Data

http://citiwire.net/post/1692/

Ongoing Drag: Commercial Real Estate

Jonathan D. Miller / Feb 07 2010

For Release Monday, February 8, 2010
Citiwire.net

Here’s the good news: The economy may be turning the corner thanks to a heavy dose of government stimulus. And since March stock and bond portfolios have rebounded and at least house prices have bottomed after a three year freefPrivacy and the internet Lives of others Facebook and Google face a backlash, from users and regulators alike, over the way they have handled sensitive data May 20th 2010 | FRANKFURT AND SAN FRANCISCO | From The Economist print edition JENNIFER STODDART, Canada’s privacy commissioner, is furious with Facebook. In August 2009 the social-networking site struck a deal, agreeing to change its policies within a year to comply with the country’s privacy law. Now, says Ms Stoddart, the company appears to be reneging on an important part of that deal, which involved giving users a clear and easy-to-implement choice over whether to share private data with third parties. “It doesn’t seem to me that Facebook is going in the right direction on this issue,” she says, hinting that, without a change of course, the firm could soon become the subject of another formal investigation by her organisation. Facebook is not the only internet giant to provoke the ire of data watchdogs. Google endured withering criticism this week following news that it had recorded some personal communications sent over unsecured Wi-Fi data networks in homes and offices in some 30 countries. On May 17th Peter Schaar, Germany’s federal commissioner for data protection, called for an independent investigation into Google’s behaviour, claiming that it had “simply disobeyed normal rules in the development and usage of software.” The cases highlight rising tension between guardians of privacy and internet firms. And they reflect concern among web users about how private data are made public. Several prominent internet types such as Cory Doctorow, a science-fiction author, and Leo Laporte, a podcaster, have abandoned Facebook. Sites such as QuitFacebookDay.com are urging others to do so, nominating May 31st for a mass Facebook “suicide”. This is unlikely to stop the meteoric rise of Facebook, which is poised to claim half a billion members and which draws even more visitors as a whole to its site (see chart). But nerves have been rattled at the company’s headquarters in Silicon Valley, where bosses are mulling over how to respond. Several senior folk are now hinting that Facebook will soon roll out simpler privacy controls to make it easier to keep more data hidden. MySpace, a rival, is already making its controls simpler in an effort to woo disaffected Facebookers to its service. A revolt over Facebook’s handling of privacy has been brewing for some time. In December the social network changed the default settings on its privacy controls so that individuals’ personal information would be shared with “everyone” rather than selected friends. Facebook argued this reflected a shift in society towards greater openness and noted that users could still adjust privacy settings back again. But incensed privacy activists lobbied for it to be reversed. The switch should not have come as a surprise. Early on, many social networks impose fairly tough privacy policies in order to attract and reassure users. But as more join, controls are gradually loosened to encourage more sharing. As people share more, Facebook can increase the traffic against which it sells advertising. And the more it learns about users’ likes and dislikes, the better it can target ads that generate hundreds of millions of dollars. Protests grew louder still following a developers’ conference last month at which Mark Zuckerberg, Facebook’s boss, announced yet another series of policy changes. One that caused irritation was an “instant personalisation” feature that lets certain third-party websites access Facebook data when people visit. Critics say that Facebook has made it tricky to disable this feature, which may explain why Ms Stoddart dislikes it so much. European officials are grumbling about Facebook too. This month a group of data-protection experts who advise the European Commission wrote to the social network, calling its decision to loosen the default settings “unacceptable”. And in the United States, the Electronic Privacy Information Centre, a non-profit group, has asked America’s Federal Trade Commission to see if Facebook’s approach to privacy violates consumer-protection laws. Privacy watchdogs are also seeing if Google has broken any laws by capturing Wi-Fi data without permission. The search firm says that an experimental software project designed to gather data from unencrypted Wi-Fi networks was accidentally rolled out along with its Street View initiative, which uses cameras mounted on cars to film streets and buildings. As a result snippets of sensitive private data were collected and stored for years, without the Street View leaders’ knowledge. Street unwise Google apologised and stressed that the unauthorised sampling collected only enough data to fill a single computer hard disk. It added that the information had not been used in any products nor shared outside Google. And it said it would appoint an independent body to review the fiasco in addition to conducting an internal review of its privacy practices. “We screwed up,” admitted Sergey Brin, a Google cofounder, on May 19th. Yet Google’s reputation has been damaged. The episode shows that it needs to get a better grip on what its staff are up to. Initial denials that it had collected sensitive data, reversed when Germany’s privacy watchdog demanded a more detailed review, also look like a public-relations blunder. And doubts have been raised about the quality of some managers. A spokesman for the firm blamed “a failure of communication between teams and within teams”. That is a worrying admission, given the vast amounts of sensitive data in Google’s digital coffers. It had already suffered this year during the launch of Buzz, its own social-networking service. Users complained that the search giant had dipped into their Gmail accounts to find “followers” for them without clearly explaining what was happening—a practice that the firm quickly scrapped. Last month ten privacy commissioners from countries such as Britain, Canada and France urged the company not to sideline privacy in a rush to launch new technology. At Google’s European Zeitgeist conference this week, Eric Schmidt claimed that the firm has the most consumer-centric privacy policy of any online service. Google’s chief executive added that no harm had been done by the Wi-Fi debacle. Others may reach a similar conclusion. But tussles over privacy issues will persist. “Nobody has a clear view of where to draw the line on privacy matters online,” says Jonathan Zittrain, a professor at Harvard Law School. Privacy commissioners will be busy for a while yet.all.

