd Government knows how tough life is going to be for voters this year as unemployment rises.But it also knows that job losses at companies such as BHP and David Jones and collapses of companies such as Australian Discount Retail are merely the symptoms of the malaise. The deeper cause is rooted in the banking system and particularly the availability of credit for business. Without a steady and reliable funding flow, the whole economy seizes up. No economic stimulus packages can work effectively if there is not enough credit to go around. This is an international problem, but its impact will reverberate throughout Australia, particularly if Australian corporates can't get the refinancing they need.

Australian banks have been warning the Government they will not be able to meet the financing shortfall likely to occur once many of the foreign banks withdraw from the local market. In response, the Government is planning to establish a special facility - supposedly temporary - that would effectively mean the Government is lender of last resort. This would be half funded by the Government and half by the big four banks.

It is an extraordinary proposal for extraordinary times. Many in the market are deeply uneasy at the prospect of the Government being in the business of direct lending to the corporate sector. Some see it more as a clever way for profitable Australian banks to get rid of dubious loans, particularly in the property market, from their balance sheets. They warn that the Government will end up carrying the cost of bad investments or temporarily propping up sectors where values must inevitably fall. But having seen the failures of the market, the Government is not prepared to take the risk of not doing enough. It has been convinced that standing back would lead to a vicious circle of falling asset values leading to more collapses and more reluctance to lend. This is why Kevin Rudd has been emphasising that the withdrawal of foreign bank lending and the tightening in domestic bank lending are hurting the real economy. "If banks do not allow clients to refinance as they would in normal conditions, then companies can be forced to sell assets, often at low value," the Prime Minister said this week. The Government will now present this proposal as another example of the action the Government is prepared to take to protect Australian interests. And given the even more radical measures being taken in Britain and the US - and a new phase of turmoil in the global banking sector - Australian
voters will probably give it a tick. At least for now.


Source

To evaluate the economic today many companies are close because of the economic global crisis and also many people are unemployed because of that the market today are sick.

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Highest Rates in Generation Confront Everyone Without Fed Funds

By James Sterngold


Jan. 26 (Bloomberg) -- Shannon Luhrsen, a stay-at-home mom in Wilmington, North Carolina, can't understand why she should pay 5.8 percent for her mortgage when her local bank gets money from the Federal Reserve at little more than 0 percent and the U.S. government is borrowing for 10 years at 2.6 percent.

“I want to get in the 4s,” Luhrsen said. “That would be fantastic. I don't want the bank to have my money. I want to have my money.”

The last time the disparity between 30-year mortgage rates and 10-year Treasury yields was so great during a period of Fed monetary policy loosening was 1982, when Timothy F. Geithner entered his senior year at Dartmouth College and Ben S. Bernanke was an assistant professor at Stanford University.

Until Geithner, President Barack Obama's nominee for Treasury Secretary, and Fed Chairman Bernanke figure out a way to narrow the spread, which would help shore up house prices, the economy will be in “quicksand,” said Clyde V. Prestowitz Jr., president of the Economic Strategy Institute in Washington and a counselor to the Secretary of Commerce during the Reagan Administration.

“We can't stabilize the overall economy until we fix housing prices, and mortgage rates are a huge, if not the biggest part of that,” Prestowitz said.

Maxine Waters, a California Representative and the No. 3- ranked Democrat on the House Banking Committee, also wants banks to lower mortgage expenses.
"If the government is making sure that cost is dropping for the banks, it should be dropping just as much for consumers, but they're not,” Waters said in an interview last week. “Banks could make loans at 4.5 percent, or even lower, and it would still be profitable.”

Rising Profit Margins

JPMorgan Chase & Co., the largest U.S. bank by market value, helps families purchase homes with long-term mortgages that they can afford and also assists them in refinancing existing mortgages to lower monthly payments, said David Lowman, head of home lending at the New York-based company. He wasn't more specific in a statement sent in response to questions about home- lending costs. While the average 30-year fixed mortgage rate fell below 5 percent this month for the first time since McLean, Virginia- based Freddie Mac started keeping records in 1971, the banks' profit margins are increasing. That's because the yield spread between 30-year mortgages and 10-year Treasury notes is 2.5 percentage points, compared with an average 1.7 points during the past two decades, data compiled by Freddie Mac and Bloomberg show. The difference was 3.3 percent on Dec. 3, the widest since 1986 when the Tax Reform Act eliminated real estate-related tax shelters, causing investors to sell properties and reducing market values.

