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February 28, 2010

Judge Finds No Reason to Look for Misconduct in KB Home Case

Judge Finds No Reason to Look for Misconduct in KB Home Case
The National Law Journal

A federal judge refused on Tuesday to look into whether the government committed prosecutorial misconduct in its criminal stock options backdating case against former KB Home Chief Executive Officer Bruce Karatz. Karatz's lawyer, John Keker, asked for an evidentiary hearing after a judge tossed out a similar case against two former Broadcom executives. Calling the allegations in the KB Home case "sheer speculation," U.S. District Judge Otis D. Wright II said the Broadcom matter has "nothing to do with this case."
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February 27, 2010

Wayne Foss, mai appraisal

Another good example of why the commercial appraisal business is so skrewed up http://www.hwforums.com/2191/messages/638.html Wayne Foss, mai appraisal

The Harris Company, REA/C, http://www.harriscompanyrec.com


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Marcus & Millichap Real Estate Investment Services

Our market research reports offer insights, analyses and forecasts of property performance and investment opportunities in major MSAs nationwide.

National Reports Local Apartment Local Industrial Local Office Local Retail Local Self-Storage

Get Adobe Acrobat Reader To view and print electronic copies of the publications, you will need Adobe Acrobat Reader.

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February 26, 2010

Hello from Southern California Edison's Customer Technology Application Center (CTAC),

Hello from Southern California Edison's Customer Technology Application Center (CTAC),

Please find below the link for the Energy Centers Home Page. From this page you can navigate your way through the Energy Centers to view and register for upcoming energy efficient workshops all in one simple step.

If you have attended our workshops in the past, please use your contact ID# when registering.

To register on-line please follow the link below:

If you prefer reservations can also be made via phone Monday through Friday
8:00 a.m. - 5:00 p.m. by calling 1 (800) 336-2822 ext 42537 or 626-812-7537

Thank you again for your continued support and we look forward to seeing you at one of our upcoming seminars

Sincere Regards,
Edison CTAC
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Tough-talking Broward Property Appraiser Lori Parrish called it a "tax dodge"

Tough-talking Broward Property Appraiser Lori Parrish called it a "tax dodge" four years ago when Pastor Frederick "Sonny" Irons asked her to grant his $1.9 million Fort Lauderdale waterfront estate tax-exemption as a church: http://www.sun-sentinel.com/news/elections/fl-bulldog-parrish-pastor-20100226,0,4683117.story

The Seafarer's Church of the Creator

"Everyone knows what a real church is, and this isn't it," Parrish told the Sun Sentinel after she rejected Irons' request.

But Parrish has changed her mind about Irons' tiny Seafarer's Church of the Creator.

In December, without announcement, Parrish settled a three-year-old lawsuit with Irons by agreeing to grant his application for tax-exempt status for 2006, but not for 2005. The deal reversed Parrish's original decision to deny the exemption for both years and meant Broward's tax collector couldn't collect about $33,000 in property taxes assessed for 2006.

More importantly, Parrish has given her official blessing to a perpetual property tax exemption for the two-story brown brick home at 1309 SW Fifth Court where Irons and his wife, Judy, reside. That means the valuable parcel astride the north fork of the New River is now legally a church and parsonage, and the city and county can no longer collect taxes on it.

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Your client Curtis Harris with password " Cochise" is being notified about changes to the following properties and/or a new listing.


Curtis D. Harris, BS, CGREA, REB 310.337.1973:  http://www.harriscompanyrec.com

POW Login Page: http://pow.themls.com/login.cfm

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No Real Commercial Recovery Before 2011

No Real Commercial Recovery Before 2011
Although the economy has been growing lately, fallout from the recent recession continued to negatively impact commercial real estate sectors in the fourth quarter, but there is hope for some improvement next year, according to the National Association of REALTORS®.

Lawrence Yun, NAR chief economist, said commercial real estate almost always lags the economy. “Because of the lingering impact from the deep recession over the past two years, vacancy rates will trend higher and many commercial property owners will need to make rent concessions,” he said.

“With the job market expected to turn for the better later this year, we’ll see rising demand for office and warehouse space, but that isn’t likely before 2011,” Yun said. “At the same time, improved consumer confidence would help sustain the retail sector and encourage more people to enter the rental market.”

Yun notes that commercial vacancy rates remain high in most market areas and are depressing rents.

The Society of Industrial and Office Realtors, in its SIOR Commercial Real Estate Index, an attitudinal survey of more than 700 local market experts, suggests a flattening level of business activity in upcoming quarters with 55 percent of members expecting the market to improve in the second quarter.

The SIOR index rose 0.2 percentage point to 35.5 in the fourth quarter, compared with a level of 100 that represents a balanced marketplace. This is the first gain following 11 consecutive quarterly declines. Although some indicators show that a decline in commercial property values is beginning to flatten, 86 percent of respondents report prices are below replacement costs.

Nearly nine in 10 survey participants said new commercial development is virtually nonexistent in their market areas, and rent concessions are reported almost everywhere.

A Long Way To Go
An independent survey earlier this month showed a couple dozen banks are willing to expand commercial credit this year, which is critical. The lending expansion is aided by the Federal Reserve's Term Asset-Backed Loan Facility (TALF), which is encouraging issuance of commercial mortgage-backed bonds. In addition, regulators are prodding lenders to extend terms for many existing commercial loans.

“We have a long way to go for satisfactory levels of commercial credit, but these are important first steps,” Yun said. “Given that about $1.4 trillion in commercial debt will come due over the next three years, more extensive action is needed and the Fed needs to more actively help resuscitate commercial mortgage-backed securities. The credit improvement will mean more commercial property sales in 2010, even some at deeply discounted prices.”

Looking at the overall market, commercial vacancy rates generally will stay at elevated levels, according to NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.

Office Market
With a lot of sublease space currently on the market, vacancy rates in the office sector are forecast to rise from 16.3 percent in the fourth quarter of 2009 to 17.6 percent in the fourth quarter of this year; the longer term outlook is for vacancies to average 17.4 percent in 2011.

Annual office rent is projected to decline 7.2 percent in 2010, following a drop of 12.7 percent last year. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, should be a negative 27.3 million square feet in 2010.

Industrial Market
There is proportionately less industrial sublease space on the market than in the office sector, but obsolescence remains a factor. Industrial vacancy rates will probably rise from 13.9 percent in the fourth quarter of last year to 14.9 percent in the closing quarter of 2010; they could average 14.5 percent next year.

Annual industrial rent is likely to fall 9.6 percent this year, after declining 10.9 percent in 2009. Net absorption of industrial space in 58 markets tracked is seen at a negative 93.5 million square feet in 2010.

Retail Market
Retail vacancy rates are expected to edge up from 12.4 percent in the fourth quarter of 2009 to 12.7 percent in the same period of this year, and may hold at that level in 2011.

Average retail rent is forecast to decline 2.4 percent in 2010, following a drop of 4.0 percent in 2009. Net absorption of retail space in 53 tracked markets should be a negative 3.4 million square feet this year.

Multifamily Market
The apartment rental market – multifamily housing – is poised to gain from a rise in household formation. Multifamily vacancy rates are likely to decline from 7.4 percent in the fourth quarter of last year to 6.6 percent in the fourth quarter of 2010, and possibly edge down to 6.1 percent next year.

Average rent is projected to decline 3.4 percent this year, following a decline 3.6 percent in 2009. Multifamily net absorption is expected to be 115,000 units in 59 tracked metro areas this year.
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Statement Of Martin J. Gruenberg Vice Chairman Federal Deposit Insurance Corporation

Statement Of Martin J. Gruenberg Vice Chairman Federal Deposit Insurance Corporation On Condition Of Small Business And Commercial Real Estate Lending In Local Markets Before The Committee On Financial Services And Committee On Small Business U.S. House Of Representatives; 2128 Rayburn House Office Building
February 26, 2010

Chairman Frank, Chairman Velazquez, Ranking Member Bachus, Ranking Member Graves and members of the Committees, I appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC) on the state of lending and credit availability for small business and commercial real estate.

The events surrounding the financial crisis of late 2008 have taken a heavy toll on real economic activity across our nation. The extraordinary policy responses to that crisis were highly effective in stabilizing global financial markets and laying the foundation for economic recovery. However, the large dislocations that have taken place in real estate and credit markets continue to inhibit the pace of that economic recovery, contributing to persistent high unemployment and slow growth in consumer and business spending. Resolving these credit market dislocations will take time. Still, the pace of the economic recovery can be enhanced by policies that promote the prompt and orderly workout of existing problem loans and that enhance the ability of lenders to make new credit available to qualified households and businesses.