But lots of problems remain — not just slowness of job recovery. Just check the corner I watch for a living: commercial property. This sector continues to sink, buried in hundreds of billions of dollars in bad loans to overleveraged owners, who paid too much during a frenzied 2004-2008 transaction binge. Representative of these toxic assets, half-built condo projects, see-through floors in office buildings, and papered-over mall store fronts stand on view from coast to coast.

Commercial real estate usually lags post-recession upturns. But continuing declines in office, shopping center, hotel, apartment and warehouse markets strain the nation’s still-fragile banking sector and threaten to temper prospects for sustained economic recovery.

Out of mutual self-preservation, property owners and their lenders obfuscate the extent of losses in a dance of mutual convenience called “extend and pretend.” Banks don’t foreclose on defaulting borrowers so the financial institutions can avoid booking losses, which could spook resuscitating credit markets. Government regulators encourage this kabuki theater and pump money into banks helping them build up loss reserves so they can eventually take write downs and reconcile balance sheets. Everyone has been hoping that the economy can recover quickly enough to bridge some of the declines. But the gloomy jobs picture and burdensome household debt (all those mortgage, credit card, car, and student loans) combine to hobble demand for office, retail, and apartment space as well as hotel rooms.

So “extend and pretend” will likely turn into a bridge to nowhere — at some point this year commercial properties will inevitably crash land, after losing on average 40 percent to 50 percent in value. Premium locations in the nation’s important gateway cities will fare better — investors already circle properties in New York, San Francisco, and Washington, looking for bargains. That may well keep a floor on prices in such cities — but not in secondary and tertiary markets not directly linked to global pathways. Office rents in many cities have retreated to 1980s face rates as occupancies continue to decline. Apartments and industrial properties are registering record vacancies and rent erosion.

Finally facing reality, tapped out owners begin to turn back the keys to lenders — they don’t want to maintain debt service payments in projects without hope of generating expected revenues or recouping lost value. That’s what happened to the Peter Cooper Stuyvesant Town complex in Manhattan late last month. Bought at market highs for $5.4 billion in 2006, the apartments may be worth about $1.8 billion today. Savvy investment pros like Tishman Speyer, Black Rock, and their pension fund clients take hundreds of millions of dollars in losses on their equity investments, but non-recourse loans pin most of the write downs on lenders (including Fannie Mae and Freddie Mac) and an array of bond holders, who could land in extended and messy litigation scraps over who has rights to what remains.

Out of necessity, more banks will start to drop the foreclosure hammer, taking control of troubled assets and pushing out owners who can’t or won’t maintain properties. Each such action risks permanent diminution in value. More regional banks will fail under the weight of bad real estate debt (15 so far in 2010 after 130 last year) and the FDIC will take over, then foreclose and try to sell property assets. As lenders start to recognize losses, buyers and stressed owners will gain greater confidence about pricing levels, helping revive moribund transaction markets. But few investor players expect any chance for a robust comeback unless the economy starts to generate large numbers of jobs.

Developers, meanwhile, will be dead in the water for several years, tamping down demand for construction jobs and materials — commercial building pipelines across all property types register their lowest volumes on record. Most recent vintage projects, especially condominiums and hotels, head directly into default — tenants continue to economize and expect generational low rent terms not the record highs anticipated by builder pro formas at ground breakings.

All these setbacks delay recovery in the financial sector and the overall economy — banks must reserve for losses instead of lending to businesses to help stimulate hiring. State and local governments suffer declines in tax revenues from depreciating property values and lower sales volumes. Beyond lost construction jobs, the real estate sector collapse also vaporizes tens of thousands of high-paying “middlemen” professionals — lawyers, brokers, investment managers, appraisers, mortgage bankers, and analysts who had gorged in the fee fest from frenzied property buying, financing and flipping. The vanishing value mirage dissipates an important industry and destroys paper wealth on which credit markets staked enormous investment bets.