FOMC Action

The Fed cut the benchmark interest rate six times in the past year. It was reduced last month to as low as zero to combat the longest recession since 1982 and revive the credit market. The Federal Open Market Committee said in a Dec. 16 statement that “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” Fed policy makers twice pared the overnight lending rate to 1 percent since adopting it as the main tool of monetary policy in the late 1980s. The 1 percent held from June 2003 to June 2004, and again from the end of October until last month's reduction. As rates dropped during the past 12 months, the gap between mortgage and Treasury yields approached 1982 levels. The gross domestic product contracted 1.9 percent that year, the worst performance since 1946.

Volcker to Bernanke

Former Fed Chairman Paul A. Volcker raised the government's target interest rate to 20 percent in 1980 and then again in 1981 to break the back of inflation as the economy sank into a recession. Inflation peaked at 14.8 percent in March 1980 and declined to 3.8 percent by the end of 1983.

Efforts by Bernanke, 55, to reverse the two-year drop in home prices and the economic slump depends in large part on banks lowering rates enough to stimulate loan demand. His attempts are so far having little effect. Analysts estimate the economy will contract 1.5 percent in 2009, a half percentage point more than projected a month ago, according to a survey compiled by Bloomberg last week.

JPMorgan and Charlotte, North Carolina-based Bank of America Corp., the country's biggest home lender, said the industry is changing the terms of existing mortgages to keep Americans in their homes as job losses spread across the nation. Jamie Dimon, JPMorgan's chief executive officer, said in a Jan. 15 statement that the company has prevented more than 300,000 foreclosures, and “we plan to help more than 300,000 more families keep their homes through mortgage modifications over the next two years.”

Adjustable Rates

Bank of America will adjust more than $100 billion of existing home loans to keep as many as 630,000 borrowers from defaulting over the next three years, CEO Kenneth D. Lewis said during a Jan. 16 conference call after the company reported a fourth-quarter loss of $1.79 billion. In the current business climate, “rates should be 4 percent, not 5 percent,” said Lawrence Yun, chief economist of the National Association of Realtors, a lobbying group in Washington. Spreads are even wider for adjustable-rate mortgages. The average 1-year ARM is almost 5.8 percentage points above three- month Treasury bill yields, the biggest gap ever, and far above the historical average of about 2 percentage points, according to Bloomberg data. The difference peaked at 6.9 percentage points on Sept. 16, after the bankruptcy of New York-based investment bank Lehman Brothers Holdings Inc.

Luhrsen's Lament

“Mortgage rates are probably 25 to 50 basis points too high, once you factor everything in,” said Laurie Goodman, an economist and senior managing director at Amherst Securities Group LP in Austin, Texas.
She estimates the wider spreads mean banks making loans of $300,000 and then selling the mortgage on the so-called secondary market are earning about $6,240 more than they did as recently as three years ago when the housing market was booming. Luhrsen, the 40-year-old mother of two in Wilmington, North Carolina, said she wants to refinance her 30-year fixed loan and checks the Internet every other day for a lower rate. The best she can do is a little more than 5 percent. “I want to get as low a rate as possible,” Luhrsen said. No matter how far rates fall, borrowers always want them lower, said Chris Hutchens of Alpha Mortgage Corp., Luhrsen's mortgage banker in Wilmington. “If it goes to 5, people will want it to go down to 4, and if it goes to 4, they want 3,” Hutchens said. “I want to say, 'Hey, it's not going to zero.' But that's what everybody wants.”

Geithner Hearing

The increase in costs runs contrary to programs supported by Obama, who said in speeches during the past month that “we've got to start helping homeowners in a serious way.” Geithner, 47, said Jan. 21 at a Senate Finance Committee hearing that the new administration will propose a “comprehensive plan” within the next few weeks to respond to the economic and financial crises. It will address the credit crunch, the collapse of the housing market and the global economy, he said. Stan Sieron, a realtor in the St. Louis suburb of Belleville, Illinois, said that, with banks able to borrow overnight at almost nothing and the Treasury pouring record amounts of capital into the financial system, mortgage rates of 5 percent are doing little to stabilize prices or attract new buyers to soak up the excess supply of homes. “I do think banks could go much lower, to 4 percent or so now,” Sieron said. “It's not just rates, though. They're really tightening up lending. People I know are having an extremely difficult time getting loans. Everything is an issue, and there are too many 'no's.'”