Adverse credit conditions and stressed balance sheets have created a difficult environment for both borrowers and lenders. The weakened economy has contributed to an overall decline in both the demand for and the supply of small business credit. Large banks have significantly cut back on lines of credit to consumers and small businesses. In addition, small and mid-sized institutions, who tend to make business loans secured by residential and commercial real estate properties, are dealing with the effects of large declines in real estate values, which tend to reduce the collateral coverage of existing loans and make it more difficult for household and small business borrowers to qualify for new credit. This dynamic is contributing to persistent weakness in local economic conditions that is placing further stress on credit performance at small and mid-sized banks that serve those communities.

In response to these challenging economic circumstances, banks are clearly taking more care in evaluating applications for credit. While this more conservative approach to underwriting may mean that some borrowers who received credit in past years will have more difficulty receiving credit going forward, it should not mean that creditworthy borrowers are denied loans. Unfortunately, in such a difficult environment, there is a risk that some lenders will become overly risk averse.

As bank supervisors, we have a responsibility to encourage institutions, regularly and clearly, to continue to make soundly structured and underwritten loans. Acknowledging this responsibility, the FDIC and the other federal banking regulators supplemented prior guidance and issued the Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers earlier this month to emphasize that examiners will follow a balanced approach in assessing small-business lending. The Statement recognizes that many small businesses are experiencing difficulty in obtaining and renewing credit to support their operations. It is clear that for a number of reasons small business credit availability has tightened, particularly at the largest institutions. The FDIC and the other banking regulators believe that continued sound lending to creditworthy borrowers is critical to the long-term success and health of the small business sector -- and their lenders.

The Statement indicates that financial institutions should understand the long-term viability of a borrower's business, and focus on the strength of a borrowers' business plan to manage risk rather than using portfolio management models that rely primarily on general inputs, such as a borrower's geographic location or industry. This new guidance states that examiners will not adversely classify loans solely on the basis of a decline in the collateral value below the loan balance, or the borrower's association with a particularly stressed industry or geographic location.

In my testimony, I will briefly describe credit quality at FDIC-insured institutions, trends in the availability of credit, and conditions currently creating obstacles to credit availability. I also will address concerns that banks are receiving mixed messages from their supervisors. Finally, I will discuss the efforts the FDIC is making to encourage prudent lending by the institutions we supervise.

Credit Quality and Lending Activity at FDIC-Insured Institutions

Expenses for troubled loans continue to weigh heavily on the industry. The industry earned less than $1 billion in the fourth quarter, essentially just breaking even. During the quarter, insured institutions added $61.1 billion in provisions for loan and lease losses to their reserves, although this was $10.0 billion less (-14.1 percent) than they set aside in the fourth quarter of 2008. Net charge-offs of loans and leases totaled $53.0 billion, an increase of $14.4 billion (37.2 percent) compared to a year earlier. The annualized net charge-off rate in the quarter was 2.89 percent, which is the highest rate in any quarter in the 26 years for which quarterly charge-off data are available. The amount of loans and leases remaining on banks' balance sheets that were noncurrent rose by $24.3 billion (6.6 percent) during the quarter.1 At the end of December, 5.37 percent of all loans and leases were noncurrent. This also represents a 26-year high. However, fourth quarter 2009 was the third consecutive quarter that the rate of increase in the volume of noncurrent loans slowed.

Major loan categories exhibited high levels of charge-offs and noncurrent loans. The highest net charge-off rates in the fourth quarter were for credit cards (9.16 percent annualized) and real estate construction and development loans (7.77 percent). The net charge-off rate for real estate construction and development loans represented a record high and the net charge-off rate for credit card loans is near the record high set last quarter. Construction and development loans also had the highest noncurrent rate at the end of December (15.95 percent), followed by 1-4 family residential mortgage loans (9.31 percent), both record high levels.

Larger institutions had higher charge-off and noncurrent rates than smaller institutions. The average net charge-off rate on all loans and leases for community banks (institutions with less than $1 billion in assets) was 1.70 percent in the quarter, compared to an average of 3.09 percent at larger institutions. The ratio of noncurrent loans and leases to total loans and leases for community banks as of December 31 was 3.43 percent, versus 5.68 percent for larger institutions. Some of the difference in credit quality performance reflects differences in the composition of loan portfolios at large and small banks. Large institutions have higher proportions of retail loans (residential mortgages and consumer loans) while community banks have larger relative shares of loans to commercial borrowers. Consequently, the impact of falling housing prices and rising unemployment and bankruptcies has been greater in the loan portfolios of large banks. Further deterioration in commercial real estate (CRE) markets would have a greater proportional impact on the performance of small and medium-sized institutions.

Tighter underwriting standards, deleveraging by institutions seeking to improve their capital ratios, and slack loan demand have all contributed to declines in loan balances at many institutions. Total loan and lease balances at FDIC-insured institutions declined by $128.8 billion (1.7 percent) during the fourth quarter. This is the sixth consecutive quarter that aggregate loan balances have fallen. In 2009, loan balances declined by $587.3 billion, or 7.5 percent, which was the largest percentage decline since 1942.

Much of the decline in loan balances occurred at larger institutions. Institutions with total assets greater than $100 billion as of December 31st reported an aggregate net decline in total loans and leases of $116.8 billion in the quarter, or over 90 percent of the total industry decline. On a merger-adjusted basis, at community banks that filed reports as of December 31st, total loan and lease balances decreased $4.3 billion during the quarter. A majority of institutions (53.2 percent) reported declines in their total loan balances during the quarter.

Table 1. Loan Growth by Asset Size Groups, Fourth Quarter 2009
(Dollar amounts in billions)
Asset Size Number of Institutions Number  Not Reporting Increase in Loans Number Reporting Increase in Loans Aggregate Net Change in Loans
($ Billions)
Percent Change
> $100 Billion* 48 40 8 (116.8) -2.82%
$10 - $100 Bill. 77 55 22 9.6 0.74%
$1 - $10 Billion 554 372 182 (16.9) -1.78%
< $1 Billion 7,333 3,794 3,539 (4.3) -0.41%
All Insured Institutions 8,012 4,261 3,751 (128.4) -1.73%

Note: Reflects changes in loan balances for institutions categorized by size group as of December 31, 2009. Changes in these groups are adjusted for mergers and acquisitions. The difference between the net decline on this table ($128.4 Billion) and the industry aggregate net decline ($128.8 Billion) reflects institutions that closed during the quarter but were not acquired by another institution.

Source: Call and Thrift Financial Reports.


*The > $100 billion asset size category includes insured depository institution affiliates that would otherwise fall in smaller size groups.

Factors Affecting Small Business Lending

Weak economic conditions have created an extremely challenging business environment, which particularly affects small businesses. After real GDP posted four consecutive quarters of decline during the second half of 2008 and first half of 2009, economic activity is now showing some signs of recovery. Consumer spending rose in both the third and fourth quarters of 2009 after declining in three of the prior four quarters. Even the housing sector showed some signs of stabilization in sales and prices during the second half of 2009. However, the unemployment rate remains high -- 9.7 percent as of January 2010 -- and persistent labor market weakness poses ongoing risks to the business outlook. Small business optimism remained near record low levels in December, according to a survey by the National Federation of Independent Business (NFIB).2

This weakness in business conditions has had significant effects on both credit demand and supply. The demand for business credit tends to vary over the business cycle with the level of spending on new capital equipment and inventories. Small businesses reported that capital spending levels remained near record low levels in December 2009, as did the demand for credit to finance such projects.3 Similarly, in the Federal Reserve's most recent Senior Loan Officer Opinion Survey, banks again noted weaker loan demand from business borrowers, especially from small businesses. At the same time, access to credit remains difficult, as lenders raise credit standards in response to higher loan losses. Banks continued to report net tightening of their lending standards on business loans in January 2010, although the pace of that tightening has slowed.4

Surveys of small businesses suggest that while small business loans have clearly become harder to obtain, deteriorating business conditions appear to represent an even larger problem. In the NFIB's December 2009 survey, the percent of respondents who said that loans were "harder" to get in the last three months outnumbered those who said loans were "easier" to get by 15 percentage points, near the record high in 1980. In addition, the percent of respondents citing "finance and interest rates" as their single most important business problem stood at just 4 percent, compared to 3 percent one year ago. By comparison, a 34 percent plurality of respondents cited "poor sales" as their biggest business problem, up from 27 percent a year ago. The percentage of respondents who said that sales were "lower" in the last three months outnumbered those who said sales were "higher" by 25 percentage points.5

Ensuring that creditworthy small business borrowers have access to credit remains critical to sustaining the economic recovery. FDIC-insured institutions are a major source of financing for small businesses, supplying over 60 percent of the credit used by small businesses to run and grow their businesses. Community banks have a particularly important role in lending to small businesses. As of June 30, 2009 (the most recent data available), community banks accounted for 38 percent of small business and farm loans, even though these institutions represented only 11 percent of industry assets.

