C.M.O. 6.23.2009
Credit Market Overview
June 23, 2009
While running some errands over the weekend I passed one of those shops that sell cards and candles and those magnets that everyone’s refrigerator boasts at least one of. There were also a few of those posters with various sayings on them one of which said something like; “you can’t keep doing the same thing and expect different results”. Seemed obvious, made sense, so I filed it in the back of my mind with all of the other useless information.
Then, while reading the paper yesterday, it became clear. It seems that the Chairman of the House Financial Services Committee, Barney Frank (D., MA) and Anthony Weiner (D., NY) are pushing to have FNM and FRE to relax recently tightened lending standards on mortgages for new condominiums, with Mr. Weiner saying the new standards “may be too onerous”.
In March FNM said it would no longer guarantee mortgages on condominiums where fewer than 70% of the units have been sold, which is higher than the 51% number the bar was previously set at. FNM and FRE have also raised the fees on mortgages for lenders that cannot make at least a 25% down payment.
Charles Foschini, vice-chairman of CB Richard Ellis in South Florida had his own opinion on the new lending standards saying: “In the absence of these changes, Fannie and Freddie would be putting good money after bad and run the risk of further increasing the building epidemic of foreclosures and dysfunctional homeowner associations in Florida and around the country”.
I do always find it interesting that people who work for a buck and people who work for a vote often find themselves on different sides of the same issue.
Speaking about making a buck, it appears the top brass at Lennar (LEN) are pretty good at turning one, which is saying something in this market. Back in 2006 and 2007 the company entered into a number of joint ventures which gave the other party in the deal at least 51% of the new entity. The newly created JV then issued debt and purchased land that LEN had previously owned outright with LEN using the proceeds of the deal to pay down its own debt. The JV debt was not required to be reflected on LEN’s balance sheet because the venture was not majority owned by LEN. And you thought these guys just banged nails!
One of the more storied deals included Calpers (California Public Employees Retirement System) where Calpers put up $970MM to own 68% of a venture called LandSource. The deal was struck in early 2007 and wound up going bust just 16 months later. Calpers walked away from the table at that point but LEN hung on through bankruptcy and is now leading a group of new investors in an effort to take the entity out of Chapter 11, with the land in question being valued at just 18% of the original deal price.
LEN issued $400MM of a 12 ¼ coupon note maturing in June of 2017 back in April at 969.6bps over the associated Treasury. The CDS spread in the 8 year area would have been about 350bps at the time so there was quite a premium required by the market place to take on this paper. Having said that, when you can buy back land at less than 20% of what it used to cost you can probably afford to pay up to borrow the money to do the deal.
So, let’s see how these two examples compare to that little missive we saw in the window this past weekend. Congress wants FNM and FRE to lessen lending standards which the vice chairman of CB Richard Ellis believes will create more of the “same” problems that we’re suffering through now. LEN figured out how to get debt off its balance sheet and buy back property at pennies on the dollar, a little something “different” to say the least.
Maybe there is something to that saying after all.
Enjoy the week,
Jim Delaney