Prices in Freefall

Home prices in 20 major U.S. cities have declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales. The S&P/Case-Shiller Index dropped by a more than estimated 18 percent in the 12 months through October. The gauge has fallen every month since January 2007. Foreclosure filings rose 81 percent last year as companies slashed payrolls by almost 2.6 million, the most since 1945, the Labor Department and Irvine, California-based research group RealtyTrac Inc. reported.
“A lot of people working at mortgage companies are dealing with defaults, not originating new loans,” said Goodman of Amherst Securities. Financial institutions have reduced risk-taking after more than $1 trillion of writedowns and credit market losses since 2007, triggered by record subprime home-loan defaults in the U.S., data compiled by Bloomberg show.

Stricter Standards

With lenders tightening standards, as few as 50 percent of applications are resulting in mortgages this month, down from an average of about 70 percent during the past 18 months, according to analysts at Zurich-based
Credit Suisse Group AG. Banks are so traumatized by their losses that they're reluctant to narrow lending spreads or extend loans, said Douglas Duncan, chief economist at Fannie Mae, the Washington-based mortgage buyer seized with Freddie Mac in September after federal regulators determined the companies were at risk of failing. “Underwriting criteria have been tightened considerably, and that is a real issue,” Duncan said. “Mortgages could well be close to 4 percent if they reflected traditional spreads. It's not greed or things like that. It's the real risks the banks see.” Waters, the U.S. congresswoman, said the House will push the Obama Administration to bring cheaper rates to homebuyers. Before releasing the second $350 billion of the $700 billion Troubled Asset Relief Program, she said guidelines will be sought that push banks to increase mortgage lending, drop rates and negotiate modifications for loans in default.

Waiting for Washington

Without significant pressure from Washington, the banks will maintain the wide interest rate spreads to resuscitate depleted balance sheets, rather than pass along the savings to consumers, said Alan Fischer, executive director of the San Francisco-based California Reinvestment Coalition, an advocate group for low- income housing. “The banks are just doing what is safest, but it doesn't reflect taxpayer needs or the public good,” he said. “They've gone from making too many unsafe loans to making it almost impossible for the folks who really need the loans to get them. The financial institutions just aren't going to fix this on their own. You have to look to the new Congress and Washington, not the markets.” In addition to reducing lending rates and using TARP to inject capital into banks, the government has allocated more than $100 billion since
September for Fannie Mae and Freddie Mac to buy new mortgages, Freddie Mac Chief Economist Frank Nothaft wrote in a report earlier this month. The Fed has said it may add another $570 billion. 'Looking to Save' The Mortgage Bankers Association in Washington forecasts that mortgage originations for home purchases, rather than refinancings, will decline to $847 billion this year from $1.14 trillion in 2007. Bank rates are set largely by what Fannie Mae and Freddie Mac are willing to pay for mortgages in the secondary market, not the companies' cost of funds, according to Jay Brinkmann, the MBA's chief economist. Luhrsen and her husband Mike, a 42-year-old airline pilot, said they worked hard to buy their three-bedroom ranch house with a boat pier. Now they see their ability to retire and pay for college slipping away. “I'm very frightened about the economy,” she said. “We worked very hard for what we have, and we're afraid it's being taken away from us. So we're looking to save as much as we can. I see saving as investing in our
future. Every little bit counts right now.”


Source

It should be the bank will lower mortgage so that the borrowers would lovely to borrow again.

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Hotel Loans Coming Due During Distressed Times

By By Hans Detlefsen and Emil Iskandar


This article outlines a series of possible options owners may consider if their hotel loans are scheduled to mature during these distressed times. In a November 8th, 2008 article by Bloomberg, analysts from RBS Greenwich Capital estimated that approximately $88 billion in commercial real estate loans will come due in 2009. A significant portion of these loans are for hotel assets. As the national economy continues through a recession that began more than a year ago, and as credit remains constricted, the options for hotel owners with loans coming due will be limited. Refinancing risks may also be compounded by the fact that hotel values have declined due to lower leverage and reduced cash flows, as lenders become more conservative and markets experience deteriorating demand.

This article outlines a series of possible options owners may consider if their hotel loans are scheduled to mature during these distressed times.