Recent initiatives and proposals to support small business financing will help to sustain local communities and community banks. For example, the American Recovery and Reinvestment Act (ARRA), signed into law last February, temporarily raised the guarantee levels on Small Business Administration (SBA) 7(a) loans and eliminated upfront borrowing fees on SBA loans in the 7(a) and 504 programs. ARRA also provided a range of tax cuts and tax incentives for small businesses, helping them to cope with the unusually harsh economic environment. In addition, the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF) was authorized to provide financing for SBA-backed loans. After these measures were implemented in early 2009, both the volume of SBA loan originations and the volume traded in the secondary market have risen above pre-crisis levels.6 Further efforts to support small business financing will also provide important benefits to the overall economy.

Commercial Real Estate

The deep recession, in combination with ongoing credit market disruptions for market-based CRE financing, has made this a particularly challenging environment for commercial real estate. The loss of more than 8 million jobs since the onset of the recession has reduced demand for office space and other CRE property types, leading to deterioration in fundamental factors such as rental rates and vacancy rates. Against a backdrop of weak fundamentals, investors have been re-evaluating their required rate of return on commercial properties, leading to a sharp rise in "cap rates" and lower market valuations for commercial properties. Finally, CRE financing has been harder to obtain since last year's financial crisis. There were no commercial mortgage-backed securities (CMBS) issued between July 2008 and May 2009 and only $5.1 billion has been issued since then. Commercial mortgage lenders are also reassessing their underwriting standards. According to the Federal Reserve's Senior Loan Officers Survey, a majority of lenders surveyed reported tightening underwriting standards during the financial crisis in late 2008 and into 2009. Even according to the most recent survey in January 2010, more than one-fourth of lenders surveyed continued to report tightening underwriting standards, while none reported easing underwriting standards.7

Nationally, prices for CRE properties as measured by the Moody's/REAL Commercial Property Price Index are more than 40 percent below their October 2007 peak. As of fourth quarter 2009, quarterly rent growth has been negative across all major CRE property types nationally for at least the past year. Asking rents for all major CRE property types nationally were lower on a year-over-year basis.8

The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters continues to be in CRE lending. While financing vehicles such as CMBS had emerged as significant CRE funding sources in recent years, FDIC-insured institutions still hold the largest share of commercial mortgage debt outstanding, and their dollar volume exposure to CRE loans stands at a historic high. As of December 31, 2009, CRE loans totaled almost $1.8 trillion, or 24.9 percent of total loans and leases. In terms of concentrations of credit, CRE at FDIC-insured institutions represented 133 percent of total risk-based capital, lower than the 151 percent seen one year earlier, but still significantly higher than levels at the beginning of the decade.

The large and widespread decline in the value of residential and commercial real estate over the past two to three years represents a major dislocation to certain lending markets. Small firms tend to borrow on a secured basis because it helps them obtain more credit on more advantageous terms than would be the case for an unsecured loan. As of September 2009, just over half of the total liabilities of nonfarm noncorporate businesses (many of which are small businesses) took the form of mortgage loans.

It is clear that the decline in the value of collateral impacts the ability of business borrowers to obtain new credit or renew existing lines. In many instances, this can result in fewer new loans being granted, less additional credit being made available under existing lines, and demands for additional collateral. Declines in real estate values have reduced the collateral coverage for many secured loans, raising their effective loan-to-value ratio.

The widespread problem of eroding collateral positions represents a serious dislocation in small business loan markets at present. It is also a problem that the federal banking agencies have directly addressed through the October 2009 Policy Statement on Prudent Commercial Real Estate Workouts. While these efforts to help banks and borrowers work together can help to reduce unnecessary foreclosures and preserve credit relationships in many cases, they can do little to correct the underlying problem of lower asset values. This is a problem that can only be resolved over time, as problem loans are dealt with and market conditions return to normal.

Losses in CRE portfolios thus far have been most prominent in construction and development (C&D) loans. As noted previously, noncurrent and net charge-off rates for C&D loans are both at record high levels. Outside of construction portfolios, losses on loans backed by CRE properties have been modest to this point. Net charge-offs on loans backed by nonfarm, nonresidential properties have been just $11.3 billion over the past eight quarters. Over this period, however, the noncurrent loan ratio in this category has nearly quadrupled to 3.82 percent, and we believe it will rise further. It is likely that increased vacancy rates and lower rental income will translate into more borrowers unable to cover their debt service. The ultimate scale of losses in the CRE loan portfolio will very much depend on the pace of recovery in the U.S. economy and financial markets during the next few years.

The Role of Bank Supervision

As federal supervisor for nearly 5,000 community banks in the U.S., the FDIC and its examiners uniquely understand that bank lending is the lifeblood of our local and national economies. We share Congress' and the public's belief in making credit available on Main Street and working with borrowers that are experiencing difficulties.

The FDIC's bank examiners work out of duty stations located in 85 communities across the country, and are both knowledgeable of local conditions and very experienced in their profession. Many have seen more than one previous economic down cycle and recognize the critical role that banks play in credit availability. We believe that our examiners do their jobs with a keen understanding of the economic environment and real estate conditions where banks operate.

Concerns have been expressed by small businesses, trade groups, and members of Congress that the bank supervisors may be contributing to the lack of credit availability, and that examiners are discouraging banks from extending small business and commercial real estate mortgage loans. There are assertions that examiners are instructing banks to curtail loan originations and renewals, and are criticizing sound performing loans where collateral values have declined. We also have heard criticisms that regulators are requiring widespread re-appraisals on performing commercial real estate mortgage loans, which then precipitate write-downs or a curtailment of credit commitments based on a downward revision to collateral values.

We recognize that the supervisory process mirrors the underlying economic, financial, and managerial challenges that many banks are facing. Even at the most troubled institutions, our primary goal is to help the institution return to financial health and sound operation.

I would like to emphasize that FDIC examiners are not directly involved in bank credit decisions. Accordingly, the FDIC provides banks with considerable flexibility in dealing with customer relationships and managing loan portfolios. We do not instruct banks to curtail prudently managed lending activities, restrict lines of credit to strong borrowers, or deny a refinance request solely because of weakened collateral value. In addition, we encourage banks to be knowledgeable of local market conditions and closely review collateral valuations when a borrower's financial condition has materially deteriorated and a sale of the collateral may be necessary. We would not require a re-appraisal for a healthy performing loan. We leave the business of lending to those who know it best -- the community bankers who provide credit to small businesses and consumers on Main Street. The FDIC believes that bank supervision should avoid interfering with banks' day-to-day credit operations.

To reiterate the importance of bank lending at this critical stage in the economic cycle, we have an on-going dialogue with our regional directors about credit availability. It has been re-emphasized that examiners should encourage banks to originate and renew prudently underwritten commercial loans and work cooperatively with borrowers facing financial difficulties. Examiners will not criticize financial institutions for making good loans or entering into prudently structured workout arrangements. These expectations are consistent with the FDIC's bank examination process and policy guidance that has been issued to the institutions we supervise.

The crux of many of the complaints about refinancing commercial loans seems to center on what is a performing loan. We hear that loans are considered to be in performing status by many borrowers because they are current on the interest payments. However, in some cases, the interest payments are coming from the loan proceeds -- often because the borrower is in a deteriorating financial condition. It is difficult for the bank, and the examiner, to not consider this situation a potential problem. In other cases, borrowers complain that examiners are telling banks that more equity is needed when the collateral goes down in value. To be clear, FDIC examiners focus on borrower cash flow as the primary source of repayment during our credit reviews -- not on collateral support which serves a secondary or tertiary source of repayment. When reviewing loans during our examinations, we look at collateral documentation, but also closely focus on the borrower's financial strength, as well as other critical elements of credit support such as guarantor support, business cash flow and prospects. The borrower's willingness and ability to keep payments current, especially when economic conditions are stressed, is always the primary evaluative criterion for our loan reviews.

