Exploring Impediments to a Real Estate Recovery Agenda - December 1, 2011
Welcome and opening remarks
Dennis Lockhart, President and CEO, Federal Reserve Bank of Atlanta
Panel 1: The Insurance Perspective
Insurance companies frequently sold homeowners policies as loss leaders in order to gain auto and life insurance business. Consequently, homeowners policies have not reflected the true cost of insurance. Some states, including Mississippi, have been transparent in subsidizing the cost of property insurance through appropriations from the state's general budget. Experts agree that, if a subsidy is to be given, this method is preferable to those that are more opaque and distort property markets. Because Fannie Mae and Freddie Mac do not require earthquake policies, they hold the largest exposures to earthquake risk. Given the effects of diversification, property insurance rates would likely fall if Fannie Mae and Freddie Mac were to require earthquake insurance. Examiners should consider the strength of the insurance company that wrote the policy related to a loan rather than just whether the borrower purchased the insurance.
"Setting the Stage"
Chuck Nyce, Associate Director, Catastrophic Storm Risk Management Center, Florida State University [Presentation]
Carl Hudson, Director, Center for Real Estate Analytics, Federal Reserve Bank of Atlanta
Sharon Binnun, Chief Financial Officer, Citizens Property Insurance Corporation
Bradley Kading, President and Executive Director, Association of Bermuda Insurers and Reinsurers [Presentation]
Greg Heerde, Managing Director, Aon Benfield [Presentation]
William Hardin, Director, Jerome Bain Real Estate Institute, Florida International University [Presentation]
Martin Grace, Professor, Department of Risk Management and Insurance, Georgia State University [Presentation]
Panel 2: The Housing Perspective
Negative equity occurs when a borrower owes more on a house than the house is worth. This situation impedes a housing recovery because it is a major contributor to the high rate of foreclosures. Foreclosure often occurs when the homeowner has negative equity and also experiences an unexpected loss of income—the owner does not have enough equity to sell the house and is also unable to pay the mortgage. Though the appearance of negative equity has evolved over time, the typical borrower today with negative equity has a refinanced loan, has no junior liens, owns a single-family residence, and is an owner-occupant. Some servicers approaching such a situation consider different scenarios with net present value that would allow them to maximize their return. Often, the servicer can maximize its return by writing down the principal on the loan and allowing the borrower to share a portion of the house's appreciation. Though workout options like this seem straightforward, servicers have largely not adopted them because of their inability to distinguish borrowers' breaking points. Most have decided it is more cost-effective to not offer restructurings.
Kris Gerardi, Research Economist and Assistant Policy Advisor, Federal Reserve Bank of Atlanta
Paul Willen, Senior Economist and Policy Advisor, Federal Reserve Bank of Boston [Presentation]
Mark Fleming, Chief Economist, CoreLogic [Presentation]
Steven Nesmith, Senior Vice President and Assistant General Counsel, Ocwen Financial Corporation [Presentation]
Panel 3: The Commercial Real Estate Perspective
The economic fundamentals of commercial real estate remain a challenge. Finance, valuation, and macroeconomic issues are combining to hinder the recovery of the commercial real estate market. Imminent debt maturities in the amount of $1.8 trillion and the lack of commercial mortgage-backed securities and bank financing are combining to create an extraordinarily high hurdle for the market to overcome. Some banks are beginning to engage in more lending opportunities, but they require these opportunities to be higher quality and less risky than in the past. Commercial real estate fundamentals in gateway markets like New York City, Boston, and Chicago continue to improve, especially in core properties, as insurance companies are investing in equity and debt opportunities with minimized downside risks. Multifamily projects continue to remain in high demand, especially in these core areas. Valuation-related issues are affecting all markets, most notably thinner markets, which are generally rural markets or some suburban markets.
Brian Bailey, Senior Financial Policy Analyst – Commercial Real Estate
Ann Hambly, Co-Chief Executive Officer and Founder, 1st Service Solutions
Ken McIntyre, Managing Director, MetLife
Walter Mercer, Executive Vice President of Commercial Real Estate, SunTrust Banks, Inc. [Presentation]
Brian Bowling, Vice President, Supervision and Regulation, Federal Reserve Bank of Atlanta