Extending Hotel Loans

Extending or rolling over an existing loan on a hotel may be the best option if it is available. The availability of this option depends on the performance of the existing loan and the lender's current capital needs. Assuming the lender has sufficient capital, the lender will try to determine whether the hotel's operations can be expected to produce ongoing cash flows sufficient to make loan payments in the future. If the cash flows appear strong enough under new lending parameters, then a lender may be willing to extend the existing loan.
However, it is important to keep in mind that lenders are investors and they have the goal of making loans for a profit. Like any prudent investors, lenders will evaluate the loans they make in the context of any "opportunity cost" that may be associated with committing their capital to a certain asset or project. That is, a prudent lender will evaluate the expected yield of extending your loan versus originating a new loan. Given the high degree of competition for loans in today's credit environment, owners should anticipate some changes to the existing terms of their loans. These changes are likely to include adjustments to interest rates, some equity payment to reduce the outstanding loan balance, and payment of extension fees.

Refinancing Hotel Loans

If an existing lender needs capital and is not willing to extend a hotel loan even though cash flows are expected to be adequate to service the loan, the borrower will likely need to refinance the existing loan with a
different lender. Because the number of lenders actively seeking to make loans on hotel properties has declined in recent months, only the best-performing assets have this option available to them. Even then,
owners are unlikely to find a new lender willing to refinance a loan with the same leverage and interest rate that applied to many hotel loans issued during the 2004-2007 peak of the industry cycle. When refinancing a hotel, a new lender will require the property to meet certain performance benchmarks. Any expected decline in cash flows will make meeting these benchmarks more challenging. On average, loan-to-value ratios are likely to be in the range of 50% to 65% rather than the higher 70% to 85% leverage levels available in recent years.

Deleveraging

With the exception of hotel assets with very strong cash flows or very low debt levels, most borrowers will need to deleverage, given today's tighter lending parameters. Moreover, today's lower loan-to-value ratios will be applied to the hotel's current market value, which may be 10% to 30% lower than its market value was when the existing loan was underwritten, assuming the asset is performing well enough to produce a positive cash flow. Taken together, these two factors can create a substantial cash "shortfall". The table shows historical operating performance for a 200-room, full-service hotel and a forecast for operating performance in 2009.

Performance figures reflect the ongoing national economic recession as well as severe tightening of the credit markets. In 2006, the hotel achieved an annual occupancy of 75% and an average rate of US$210, which
produced a net income of US$3.4 million. By applying a capitalization rate of 8.5% to the net income, the resulting value would be US$40.6 million. A loan-to-value ratio of 75% would have allowed the owner to take out a loan for $30.5 million in that year.

In the second half of 2007 credit began to tighten and the national economy entered a recession in December, 2007. As a result, net income declined in 2008 and is expected to decline further in 2009. At the same time, capitalization rates increased as buyers perceived more risk in commercial real estate investments. Moreover, loan-to-value ratios declined substantially. When the hotel's loan comes due in 2009, the owner would potentially face a shortfall of US$10.8 million needed to refinance the hotel, or roughly one-third of the original loan amount.Due to the decreased leverage now available for financing hotel investments, exacerbated by lower market values, owners of highly leveraged assets should be prepared to increase the amount of equity in their hotels. One obvious way to accomplish this is for such owners to invest more of their own money to pay down a portion of the debt currently held in these projects. By increasing the equity in a hotel and reducing the debt, an owner will decrease the lender's risk and capital commitment. This will allow the owner to attract a broader range of lenders willing to consider financing the debt when it comes due; however, it will decrease the owner's return on investment because leverage is reduced.For owners with enough liquidity in their balance sheet, paying down and injecting new equity into their hotel investments may not be a huge undertaking. In fact, this may be an opportunity to reduce borrowing costs. There have been transactions in the recent past involving early retirements of hotel notes. In exchange for owners paying down loan balances, some lenders are offering discounts to entice certain owners to do so. Unfortunately, this is not the case for most hotel owners.

Finding an Equity Partner

Injecting a large sum of money into a hotel may not be a viable option for some owners, especially during distressed times. One alternative that owners may consider is to seek equity partners who have cash and a
willingness to invest it in hotel assets. The primary advantage of this strategy is that it does not require owners to use their own funds to pay down debt on maturing loans. The primary disadvantage of this strategy is that equity partners are often costly and they may be very selective, especially in desperate times.