We have also reached out to the industry to help us frame policies and supervisory procedures that will help lenders navigate through this credit cycle and become more comfortable extending and renewing loans. One of the first steps in this process was to establish the FDIC's Advisory Committee on Community Banking in mid-2009 to better enable our Board and senior management to have a dialogue with the industry on how we can improve our supervisory programs and foster improved availability of credit. The Advisory Committee met most recently on January 28th where we discussed many of the issues we are discussing today in this testimony -- issues facing the community bankers including credit availability and access to the capital markets. We also discussed interest rate risk exposure, funding issues and other topics of interest to community bankers in this current financial environment. The Advisory Committee will continue to meet regularly and provide direct input from community bankers on the many critical issues they currently face. Our expectation is that, together, we can come up with creative solutions to address some of the difficult challenges facing the industry. Community banks are the lifeblood of their communities, making loans to countless individuals, small businesses, not-for-profit organizations and other community-based organizations, so we must ensure the continued viability of well-run community banks.

From a banking policy perspective, the FDIC has issued several statements that encourage financial institutions to continue making prudent CRE loans and working with borrowers that are experiencing difficulty. We have been providing this encouragement since the onset of the current crisis. In March 2008, we issued a Financial Institutions Letter on Managing CRE Concentrations in a Challenging Environment which reiterated supervisory guidelines for managing CRE portfolios, while encouraging banks to keep prudent CRE credit available in their markets. At the time, we recognized that credit for small business and commercial real estate had become relatively scarce, and our goal was to support banks' efforts to continue lending despite difficult market conditions.

In November 2008, the FDIC joined the other federal banking agencies in issuing the Interagency Statement on Meeting the Needs of Creditworthy Borrowers to encourage banks to continue making loans available to creditworthy borrowers and work with mortgage borrowers that are having trouble making payments. The banking agencies remain committed to this Statement as it promotes lending to creditworthy customers, working with mortgage borrowers that need relief, and implementation of appropriately structured compensation programs.

More recently, in October 2009, we joined the other financial regulators in issuing the Policy Statement on Prudent Commercial Real Estate Workouts. This Policy Statement encourages banks to restructure commercial real estate loans, applying appropriate and long-standing supervisory principles in a manner that recognizes pragmatic actions by lenders and borrowers are necessary to weather this difficult economic period.

As I mentioned earlier, the regulators have also issued the Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers on February 5th, to encourage prudent lending and emphasize that examiners will apply a balanced approach in evaluating small business loans. We believe this statement will help banks become more comfortable extending soundly underwritten and structured small business loans.

We will continue our dialogue on credit availability with the banking industry, members of Congress, and the public in 2010. As I stated earlier, bank lending is an essential aspect of economic growth and will be vital to facilitating a recovery. Our efforts to communicate supervisory expectations to the industry should help banks become more comfortable extending and restructuring loans, and in turn strengthen business conditions and hasten a much-awaited recovery.


FDIC-insured banks are uniquely equipped to meet the credit needs of their local markets, and have a proven tradition of doing so, through good times and bad. However, in the wake of the longest and deepest recession since the 1930s, large dislocations in real estate and credit markets are contributing to an economic recovery that is characterized by weak private demand and persistent high unemployment. While it will clearly take time to fully resolve these credit market dislocations, there is a clear need for policies that promote the prompt and orderly workout of existing problem loans and that enhance the ability of lenders to make new credit available to qualified household and business borrowers.

In concert with other agencies and departments of the federal government, the FDIC continues to employ a range of strategies designed to ensure that credit continues to flow on sound terms to creditworthy borrowers. Banks are being encouraged to work with borrowers that are experiencing difficulties during this difficult period whenever possible. While many challenges remain before us, I am confident that the banking industry as a whole is moving in the right direction -- toward sounder lending practices, stronger balance sheets, and a greater capacity to meet the credit needs of their communities.

1 Noncurrent loans are those that are 90 days or more past due or on nonaccrual status.

2 "NFIB Small Business Economic Trends," January 2010.

3 "NFIB Small Business Economic Trends," January 2010.

4 Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices, January 2010, http://www.federalreserve.gov/boarddocs/SnLoanSurvey/

5 "NFIB Small Business Economic Trends," January 2010.

6 U.S. Department of Treasury, "Treasury, SBA Host Small Business Financing Forum," November 18, 2009, http://www.treas.gov/press/releases/tg411.htm

7 Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices, January 2010, http://www.federalreserve.gov/boarddocs/SnLoanSurvey/

8 Property and Portfolio Research


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Statement of Martin J. Gruenberg, Vice Chairman, Federal Deposit Insurance Corporation

Statement of Martin J. Gruenberg, Vice Chairman, Federal Deposit Insurance Corporation on the Condition of Small Business and Commercial Real Estate Lending in Local Markets before the Committee on Financial Services and Committee on Small Business of the U.S. House of Representatives delivered on February 26, 2010 are available at the following link:


FDIC speeches, testimony, and other information are available on the Internet at www.fdic.gov, by subscription electronically (go to www.fdic.gov/about/subscriptions/index.html) and may also be obtained through the FDIC's Public Information Center (877-275-3342 or 703-562-2200).



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February 24, 2010

15.997 Practice of Finance: Advanced Corporate Risk Management

15.997 Practice of Finance: Advanced Corporate Risk Management

As taught in: Spring 2009

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February 23, 2010

New eLearning Course Helps Underwriters Interpret Appraisal Reports

New eLearning Course Helps Underwriters Interpret Appraisal Reports

Our new e-learning tutorial, Analyzing Residential Appraisals, teaches you how to interpret the information on the Uniform Residential Appraisal Report, Form 1004.




The recorded tutorial has four main sections:

  1. "Appraisal Basics" covers the fundamental information that you need to know about the appraisal process.
  2. "Explore Form 1004" enables you to learn exactly what to look for in every section of the Form 1004, the Uniform Residential Appraisal Report. You'll learn our guidelines, how to spot red flags that may indicate errors or even fraud, and where to get detailed information on that particular section.
  3. "Try and Apply" presents several different scenarios that enable you to apply what you've learned.
  4. "Test My Knowledge" is a quiz that enables to see just how well you know the material.




In this course, you determine the curriculum -- from a high-level overview to precise detail -- so you can concentrate on the areas you need the most help with. Once you complete the course, you can continue your learning by accessing the "Attachments" section, which contains links to more appraisal resources on eFannieMae.com.



The course ends with an evaluation, where you can give us your opinion and help us provide the training resources that you need to succeed.



Remember, like all of our e-learning courses, Analyzing Residential Appraisals is free, and available 24 hours a day, seven days a week, on eFannieMae.com.

Analyzing Residential Appraisals

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spacer2/19/2010www.LandAndFarm.comNews and property listingsspacer

1. Creating Biofuel from Forestland
2. Carbon Offsets Deals Announced
3. Large Conservation Easement in Virginia
4. Recent Properties

 Creating Biofuel from Forestland

RWE Innogy, a Germany-based electric power and natural gas company, recently announced that it will be building a new bioenergy plant in Georgia.  The plant, which will cost RWE Innogy $150 million to build, is expected to produce 750,000 wood pellets from Georgia forests each year.  These will then be shipped to Europe and turned into fuel.  This project is expected to help RWE reduce its use of coal.

While many such projects have already failed, hopes are high that this one, which is sending the wood pellets to Europe, rather than the United States, will have more success.  Many countries that ratified the Kyoto Protocol, including Germany, are seeking to lower their greenhouse emissions under the terms of the mandate.  The United States chose not to ratify the Kyoto Protocol, so many consider the United States market for biofuel more sluggish than its European counterparts.

It's a win-win situation for Georgia, which, according to state officials, has more than 24 million acres of forestland, which are growing 30 percent faster than they are being harvested.

Jane Stuckey, director of Georgia's Center of Innovation for Energy, noted that more U.S.-European deals might be in the works.

Perhaps more biofuel plants will lead to a greater demand for timber.  Only time will tell.

To read the full article on RWE Innogy's new bioenergy plant, click http://www.ajc.com/business/bioenergy-plant-coming-to-279267.html

To learn more about the Kyoto Protocol, click http://unfccc.int/kyoto_protocol/items/2830.php.

 Carbon Offsets Deals Announced

CE2 Carbon Capital has recently announced new carbon offsets deals that are hoped to help the environment and develop the U.S. carbon market.

One such deal is a joint project with Dogwood Carbon Solutions to develop carbon offsets in the Ozark mountain region of Missouri and Arkansas.  The project will rely on individual landowners, who must agree to manage their forests sustainably in return for a share of the carbon offsets profits.  Some of the sustainable foresting practices outlined by the project include extended rotations and greater retention of trees at harvest.

