Bank of America not out of the woods yet!
Underlying Bank of America's (BOA) heap of one-time gains and charges in the last quarter was a sizable decrease in revenue and, in many consumer businesses, loan balances. Though BOA has made concrete progress in spinning off unwanted lines of business, cutting Fannie Mae and Freddie Mac liabilities, and reducing boom-time lending losses, its fourth-quarter results suggest that it is still in the thick of addressing legacy troubles. "It was not a great quarter," said analyst Michael Mayo of Credit Agricole Securities. "If you have two or three quarters like this in a row, then you raise some big issues. … The cleanup is not done, but it is progressing." Revenue dropped 11% year over year, with management citing limited short-term opportunities to make up for the fee income lost to new regulatory restrictions. Brian Moynihan, BOA's chief executive, conceded that the 13,000 extra employees it has working through the mortgage mess at its Countrywide unit aren't going anywhe
re soon, and Bank of America expects its net interest income, now at 2.7%, to fall in the first half.
Though the company made progress in the fourth quarter in tackling government mortgage put-back risks, it also appeared to be bracing for continued fights. Its litigation reserves — a "disproportionate" percentage of it tied to Countrywide — rose to $1.5 billion from $500 million. When asked to forecast this figure, Moynihan said, "it's hard to think about a run-rate for litigation expenses." Year over year, BOA's progress appears more concrete. Over the course of 2010 the company divested 20 business lines that sold for $19 billion. Its Tier 1 capital ratio rose 1.5%, to 8.6%. For the fourth quarter BOA reported $5.1 billion in credit-loss provisions — half what it set aside in the year-earlier quarter. And its net charge-off rate dropped nearly a full percentage point, to 2.87%. Quarter to quarter, however, the improvement was much less dramatic.
Though some of the difference is likely attributable to seasonal issues, B of A lowered its credit-loss provisions only slightly, from $5.4 billion to $5.1 billion. And total non-performing loans showed similarly modest quarter-over-quarter declines, from $34.6 billion to $32.7 billion. Loan growth was weaker than at some rivals. The company's overall average loan book grew 0.7%, to $940.6 billion, from the previous quarter. In commercial and industrial lending, average balances increased by 2% from the third quarter, a sign of "stability," BOA said.
Gas prices on the way up?
The American Petroleum Institute, an oil industry group, made no specific price forecast for 2011 but didn't seem to see a drop anytime soon. "Unless we see increases in supply, it's hard not to see a tighter market," John Felmy, the institute's chief economist, said in a conference call with reporters. Felmy said worldwide oil demand in 2010 hit a record of more than 87 million barrels a day, driven largely by strong growth in India, China and the Middle East. Supply, meanwhile, was constricted by the drilling moratorium in the Gulf of Mexico following the BP disaster, slow production growth in non-OPEC countries, and OPEC production controls.
The government's Energy Information Agency estimates that the drilling moratorium in the Gulf will curtail oil production by about 120,000 barrels a day in 2011. The moratorium has been lifted, but new permits have been slow in coming. OPEC holds just under 5 million barrels a day in production capacity that it is leaving in the ground. Gasoline price have risen 12 cents a gallon, or 4%, in just the last month, according to the motorist group AAA. The nationwide average stands around $3.12 a gallon, less than a dollar below the record high.
Lenders to destroy documents?
Federal bankruptcy judges in Delaware are due to hold separate hearings Monday on requests by two defunct subprime mortgage lenders to destroy thousands of boxes of original loan documents. The requests, by trustees liquidating Mortgage Lenders Network USA and American Home Mortgage, come despite intense concerns that paperwork critical to foreclosures and securitized investments may be lost. A series of recent court rulings have increased the importance of original loan documents, holding that they are essential for investors to prove ownership of mortgages and to have the right to foreclose. In the Mortgage Lenders case, the U.S. Attorney in Delaware has formally objected to the requested destruction because loss of the records "threatens to impair federal law enforcement efforts." The former subprime lender shut down in February 2007.
In a Jan. 6, 2010, motion, Neil Luria, the liquidating trustee, asked Bankruptcy Judge Peter J. Walsh for permission to destroy nearly 18,000 boxes of records now warehoused by document storage company Iron Mountain. In the American Home Mortgage case, the liquidating trustee, Steven Sass, has asked Bankruptcy Judge Christopher Sontchi to approve destruction of 4,100 boxes of loan documents stored in a dank parking garage beneath the company's former headquarters in Melville, Long Island. AHM had been one of the biggest originators of subprime loans until it abruptly collapsed and closed in August 2007.
The boxes are the last still held by AHM. Sass stated that the local fire marshal wants the documents removed as a fire hazard, and he said the cost of moving them would be prohibitive. In accordance with a 2009 court order, the bankrupt company earlier had destroyed the contents of thousands of other boxes after banks and other loan servicers had been given a chance to request and pick up particular files. The issue of document destruction is sensitive because in recent months evidence has turned up that vast numbers of original loan documents by major lenders were never transferred as required when the mortgages were securitized and sold to investors. Lawyers for homeowners have strongly objected to AHM's document destruction, contending that vital evidence borrowers need to defend themselves in foreclosure cases will be lost.
NABE - hiring to improve
The National Association for Business Economics (NABE) said the hiring outlook for the next six months is at a 12-year high. "The number of firms expressing positive hiring plans is at a level not seen in over a decade -- a sign of improving labor-market dynamics," Shawn DuBravac of the Consumer Electronics Association said in a statement. Forty-two percent of companies surveyed said they expect to hire more workers in the next six months, a 13% increase over the same time last year. Meanwhile, 51% expect no change in hiring, while only 7% expect a decrease. GDP projections are also at moderate to high levels, with 62% of respondents planning for real GDP growth of 2% to 3% in 2011, and one in five expecting GDP growth in the 3% to 4% range. In total, 82% of respondents expect GDP growth in excess of 2%, a sharp increase over the 54% who expressed the same level of optimism last year. Respondents were also asked to assess the impact of the sweeping package of tax cuts pa
ssed by Congress late last year.