Currently, equity partners are seeking yields in the range of 20% or more.

One thing to bear in mind is this level of yield is a function of the equity partner's cost of capital, as well as the yields offered by other alternative investments in the market. This level could go up or down, depending on how soon the economy and debt markets improve. Currently, most market indicators and experts' opinions would lead one to believe that this yield level is not likely to decline substantially in the near-term.

Finding a Second Lender

If an owner is not able find, or willing to seek, an equity partner, another option is to seek a second lender. So-called "mezzanine" lenders seek to provide an additional loan, which would be subordinate to the owner's original loan. Because this second loan is subordinated to the original loan, it is riskier and requires a higher interest rate than the first loan. The interest rate is likely to be lower than an equity partner's yield requirement. A second loan may allow some owners to finance shortfalls, like the one identified in the previous example, without using additional equity. However, the availability of such financing in 2009 may remain limited.

Selling the Hotel

If none of the previous options are available or acceptable to a hotel owner with a loan coming due, then the best remaining option may be to sell the hotel. Selling a hotel allows the owner to obtain cash, assuming the hotel's value exceeds its current debt burden. While selling a hotel is the ultimate exit strategy for most owners, selling during an industry downturn is likely to yield a lower price than owners anticipated.

Furthermore, when owners near the date of their loan's maturity they may come under extreme compulsion to sell the asset. There may be limited time to market such assets before the loans mature if owners wait too long, in hopes of extending or refinancing existing loans. These conditions describe two of the key parameters in the definition of "liquidation value". A hotel's liquidation value is likely to be significantly lower than its "market value", which requires typically motivated buyers and sellers. If an owner of a highly leveraged hotel waits too long to de-leverage or sell the hotel, then the seller's motivation may become distorted by a compulsion to sell the asset in a short period of time before the existing loan matures.

Concluding Remarks

As maturing hotel loans come due in 2009, owners will have to determine which, if any, of these strategies are likely to be available to them.

Planning sooner rather than later can help maximize an owner's options.

One of the first steps in evaluating potential strategies is to evaluate the likely future operating performance of hotels with maturing loans and to obtain an unbiased determination of market value. With a realistic understanding of market performance and market value, both owners and lenders can create and achieve realistic goals for their hotel investments. If a loan extension or refinancing is an option, owners should approach and start talking to lenders early. Negotiations are less successful when the parties are under duress and subject to unrealistic time pressures.


Source

Refinancing risks and also compounded by the hotel values have declined due to lower leverage. The changes can come up with a good results for the hotel loans because of the adjustments of interest rate.

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Dark months ahead?

John Durie

DAVID Jones boss Mark McInnes has set the low bar for the tales of gloom.

He forecasts the worst sales conditions for 20 years with no hope for recovery until the second half of next year.

Comings on the same day BHP Billiton, as expected, shut its Ravensthorpe nickel production in Western Australia and will cut some 6000 jobs world-wide, while Rio Tinto snaked in news of cutbacks in its aluminium production and 1100 jobs gone.

The good news from Rio is at least its Australian alumina operations have been spared the knife.

None of this came as any great surprise and in fact the bourse stood up remarkable well, shedding 62 points in morning trade to be still 62 points above the November lows.

These lows will be breached and it should be noted financial stocks have already taken out their November lows to be trading at their lowest levels for eight years.

Prime Minister Kevin Rudd did what prime ministers are meant to do and reassured the punters he was ready to help support the financial system, as said previously, he should move with caution to avoid simply subsidising the banking cartel even further than he already has.

But there is no harm in soothing words, even if they were planted directly by the folk from NAB.

The Wesfarmers board meets in Perth today prior to its scheduled golf game to consider the financing options.

As you would expect, the company has canvassed lenders to see what it would cost to refinance early should the banks be willing to do so and this cost will be compared to the equity raising options.

Wesfarmers boss Richard Goyder is keen to settle matters early to let him get on with his job free of balance sheet concerns.

There is work to do as shown by David Jones’ McInnes, who said same sore sales are down a massive 9.5 per cent and the retailer is budgeting for sales falls in the first half of 2010 with no improvement until the second half.

Market bulls were pinning hopes on a flood of bad news this half and recovery in the second.

The first part is right, the second isn’t looking so good.


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