CE2 Carbon Capital also announced a $12 million carbon offsets transaction, in which it was the buyer.  The deal also included Goldman Sachs Group and Blue Source, which develops carbon capture and storage projects.  The deal is being touted as representative of a growing carbon offsets market.

CE2 Carbon Capital, finances and develops environmentally-friendly projects.  It also purchases carbon offsets to add to its portfolio.  Carbon offsets can be purchased by government, firms, or individuals.  The offsets help fund a project that prevents one ton of greenhouse gases from entering the environment for each ton that you have wasted.

According to Alan Heaton from CE2 Carbon Capital, "The deal [with Goldman Sachs and Blue Source] signifies how important offsets are likely to be under a federal cap-and-trade program.  It shows there is real capital and high-profile participants that are in the market today."

To learn more about the carbon offsets project in the Ozarks, click http://greeninc.blogs.nytimes.com/2010/01/20/forest-carbon-offsets-in-the-ozarks/.

To read about the $12 million carbon offsets transaction, click http://greeninc.blogs.nytimes.com/2009/10/12/firms-announce-major-offsets-transaction/.

CE2 Carbon Capital: http://www.ce2capital.com/

 Large Conservation Easement in Virginia

In a complex transaction, the Hancock Timber Resource Group sold a 13,000 acre tract of mixed forest to The Nature Conservancy which then sold it to forestry investment firm The Forestland Group.  The Nature Conservancy kept a conservation easement on the property to regulate development of the ecologically significant property.

In this case the easement prohibits timber harvesting in wetlands, and within 100 feet of wetlands and streams, according to The Nature Conservancy website.  In Virginia, Hancock Timber has previously sold properties to The Nature Conservancy.

More on:

This sale of land: http://www.nature.org/wherewework/northamerica/states/virginia/press/press4378.html

Hancock Timber Resource Group: http://www.htrg.com/

The Nature Conservancy: http://www.nature.org/

The Forestland Group:  http://www.forestlandgroup.com/

Conservation Easements: http://www.nature.org/aboutus/howwework/conservationmethods/privatelands/conservationeasements/

Sample of Recent Properties

Cattle Ranch 25000 Acres Land (agriculture - dairy, agriculture - pasture/ranch, land - hunting) 25,000 acres. Cordoba, Argentina
Homestead Tn Land For Sale (agriculture - farm, land - hunting, land - residential) 18 acres. Tennessee
56 Acres, House & Horse Barn (agriculture - horse, land - recreational, land - residential) 56 acres. Bridgewater (W. Winfield), New York
270 Acres Gentry Co Mo (agriculture - agribusiness) 270 acres. Missouri
1435 Acres North Mo (agriculture - agribusiness) 1,435 acres. Missouri
12 Ac Brick Ranch Jackson Oh (land - residential, other - historic, timberland - natural) 12 acres. Jackson , Ohio
5 Acre Farms (agriculture - farm, land - hunting, timberland - natural) 5 acres. Barnwell, South Carolina
125 Acres Gentry Co Mo (agriculture - agribusiness) 125 acres. Missouri
Yellow Rose Ranch (land - recreational) 14 acres. Winslow, Indiana
409 Acres Gentry Co Mo (agriculture - agribusiness) 409 acres. Missouri
445 Acres Gentry Co Mo (agriculture - agribusiness) 445 acres. Missouri
146 Acre Pa. Farm At Auction (agriculture - farm) 146 acres. Greencastle, Pennsylvania
Heritage Log Home On 10 Acres (agriculture - horse, agriculture - pasture/ranch, land - residential) 10 acres. Guysville, Ohio
River Ridge Cabin On 23 Acres (land - recreational, land - residential, other - waterfront) 23 acres. Randolph, Virginia
89.71 Acres (land - recreational) 90 acres. Cairo, West Virginia
4 Preserved Farms For Auction (agriculture - farm, land - residential, land - undeveloped) 84 acres. Whitehouse Station, New Jersey
Cheap Land Cheap Land (land - recreational, timberland - natural) 106 acres. Barnwell, South Carolina
Executive Home On 29 Acres (agriculture - farm, agriculture - horse, land - residential) 29 acres. Manchester, Tennessee
26 Acre Pa. Farm (agriculture - farm, land - residential, land - undeveloped) 26 acres. Greencastle, Pennsylvania
Prime Commercial Property (land - commercial/other) 12 acres. Kentucky
5 Acres-3br Home Swimming Pool (land - residential) 5 acres. Kentucky
382.2 Adair (land - hunting, land - recreational, timberland - natural) 382 acres. Missouri
Grundy 280 (land - hunting, land - recreational, timberland - natural) 280 acres. Missouri
282 Sullivan (land - hunting, land - recreational, timberland - natural) 282 acres. Missouri
World Famous Tourmaline Mine (land - oil or minerals, land - recreational, other - waterfront) 20 acres. Poland, Maine
Cheap Land Florida Panhandle (agriculture - horse, land - hunting, land - residential) 10 acres. Bonifay, Florida
Spencer Mountain Paradise (land - hunting, land - residential, timberland - natural) Spencer, Tennessee
Long Term Land Investment (agriculture - agribusiness, land - residential, land - undeveloped) 102 acres. Red Wing, Minnesota
Real Estate Auction (land - residential) 1 acre. North Carolina
Lot On Elk River (land - recreational, other - waterfront, land - undeveloped) West Virginia
Auction 78 Acres In 4 Tracts (land - hunting, land - recreational, other - waterfront) 78 acres. Illinois
119 Ac Farm (land - hunting) 119 acres. Kentucky
60 Acres Of Valley With Stream (agriculture - pasture/ranch, land - hunting, land - residential) 60 acres. Tennessee
Carwell Farm (agriculture - farm, land - hunting) 636 acres. Parkin, Ark., Arkansas
Lindsey''s Gilmore Farm (agriculture - farm, land - hunting) 1,496 acres. Gilmore, Ark., Arkansas
300ac For Lease (land - hunting) 300 acres. Kentucky
Incredible 258 Ac (land - hunting, land - recreational) 258 acres. Kentucky
Incredible Hunting (land - hunting) 148 acres. Kentucky
Prime Farm (land - hunting, land - recreational) 180 acres. Augusta, Ark., Arkansas
Swift Ditch Farms Coldwater (agriculture - farm, land - hunting) 2,554 acres. Parkin, Arkansas
West Ridge Farm (agriculture - farm, land - hunting) 473 acres. Lepanto, Ark., Arkansas
Moore Moore Farm (agriculture - farm, land - hunting) 1,040 acres. Arkansas
Maple Creek Farm (agriculture - farm, agriculture - vegetable, agriculture - vineyard) 701 acres. Augusta, Ark., Arkansas
Tde Farm And Hunting (agriculture - farm, land - hunting) 200 acres. Arkansas
Goat Farm And Cheese Making (agriculture - dairy, land - commercial/other, other - waterfront) 220 acres. East Branch, New Brunswick, Canada
786 Acre Farm (agriculture - farm, agriculture - organic, agriculture - vegetable) 786 acres. Hooper, Colorado
412 Acres In Clark Co Il (agriculture - farm, land - hunting, land - recreational) 412 acres. Marshall, Illinois
Custom Mountain Home (land - recreational, land - residential) 10 acres. North Carolina
Gorgeous Home 27 Acres (agriculture - farm, agriculture - horse, agriculture - pasture/ranch) 27 acres. LAWRENCEBURG, Tennessee
63.52 Acres (agriculture - farm, land - recreational) 64 acres. Pennsboro, West Virginia
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FDIC-Insured Institutions Report Earnings of $914 Million in the Fourth Quarter of 2009

FDIC-Insured Institutions Report Earnings of $914 Million in the Fourth Quarter of 2009
Full-Year Net Income Totaled $12.5 Billion

February 23, 2010

Media Contact:
Andrew Gray (202) 898-7192



Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $914 million in the fourth quarter of 2009, a $38.7 billion improvement from the $37.8 billion net loss the industry sustained in the fourth quarter of 2008, but still well below historical norms for quarterly profits. More than half of all institutions (50.3 percent) reported year-over-year improvements in their quarterly net income. Almost one-third of all institutions (32.7 percent) reported net losses for the quarter, compared to 34.6 percent a year earlier. For the full-year, banks reported net income totaling $12.5 billion – up from $4.5 billion in 2008.