A slight majority of companies surveyed said they expect sales to improve as a result of the package, while 45% said they anticipate the law will have no effect. Companies are expecting less of a boost in the areas of employment and investment spending, with 68% of firms saying the tax deal will have no effect on hiring, while 37% said it would have a positive effect. Only 1% said hiring would be negatively effected.
CNBC's Olick - beware shadow office space
"Last summer I did some reporting on shadow office space, which is leased space, like individual offices, cubicles or entire floors, that was vacated during the recession. This shadow space was adding as much as 7 percent to office vacancy rates in Los Angeles and over 6 percent in Chicago, according to CoStar Group. Now that the office market appears to be taking a turn for the better, that shadow space will start to fill up, and in most places it will have to fill well before the company looks to take on additional space. Today Grubb & Ellis, a commercial real estate services and investment company, put some numbers to the scenario. "Grubb & Ellis expects that shadow space vacated during the recession will accommodate about one-third of all net new demand in 2011 and about one-fourth in 2012; this activity will not be reflected in the published statistics,' writes Bob Bach, chief economist, in his 'U.S. Office Market First Look: 2010-Q4.' Bach goes on to say that the 'st
ill-tepid rate of hiring,' combined with this shadow space, will keep the office market 'struggling to keep up with prior recovery cycles.' Office buildings gained 2.5 million square feet of occupied space in Q4 of 2010, the first increase since the end of 2007, according to Reis, Inc., a commercial real estate analysis firm, but the 17.6 percent vacancy rate still represents a 17-year high.
That doesn't seem overly concerning to investors in the office market. Pricewaterhouse Coopers surveyed 200 real estate executives, including investors, lenders and brokers, and found more than 70 percent believe the commercial real estate recovery is real. 32 percent say they are looking to invest in the office sector this year, second only to 45 percent who say they would opt for the apartment sector. Yes, 28 percent of office property mortgage loans will mature in 4Q '11, or about $6.8 billion, according to Fitch, in a still healing liquidity situation. But Fitch also reports that the pace of commercial loan modifications is quickening. 'Loan modifications continue to dominate as a resolution method,' writes Managing Director Stephanie Petosa. 'Servicers will resolve loans with increase velocity as liquidity returns to the CMBS market.' As more jobs are created and fewer are lost, the office sector is heading toward recovery. Investors should be careful, however, to tak
e shadow space into account when looking at specific properties and consider distressed properties, as office loan default rates remain high."
Now for our real estate education section...
Bird Dog Bidding Strategies
Congratulations! If you are reading this then chances are you seriously contemplating trying out a real estate auction. Auctions present a great way to find bargains but buying via auction also requires serious negotiation skills for novice investors. One of the more common questions presented by novice bird dogs is how to recognize and develop a competitive bidding strategy. It's actually a great question because learning how to recognize and capitalize upon different bidding strategies is the first step in increasing your awareness of the transactions and methods being used by others. Just remember, it's often possible to use different bidding methods for various situations so stay flexible and keep your eyes open for opportunity!
Unsold Selection - Unsure about where to start? Why not begin with a minimum of hassles by bidding on unsold selections. Normally a property will generates at least a few bidders but every once in awhile, there is literally no interest. The lack of interest may be due to very high prior mortgage or assumable lien but it could also be due to relatively minor problems like a small HOA fee or easily cleared title concern. The key is to do your homework well in advance and understand the true cost of correcting a defect. The ability to bid ultra-low without any competition is a clear incentive to pursue this option when the underlying problem (or perceived problem) has a cost-effective solution.
• Pros: Minimal bidding wars, ultra-low cost, often missed by novice investors or those unable to address small mishaps.
• Cons: Requires strong understanding of defects as well as knowledge of fees required to correct problems.
ROI - Another commonly used bidding strategy is based upon the anticipated return on investment. For example, the 1% rule was traditionally considered a very solid investment in terms of long term "buy and hold" strategy although it is not uncommon to realize 1.5 or even 2 percent on some auction properties.
• Pros: Solid correlation between profit and cost. Clear margins with sufficient room for growth. Tends to be conservative in nature making it a relatively lower risk investment. Heavily contingent upon cash flow.
• Cons: Fails to taken appreciation into account. Prone to under-estimate long term profit potential of marginal properties or those that require more "up front" work.
Square Footage - Many investors still prefer to purchase based upon average square foot cost. There is ample support for this bidding method; it is simple to quantify and compare the cost to the replacement and/or insurance basis as well as potential commercial or retail value. This works especially well for business based real estate needs but should not be ignored by the residential investor.
• Pros: Easily translates into insurance replacement cost, property tax appraisal and even secondary mortgage.
• Cons: Highly subjective especially for upper end properties.
Market Value - Of course, one of the most popular bidding techniques is to simply take the market value minus costs and profit to determine the bid amount.
• Pros: Highly flexible and able to acquire property in any condition at any location based exclusively on the prospective resale value.
• Cons: Market volatility can change rapidly leaving sparse margins for those that do not add sufficient padding to profit estimates.
Bottom Line - Before bidding...know your exit strategy or the proposed exit strategy of your investor. The exit strategy - and corresponding "safety measure" - will dictate the maximum bid amount. When in doubt, leave a little extra margin to make sure you and your investor are covered in case of an unanticipated expense or other cost; especially when first starting out. As you gain experience in estimating costs and correction fees, it will be possible to refine the bidding price to a much more specific level.
See you at the top!
