Financial Institution Woes Shred Markets

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The AFT Index was swept downstream with the rest of the stock market as the liquidity crisis in financial institutions continued to erode the multifamily housing sector. As our session ended Sept. 10, 2008, the AFT Index shed 34.50 points, or 3.50 percent, to end at 951.26. Declining issues outpaced advancing issues by a 6-to-1 margin.

Oil prices dropped steadily throughout our session, and markets received a boost when the federal government announced its takeover of troubled mortgage lenders Fannie Mae and Freddie Mac, but the forward momentum was short-lived.

The mood turned sour on news that Lehman Brothers, the No. 4 investment banker in the United States, was having serious problems raising cash. Lehman’s possible rescue by a South Korean bank crumbled, and serious offers did not exactly line up at its door. Wall Street cratered on the news. In addition, the National Association of Realtors’ index of pending home sales showed a lower reading than expected. Pending sales for existing homes dropped 3.2 percent, to 86.5. This compares to a previous reading of 89.4.

The big news, though, was Lehman Brothers’ struggle. “They’re trying to buy time, but it’s very dangerous on Wall Street to buy time. You need to be able to do business,” said Axel Merk, portfolio manager at Merk Funds. “I don’t think we’re at the end of the financial problems in the markets.”

What happened to Mid-America is indicative of the turmoil facing companies entwined with mortgage lenders. In late August, Mid-America said its joint venture with Fannie Mae would cease making new acquisitions.  Mid-America said it was Fannie Mae’s decision to call a halt to the purchasing. “The message is they need to preserve capital, given what’s going on with their institutes right now,” said Mid-America Treasurer Al Campbell when the announcement was made.

The sentiment expressed by some analysts at the time—that government-sponsored enterprises (GSEs) would have to be taken over by the government—was borne out by the end of our session. “While we will be the first to acknowledge that direct real estate investment and real estate lending are two different animals, and expect multifamily lending to continue given the profitability of the business, we believe that a focus on capital conservation at the GSEs will, at a minimum, cause the cost of financing for the multifamily industry to increase over the next 12 months,” said Bank of America analysts, in a research note. When the dust settled on our session, Mid-America was the second dollar loser, slipping 4.48 points, or 8.32 percent. Mid-America ended at 49.35.

Although Centerline Holding was our top percentage loser this session, it may have been clobbered by the general downward trend, since there was no specific information to explain its downturn. Centerline lost 0.45 points, or 15.25 percent, and ended at 2.50.

Forest City rose 2.09 points, or 7.47 percent, and was the top dollar and percentage gainer this session, despite moving to a loss in its fiscal second quarter results. For the quarter ending July 31, Forest City posted a net loss of $8.3 million, or 8 cents per share. This compares with net income of $67.8 million, or 63 cents per share in the comparable year-ago quarter. Results were influenced by write-offs of Summit at Lehigh Valley in Pennsylvania and for losses related to the NBA Nets team. Forest City ended at 30.08.

Shares of Essex Property Trust fell 5.07 points this session, a loss of 4.2 percent. Standard & Poor’s removed Essex from its SmallCap 600 list on Sept. 12, 2008, and replaced it with Stifel Financial. Essex closed at 115.73.