"Consistent with a recovering economy, we saw signs of improvement in industry performance," said FDIC Chairman Sheila C. Bair. "But as we have said before, recovery in the banking industry tends to lag behind the economy, as the industry works through its problem assets."

Several factors contributed to the year-over-year improvement in quarterly earnings. Noninterest income was $21.7 billion (53.2 percent) higher in the fourth quarter than a year earlier and noninterest expense declined by $16.2 billion (14.2 percent). Realized losses on securities and other assets were $8.7 billion lower and net interest income was $1.7 billion (1.8 percent) higher. Provisions for loan losses totaled $61.1 billion in the quarter, a decline of $10.0 billion (14.1 percent) from the fourth quarter of 2008. This is the first time since the third quarter of 2006 that quarterly loss provisions have been below year-earlier levels.

The FDIC noted that indicators of asset quality continued to deteriorate during the fourth quarter, although the pace of deterioration slowed for a third consecutive quarter. Insured banks and thrifts charged off $53.0 billion in uncollectible loans during the quarter, up from $38.6 billion a year earlier, and noncurrent loans and leases increased by $24.3 billion during the fourth quarter. At the end of 2009, noncurrent loans and leases totaled $391.3 billion, or 5.37 percent of the industry's total loans and leases.

Total loans and leases declined by $128.8 billion (1.7 percent) during the quarter. This is the sixth consecutive quarter in which the industry's loan balances declined. Loans to commercial and industrial (C&I) borrowers declined by $54.5 billion (4.3 percent) and real estate construction and development loans declined by $41.5 billion (8.4 percent).

Referring to more stringent lending standards and lower real estate values, Chairman Bair said, "Resolving these credit market dislocations will take time. We encourage institutions to lend using a balanced approach as outlined in the recent interagency policy statements. Institutions should neither over-rely on models to identify and manage concentration risk nor automatically refuse credit to sound borrowers because of those borrowers' particular industry or geographic location."

Total assets of insured institutions declined by $137.2 billion (1.0 percent). Banks' investments in mortgage-backed securities increased by $44.8 billion (3.3 percent) and U.S. Treasury securities rose by $15.9 billion (18.3 percent).

Financial results for the fourth quarter and the full year are contained in the FDIC's latest Quarterly Banking Profile, which was released today. Among the other findings:

Full-year revenues were higher than in 2008. Noninterest income, which had fallen in each of the two previous years, was $52.8 billion (25.4 percent) higher than in 2008, while net interest income was $38.1 billion (10.6 percent) higher. These improvements were partially offset by a $71.5 billion (40.6 percent) rise in loan loss provisions in 2009. Fewer than half of all institutions (41 percent) reported increased net income in 2009, and 29.5 percent of all insured institutions posted net losses for the year.

As expected, the number and total assets of institutions on the FDIC's "Problem List" continued to rise. At the end of December, there were 702 insured institutions on the "Problem List," up from 552 on September 30. In addition, the total assets of "problem" institutions increased during the quarter from $345.9 billion to $402.8 billion. Forty-five institutions failed during the fourth quarter, bringing the total number of failures for the year to 140, the highest annual total since 1992.

The FDIC's liquid resources – cash and marketable securities -- increased to $66 billion at year-end from $23 billion at the end of September. To provide the funds needed to resolve failed institutions in 2010 and beyond without immediately reducing the industry's earnings and capital, the FDIC Board approved a measure on November 12th that required most insured institutions to prepay about three years worth of deposit insurance premiums – almost $46 billion – at the end of 2009.

The Deposit Insurance Fund (DIF) balance – the net worth of the fund – decreased by $12.7 billion during the fourth quarter. The fund balance of negative $20.9 billion (unaudited) as of December 31 reflects a $44 billion contingent loss reserve that has been set aside to cover estimated losses. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated losses to the DIF from insured institution failures. Combining the fund balance with this contingent loss reserve shows total DIF reserves of $23.1 billion.

Total insured deposits increased by 13.5 percent ($641.3 billion) during 2009, which reflects the temporary increase in the standard maximum FDIC deposit insurance amount from $100,000 to $250,000.

The complete Quarterly Banking Profile is available at http://www2.fdic.gov/qbp on the FDIC Web site.

# # #

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's banking system. The FDIC insures deposits at the nation's 8,012 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars – insured financial institutions fund its operations.

FDIC press releases and other information are available on the Internet at www.fdic.gov, by subscription electronically (go to www.fdic.gov/about/subscriptions/index.html) and may also be obtained through the FDIC's Public Information Center (877-275-3342 or 703-562-2200). PR-36-2010

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February 20, 2010

The Rulemaking Gateway


The Rulemaking Gateway provides information to the public on the status of EPA's priority rulemakings. Use the tabs at the top of this page to sort the rules according to specific criteria, or view a list of all of the priority rulemakings currently in the Gateway. Go to About the Rulemaking Gateway to learn more.



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February 18, 2010

Department of Justice Press Release
white spacer
For Immediate Release
February 17, 2010
United States Attorney's Office
Central District of California
Contact: (213) 894-2434

Long Beach Man Pleads Guilty in $33 Million Ponzi that Lured Investors with Promises of Profits in Real Estate

A 33-year-old Long Beach man who operated a number of ventures that he used to solicit money with false claims of profitable investments in real estate has pleaded guilty to a federal wire fraud charge.

Jon Weldon James pleaded guilty yesterday afternoon to the federal offense related to his Ponzi scheme that collected more than $33 million from his El Segundo-based venture that operated under a series of names, including J.W. James and Associates, Inc., and The Cloaking Device, Inc.
Appearing before United States District Judge R. Gary Klausner, James pleaded guilty and admitted that he defrauded more than 50 individuals who invested in his real estate-related investments from late 2003 through August 2006. James offered his investments through face-to-face meetings that included hosting presentations at restaurants, where he encouraged victims to invest their savings or money from their Individual Retirement Accounts.

While James told victims that he was using their money to invest in real estate and sent account statements that purported to show profits to some investors, James invested in only a few properties and made absolutely no profit from any real estate-related investments. However, in the hallmark of a Ponzi scheme, James used investors’ money to repay other investors who requested withdrawals of their funds. James also used investor money to pay for personal expenses, which included his wedding and an investment in a recording studio and production company called “On the Ball Entertainment.”

After taking in approximately $33 million from investors, repaying some investors and spending millions on personal and business expenses, James’s illegal conduct caused losses of approximately $11 million.

James is scheduled to be sentenced by Judge Klausner on May 24, at which time he faces a statutory maximum sentence of 20 years in federal prison.

The case against James was investigated by the Federal Bureau of Investigation.

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Hello Broker,

Hello Broker,

Understanding the DSCR or Debt Service Coverage Ratio in Commercial Mortgage Lending
When underwriting a commercial real estate loan, one of the most important factors used to determine the approvability of a commercial mortgage request is the DSCR, commonly referred to as the debt service coverage ratio.

The DSCR is a ratio used to analyze the amount of debt that can be supported by the cash flow generated from the property. Or, simply the net income generated by the property divided by the new commercial mortgage payment.

In commercial mortgage lending, the DSCR is equivalent to the debt-to-income, or DI ratio in residential lending. Whereas in residential lending, the income and expenses used in the calculation are the borrower's, it is the exact opposite in commercial mortgage lending. The income and expenses used in calculating the DSCR ratio are derived from the commercial property.
Understanding the DSCR and Commercial Mortgage Lending

One of the most frequent reasons a commercial loan is denied is because the property does not meet the commercial lender's minimum DSCR requirements. Understanding how a commercial mortgage lender calculates the DSCR can be helpful to know when applying for a commercial real estate loan, conduit loan, or apartment loan.
DSCR = NOI/Total Debt Service

A common misconception made by borrowers when applying for a commercial mortgage loan is that the bank or commercial lender only uses the expenses from the property when calculating the NOI. Commercial mortgage lenders use the actual expenses plus additional holdbacks, such as, off-site management, vacancy, replacement reserves, repairs and maintenance, etc. Commercial lenders add these numbers to the expenses for several reasons, including, should the borrower default - management fee holdback, should the property lose a tenant (s) -vacancy factor, increase in costs, buffer for unexpected repairs, etc.
Calculating the Debt Service Coverage Ratio - DSCR -

Here is a basic example of how a commercial mortgage lender calculates the DSCR for a commercial loan request. The lender holdbacks are highlighted in blue, remember these are not actual expenses, but they are deducted from the property's gross income for underwriting purposes. Example assumes a 75 unit property multifamily property.
Gross Rents $1,000,000
Other Income
Total Annual Gross Income $1,000,000
Less 5% Vacancy & Collection Loss $50,000
Effective Gross Income: $950,000
Real Estate Taxes $15,000
Property Insurance $5,000
Repairs & Maintenance $5,000
Pest Control $5,000
Janitorial $5,000
Utilities $5,000
5% Off Site Management Reserve $50,000
Replacement Reserves
$200 Per Unit @ 75 Units $15,000
Total Operating Expenses: $105,000
Net Operating Income (NOI) $845,000

Now that we have calculated the NOI, we must calculate the total debt service for the property, or simply determine the loan payment consisting of only the principal and interest. We do not include the taxes and insurance as they are accounted for in the expenses of the property.

