The Ground Floor

Collateral Damage: Squeezing Out Affordable Housing

While everyone's attention is focused on market gyrations, credit squeezes and the housing melt down, not to mention the latest sex scandal and—remember—the endless Democratic Presidential campaign, the affordable housing industry is being quietly closed down.  Look at what has happened:

• Low income housing tax credits—the price for these credits has fallen in the past few months from over $1 per dollar of credit to 80 to 82 cents to the dollar—a 20% decline that is making new deals unworkable.  The main reason for this meltdown is what has happened to Fannie Mae and Freddie Mac; their accounting scandals resulting in the new restrictions on their mortgage purchases as well as the decline in housing prices and the mortgage-backed securities markets all have combined to reduce or eliminate their profits.  Thus the biggest market maker for the tax credits, Fannie Mae, has reduced its purchases of credits from over $2 billion in 2006 to $1.1 billion in 2007 and is now reportedly a net seller of credits.  Freddie Mac has also reduced its purchases as well.  The major banks that were also buyers are now struggling with loses and don't need or want credits.  While the new pricing makes credits attractive investments to the corporations that used be in the market for credits, it will take months or years to get them back in as active buyers.

Monday's Numbers and Newsworthy Notes

Newsworthy Notes

What's the Federal Reserve Board Going to Do on March 18th?

The financial futures markets, which had fully priced a 50 basis point cut in the Federal Funds Rate into "their" numbers, are now trading in a range implying (76% chance) a 75 basis point cut. Our sense is that may be a little overly generous thinking on trader's part. 50 basis points gets everyone's attention and still leave the FRB room to maneuver.

Spreads are Wide Enough to Drive a Truck Thru!

But...Treasury yields continue to decline, offsetting the majority of the widening in spreads which have occurred in recent weeks. Commercial mortgage-backed securities trading spreads (and therefore lending spreads) are at their widest, possibly ever, and increasing weekly. Conventional spreads seemed to have widened into the 250 to 300 basis point area for under 65% loan-to-value loans; quotes for loans above 65% LTV (in the 250 to 400 basis point range) are probably more nominal and symbolic than real.

"What a difference a year makes"

	March 8, 2008	One Year Ago	Change
Prime Rate	6.00%	8.25%	-2.25%
Federal Funds Rate	3.00%	5.25%	-2.25%
3-Month LIBOR	2.94%	5.36%	-2.42%
3-month Treasury	1.44%	5.13%	-3.69%
10-year Treasury	3.53%	4.80%	-1.27%
30-year Treasury	4.54%	4.91%	-0.37%

Year-to-Date Equity Market Performance

DJIA⁽¹⁾: -10.34%
S & P 500⁽²⁾: -11.92%
NASDAQ⁽³⁾: -16.68%
Russell 2000⁽⁴⁾: -13.82%
MSCI U.S. REIT⁽⁵⁾: -6.71%

(1) Dow Jones Industrial Average.
(2) Standard & Poor’s 500 Stock Index.
(3) NASD Composite Index.
(4) Small Capitalization segment of U.S. equity universe.
(5) Morgan Stanley REIT Index.

U.S. Treasury Yields (as of March 8, 2008)

3-month: 1.44%
6-month: 1.54%
2-Year: 1.52%
5-Year: 2.43%
10-Year: 3.53%

Pricing of Various Tranches of Commercial Mortgage-Backed Securities (as of March 5, 2008)

Rating; Term; Spread to U.S. Treasury Bonds

AAA; 5 years; +401 basis points
AAA; 10 years; +369 basis points
AA; 10 years; +778 basis points
A; 10 years; +978 basis points
BBB; 10 years; +1428 basis points
BBB-; 10 years; +1578 basis points
BB; 10 years; +1600 basis points
B; 10 years; +1900 basis points

Indicated Spreads for Conventional Commercial Mortgages (as of February 24, 2008)

	Commercial Mortgage Rate Spreads for 5-10 Year Fixed-Rate Mortgages
Property Type	<65% LTV	>65% LTV
Multifamily	+180 – 200	+220 – 250
Regional Malls	+225	+250 – 350
Strip/Power Centers	+225	+250 – 350
Multi-Tenant Industrial	+200 – 250	+250 – 400
CBD Office	+200 – 250	+250 – 400
Suburban Office	+200 – 250	+250 – 400
Full-Service Hotel	+250 – 300	+300 – 400
Limited-Service Hotel	+250 – 300	+300 – 400
	5-Year Treasury – 2.81%; 10-Year Treasury – 3.79%
Source: Cushman & Wakefield Sonnenblick-Goldman, LLC.

Does the Housing Slump Have a Silver Lining?

On February 26, 2008, Standard and Poor's released the latest S&P/Case-Shlller® Home Price Indicies, which showed historic drops in home prices around the country over the course of 2007. The two charts excerpted from the report below tell the story.