Any good news here? Yes. From all this carnage, expect cash buyers to make opportunistic purchases and eventually reap outsized profits. But how many cash buyers are left at all?

FICO’s Scoring Shovel Gets Bigger

Bank Technology News  |  November, 2009

By John Adams

Lenders face all manner of new risk-assessment challenges, and for FICO, that spells opportunity. Its response is FICO Score Trends v2.0, a subscription service for banks, auto finance firms and mortgage lenders that provides a much deeper dive into an institution’s risk exposure.

“This allows lenders to look at how a general population is performing and the relationship between risk and scores,” says Rachel Bell, director of global scoring solutions for FICO.

The service’s features include help in migrating to the new FICO 8 score, which doubles the predictive power of scores and is available from all three credit reporting agencies. Since FICO 8 became available earlier this year, five of the seven largest U.S. banks and four of the five largest credit card issues have begun using it. FICO Score Trends provides information on how scores have changed (from previous version of FICO to FICO 8)—to allow lenders to seamlessly make the transition to FICO 8. “There’s better segmentation,” Bell says. “And the scorecards are the same, so it’s easier to implement.”

Additionally, regional trends have been broken down further by adding state level and metropolican statistical area segmentation, which is narrower than the Federal districts used in earlier versions. Other features allow lenders to review consumer performance by earlier and later stages of risk with the addition of 60-day default and charge off data to the existing 90-day default information. There’s also a new report, the FICO Odds Shift Impact, which captures movement in odds at a given score from a prior time to current.

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• Economic data
  From the Economist Intelligence Unit
  Source: Country Data Despite a focus on reviving the economy, the new president, Barack Obama, should be able to push through a reform increasing the number of Americans covered by health insurance and measures to reduce greenhouse gases. However, resistance from Republicans will be fierce and his effort to promote greater bipartisanship does not seem to be yielding results. Mr Obama’s Democrats should be able to win the mid-term elections in November 2010 so that they will keep their majorities in both houses of Congress.
• Economic policy is now focused on containing the financial crisis and the economic downturn. A major fiscal stimulus package was approved in February, raising the federal deficit by US$787bn over the next ten years. The financial crisis will also mean that the government will have to take on more private-sector debt, and full-scale nationalisation of some banks is now quite likely. This and the direct hit from the economic downturn will lead to a dramatic deterioration in public finances in 2009-10. However, the Economist Intelligence Unit expects federal deficits to decline substantially in subsequent years and a fiscal crisis, leading to spiralling interest rates, is unlikely.
• We expect the Federal Reserve (Fed, the central bank) to keep its interest rates at 0-0.25% in 2009. It will also continue to support financial markets with ample provision of liquidity, including purchases of government bonds. An economic recovery and concerns about stimulating excessive inflation will lead to interest rate hikes from mid-2010.
• GDP will contract sharply in 2009 and growth will remain feeble in 2010 as a result of the severe weakness in the financial sector and the strains on household balance sheets. The crisis has led to a sharp deterioration in financial conditions for households and companies, a downturn in the labour market and a collapse in confidence. Even in subsequent years, the pace of economic growth will remain much weaker than during the recent boom, as it will take time for earlier imbalances to be absorbed.
• Inflation will turn negative in 2009, mainly reflecting the sharp decline in commodity prices since mid-2008. Inflation will remain low in 2010 owing to still weak economic growth. We expect the US dollar to fluctuate at around US$1.35:€1 in 2009 but to weaken moderately in subsequent years. The current-account deficit should narrow as a result of a decline in imports.

Key indicators	2008	2009	2010	2011	2012	2013
Real GDP growth (%)	1.1	-3.1	0.7	1.5	1.9	2.1
Consumer price inflation (av; %)	3.8	-1.2	0.7	1.3	1.6	1.9
Federal government budget balance (% of GDP)	-3.2	-13.7	-15.0	-11.0	-6.1	-4.9
Current-account balance (% of GDP)	-4.9	-3.1	-2.5	-2.0	-1.9	-1.5
US$ 3-month commercial paper rate (av; %)	2.1	0.2	0.7	2.0	3.5	4.9
Exchange rate¥:US$ (av)	103.4	93.8	91.5	91.0	90.0	90.0
Exchange rate US$:€(av)	1.47	1.35	1.39	1.42	1.45	1.47