To calculate the debt service coverage ratio, simply divide the net operating income (NOI) by the commercial mortgage loan payment.

Commercial Loan Size: $10,000,000 First Mortgage
Interest Rate: 6.5%
Term: 30 Years
Annual Payments (Debt Service) = $758,475

Now we can calculate the DSCR:
DSCR = Net Operating Income (NOI) = $845,000
Total Debt Service $758,475
DSCR = 1.10

What this example tells us is that the cash flow generated by the property will cover the new commercial loan payment by 1.10x. This is generally lower than most commercial mortgage lenders require. Most lenders will require a minimum DSCR of 1.20x.

If a DSCR is 1.0x, this is called breakeven, and a DSCR below 1.0x would signal a net operating loss based on the proposed debt structure.

Recently a new breed of commercial lenders, including CommercialBanc, are offering commercial real estate loans based on a global DSCR. A global DSCR is a ratio that combined both personal and property income and expenses when calculating the DSCR. This allows for a propertys with weak cash flow, or a property in a low CAP area, to still qualify for a commercial loan provided the borrower has additional income to add the the property's NOI.

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The commercial real estate dilemma

The commercial real estate dilemma

By David Ellis, staff writer

NEW YORK (CNNMoney.com) -- Luckily for banks, the commercial real estate time bomb just keeps on ticking.

Industry observers have issued dire warnings for more than a year, suggesting that lenders are on a collision course with potentially billions of dollars worth of commercial real estate losses.


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11th Circuit: County Reasonably Concluded Something Might Be Going On In The Champagne Room

11th Circuit: County Reasonably Concluded Something Might Be Going On In The Champagne Room

Posted: 17 Feb 2010 10:24 AM PST

Contradicting Chris Rock's dictum (caution, may be very offensive), Fulton County, Georgia concluded there might be something untoward going on in the Champagne Room, at least in those serving alcohol. In Flanigan's Enterprises, Inc. of Ga. v. Fulton County, No. 08-17035 (Feb. 16, 2010), the U.S. Court of Appeals for the Eleventh Circuit held the County's conclusion was not irrational.

The county commissioners believed that strip clubs featuring nude dancing might have a relationship to crime and lowered property values, so they commissioned local studies of the issue and gathered studies from other areas. The local studies revealed no relationship between strip clubs and crime or property values. But relying on the "foreign studies" which showed otherwise, the commissioners barred alcohol in strip clubs and other "adult entertainment establishments."

For its troubles, the County was sued by the owner of a strip club for First Amendment violations, and the 11th Circuit eventually agreed. The County was not required to study the issue, but having done so, it could not ignore the results. Flanigan’s Enters., Inc. of Ga. v. Fulton County, 242 F.3d 976, 986 (11th Cir. 2001).

Back to the drawing board the County went. It commissioned two more local studies. The first again showed that alcohol-serving strip clubs did not have a large impact. The second, however, showed they do. Appended to the second report were more studies from other jurisdictions showing the negative effects of adult entertainment establishments such as increased crime and lowered property values. After a public hearing and testimony, the County adopted another ordinance barring alcohol in strip clubs.

Predictably, strip club owners brought another suit claiming the ordinance violated their constitutional rights. The district court agreed, holding the ordinance did not further an important governmental interest, because the first report (showing no relationship) was the most probative.

On appeal, the 11th Circuit applied the intermediate standard of review, noting that the only real area of contention was whether the ordinance furthered some governmental interest. See slip op. at 23-24. To meet that test, the government must have some factual basis for the claim that the adult establishments cause the problems the ordinance is designed to address. Read pages 24 to 27 for a summary of the kind of evidence the government needs to have in order to be deemed to have acted reasonably. The court was satisfied that the second report and the additional foreign studies provided a sufficient basis for the County to conclude the alcohol ban was needed.

The strip club pointed out the other study which showed the opposite, but the court held that it wasn't its job to select which report it thought was the best, only to determine whether the County was reasonable when it relied on one report versus the other. Here's the money quote:

The foundation upon which the County relied need not be perfect; it need only be reasonable. We emphasize that, in this context, the County need not offer advanced statistical evidence, nor refute every conceivable interpretation of the data, even if those interpretations may be more compelling than the one reached by the municipality. It need only show that it acted reasonably, and here, Fulton County has met this burden.

Slip op. at 32.

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Get The Latest News with NH&RA

Get The Latest News with NH&RA

The Federal Housing Administration (FHA) is proposing dramatic changes to the underwriting of its 221(d)(4) and 223(f) programs that could make it much harder for developers to utilize HUD insured loans.  This comes at a particularly challenging time when conventional multifamily debt is very hard to come by.

Many developers are concerned that raising debt-service-coverage ratios and working-capital funds may put ‘the only game in town’ out of reach for many low-income housing-tax-credit developers and market-rate developers, whose only alternative will be to put more personal equity on the line. FHA is also considering new Multifamily Accelerated Processing (MAP) Lending guidelines that will include enhanced market study standards as well as new screening measure for lenders applying for a MAP license.

These proposed changes will have far reaching consequences on how affordable housing is financed. If you are a developer thinking about using FHA Mortgage Insurance, a MAP Lender or market analyst you NEED to watch these changes carefully and NH&RA can help. We will be hosting events two events in March and April with dedicated sessions that will explore the implications of these changes and how they will impact your next transaction.

NH&RA Affordable Housing Conference
March 10-13, 2010
The Ritz-Carlton South Beach
Miami Beach, Fla.

NCAHMA Spring Underwriting Forum
April 7-8, 2010
The Intercontinental Hotel
New Orleans, La.

Join us in Miami or New Orleans and get in on the discussion. Questions? Contact Thom Amdur at 202-939-1753 or tamdur@housingonline.com. Learn more about NH&RA Events at: http://www.housingonline.com/Events.aspx

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February 17, 2010

Appraisal Practices Board (APB) to Commence Work in

Appraisal Practices Board (APB) Applications Now Available

Appraisal Practices Board (APB) to Commence Work in July 2010

For Immediate Release

Contact:     Paula Douglas Seidel, 202.624.3048, paula@appraisalfoundation.org


Washington, DC, February 17, 2010  The Appraisal Foundation, a Congressionally authorized non-profit organization dedicated to promoting professionalism in appraising through the establishment of appraisal standards and appraiser qualifications, announced today that applications are now available for qualified candidates to serve on the Appraisal Practices Board (APB).


Late last year, the Foundation Board of Trustees unanimously voted to establish this new Board.  The APB will be charged with studying the issue of how to best address a void in the marketplace related to guidance on appraisal methods and techniques that would be available to all appraisers practicing in the United States.   This guidance will eventually cover all valuation disciplines, with a focus on emerging issues. 

After a recent vote of the Board of Trustees to amend the Bylaws and Articles of Incorporation, the APB has now been officially established.  The new Board will be similar in structure and composition to the already existing independent boards, the Appraiser Qualifications Board (AQB) and the Appraisal Standards Board (ASB). 

The purpose of the APB is to issue voluntary timely guidance to appraisers on emerging valuation issues that are occurring in the marketplace.  This guidance will be of assistance to appraisers, appraiser regulators and educators.  The new Board will enlist the help of market surveys to identify issues that need to be addressed and will empanel small groups of volunteer Subject Matter Experts (SME) to draft the guidance for review and approval by the Board.  The SME panels will be selected by the APB to address specific topic issues within agreed upon timeframes.  It is anticipated that the SME panels will be established in the latter part of 2010. 

The Appraisal Foundation is now seeking qualified candidates to serve on the APB.  The APB will commence work in July 2010.  Examples of qualifications that the Boards Nominating Committee will seek in candidates include the following:

  • A minimum of ten years of appraisal experience
  • A strong familiarity with the Uniform Standards of Professional Appraisal Practice (USPAP)
  • Familiarity with valuation methodology and techniques
  • Experience in writing on valuation topics and/or curriculum development
  • Experience with public speaking and/or teaching on valuation topics
  • Experience in serving on a publicly accountable board.

The APB will be a multi-disciplinary board and therefore, The Appraisal Foundation is seeking candidates from various appraisal disciplines.

The Application factsheet and form is available online on the Foundation’s web site (https://appraisalfoundation.sharefile.com/d-seaa4a4152734b0eb).  Applications will be reviewed by the Boards Nominating Committee of The Appraisal Foundation and an extensive interview process will be conducted.  The final interviews will be conducted in a public forum at the Spring Meeting of the Board of Trustees on May 21, 2010 in California.  Inquiries on the Application or the selection process can be directed to Paula Douglas Seidel (paula@appraisalfoundation.org). 

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February 14, 2010

Important FHA notice for all mortgagees:

This is the HUD national homeownership center reference guide mailing list for real estate industry professionals that are interested in updates to HUD Mortgagee letters, notices and guidebooks, & FHA Housing Industry Training. Please visit our homepage at: http://www.hud.gov/offices/hsg/sfh/hsgsingle.cfm Servicing lenders can visit HUD's National Servicing Center at: http://www.hud.gov/offices/hsg/sfh/nsc/nschome.cfm This list does not provide HudHome property listings.





Important FHA notice for all mortgagees: The February 15, 2010 Implementation Date Will NOT Change for Mortgagee Letters 2009-28 and 2009-51:



Implementation Date for New Requirements in ML 2009-28:



As indicated in the industry email of December 22, 2009, enactment of ML 2009-28 (Appraiser Independence) WILL be implemented February 15, 2010. ML 2009-28 (originally planned for a January 1, 2010 implementation) has two parts: a) prohibition of mortgage brokers and commission-based lender staff from the appraisal process, and b) appraiser selection in FHA Connection.  The effective date for both sections of this guidance will take effect for all case numbers assigned on or after February 15, 2010.  This extension has allowed FHA and lenders additional time to adjust systems to accommodate the changes. Detailed instructions on changes to FHA Connection will be issued in a new mortgagee letter, which was delayed due to federal offices being shut down the week of February the 8th and will be released the week of February 15th.  



However, lenders will be able to secure a case number assignment in FHA Connection via the Case Number Assignment Screen without inputting the appraiser information. The Case Number Assignment Screen will no longer capture the assignment choice, license ID and assignment date. Instead, lenders will be required to enter all appraisal data, including the appraiser ID, in the Appraisal Logging Screen once the completed appraisal is received by the lender and prior to closing the loan. 



Implementation Date for ML 2009-51:



ML 2009-51, Adoption of the Appraisal Update and/or Completion Report, states an effective date of January 1, 2010. The effective date was extended and will apply to all case numbers assigned on or after February 15, 2010. This extension  provided additional time needed by FHA and lenders to adjust their systems to accommodate use of the form.



All FHA Mortgagee Letters can be read online at: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/







Freddie Mac Alternatives to Foreclosure Training for Housing Counselors:
March 1, 2010 - Atlanta, Georgia. Seats are filling up fast so register soon for this course sponsored by Freddie Mac. This 1-day workshop provides housing counselors with an understanding about analyzing default situations to determine possible alternatives to foreclosure. It provides information about workout options (with an emphasis on short payoffs & mortgage modifications), applying Freddie Mac requirements, and exploring options that can help keep borrowers in their homes. Registration Required, No fee. For more info: http://www.freddiemac.com/ontrack/html/LearningCenter/ClassDescription.jsp?crsNum=ATFHC

Reminder from Freddie Mac to all Housing Counselors:

Freddie Mac requires signed written authorization from the borrower before they can communicate with Housing Counselor about any borrower's case.  95% of the requests Freddie Mac receives from housing counselors do not contain the authorization.  This delays response time on the case because Freddie Mac must have the authorization to continue.  Please provide the signed written authorization when you first contact Freddie Mac about a borrower.  





RESPA Rule Seminar:



February 19, 2009 – New York, NY. RESPA Rule Seminar. Hosted by HUD’s Office of the Inspector General. Friday, 10:00 a.m. – 2:00 p.m. at the New York Federal Building, 26 Federal Plaza, New York, NY 10278-0068 (Duane Street Entrance), 6th floor Conference Room A & B. If you have any questions please call Migdalia Murati at: 973-776-7316 or David McCarraher at: 215-430-6627. Electronic Registration Required, no fee. Registration link is: http://www.hud.gov/emarc/index.cfm?fuseaction=emar.registerEvent&eventId=367&update=N





HUD-FHA has new career opportunities for qualified individuals.  Recently posted online is the position of:



Underwriter, Vacancy announcement 09-DEU-2010-0006z, (Orange County, CA)



The Vacancy Announcements are posted at www.usajobs.gov  Please visit that website to view the announcements, additional information and to search for additional new HUD job listings.  HUD-FHA also has job opportunities in other locations around the nation.  Please bookmark and revisit www.usajobs.gov  frequently to see the new jobs as they appear online. Application forms can be found at: http://www.usajobs.opm.gov/forms.asp



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MBA Feels Market Crunch, Sells Headquarters

MBA Feels Market Crunch, Sells Headquarters The Mortgage Bankers Association (MBA) has sold its 10-story headquarters for $41.3 million, below the $79 million the trade group says it paid for the property in 2007. The MBA, which was underwater on its loan, refused to discuss its situation. A spokesperson for the MBA said the organization has reached “an agreement with all relevant parties.” CoStar Inc., a commercial real estate information firm, which purchased the property, says it plans to move its headquarters into the building. "It's a little bit of irony that in the middle of the mortgage crisis brought on by the bad lending practices of many members of the Mortgage Bankers Association that they got caught up in the same problem," Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group, told The Washington Post. As the real estate market crashed, the association's membership has continued to fall. Its membership fell to 2,500 from 3,000 in 2008, officials had said. The company was “fortunate to be able to take advantage of what we see as a historic opportunity to secure an exceptional asset at a greatly reduced price,” Andrew Florance, CoStar’s CEO, said in a statement. Source: The Wall Street Journal, James R. Hagerty (02/06/2010) and The Washington Post, V. Dion Haynes (02/05/10)
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February 03, 2010

Abbott & Kindermann Land Use Law Blog] The Fight Over Property Taxes Continues: School District Entitled to Larger Share of Property Tax Increment

Counties and cities must let go of another share of property tax revenues to school districts under the redevelopment law's distribution of the property tax increment.

View the entire entry:

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February 01, 2010

New FHA Mortgagee Letter:

This is the HUD national homeownership center reference guide mailing list for real estate industry professionals that are interested in updates to HUD Mortgagee letters, notices and guidebooks, & FHA Housing Industry Training. Please visit our homepage at: http://www.hud.gov/offices/hsg/sfh/hsgsingle.cfm Servicing lenders can visit HUD's National Servicing Center at: http://www.hud.gov/offices/hsg/sfh/nsc/nschome.cfm This list does not provide HudHome property listings.



New FHA Mortgagee Letter:











SUBJECT: Announcement of the FHA Nonprofit Data Management System



The Department of Housing and Urban Development is pleased to announce the Federal Housing Administration's (FHA) newly developed Nonprofit Data Management System (NPDMS). NPDMS is an automated web-based program management tool designed to improve the application, recertification, and reporting process for organizations that participate in the Office of Single Family Housing (OSFH) activities and to assist HUD staff with the daily administration of FHA’s Nonprofit Program activities…



To read this mortgagee letters and any attachments in their entirety, please visit: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/ view the 2010 letters and click on the letter of your choice. Mortgagee Letters from previous years can be found on the same page.






HUD-FHA has new career opportunities for qualified individuals.  Recently posted online are the positions of:


Senior Single Family Housing Specialist (QAD) Vacancy announcement F10-DE-314793-2CL (Denver, CO)


Underwriter, Vacancy announcement F10-DE-314612-2CL (Denver, CO)


Appraiser (Single Family), Vacancy announcement F10-DE-314365-2TT (Orange County, CA)




The Vacancy Announcements are posted at www.usajobs.gov  Please visit that website to view the announcements, additional information and to search for additional new HUD job listings.  HUD-FHA also has job opportunities in other locations around the nation.  Please bookmark and revisit www.usajobs.gov  frequently to see the new jobs as they appear online. Application forms can be found at: http://www.usajobs.opm.gov/forms.asp




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