By Jeffrey H. Birnbaum
Washington Post Staff Writer
Sunday, April 6, 2008
A year ago, the Mortgage Bankers Association was thrilled to sign a contract to buy a fancy new headquarters building in downtown Washington. Interest rates were low, the group's revenues were steady and the prospects for quickly renting out part of the structure were strong.
But since then, the association has fallen on tough times as many of the subprime mortgages dispensed by some of its members proved dicey. Borrowers discovered the loans were more costly than they had anticipated. Foreclosures soared, and cheap, inexpensive credit dried up, slowing the economy.
The result: The trade group is about to find it harder than it imagined to pay its own mortgage.
Scheduled to close on the building in the coming weeks, the association will have to pay millions of dollars more than it would have a year ago when it contracted to buy the 160,000-square-foot structure -- millions of dollars it is now less able to afford.
The group's leaders defend the transaction as prudent and, in the long run, wise. "Anytime is the best time to buy," said Kieran P. Quinn, chairman of the association. "Over a 10-year horizon, [the purchase] looks great."
But the short run looks a little bumpy. "The association's timing is not good, to say the least," said John E. "Chip" Akridge, a local developer. "I'm sure a year ago they would have rethought their decision if they knew what was going to happen."
Critics also see irony -- and some justice -- in this predicament. "They are certainly getting what they deserve," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group. "Mortgage bankers encouraged people to take out mortgages that were very risky, and the result of that was a large number of the mortgages went bad and caused mortgage interest rates to soar. Now they are the victims of high mortgage rates and chaos in the market more generally."
The lobbying group is about to sign the final papers to buy the 12-story building on L Street NW for about $100 million. Like many of the companies it represents, the organization is facing a triple whammy of woes: Its financing costs are up, its income is down, and the leasing market is slow, leaving it, so far, without a single tenant.
In recent months, the money available for mortgage lending has dried up dramatically. In 2003, $3.9 trillion was loaned to help finance single-family homes. This year, the industry estimates that home mortgage lending will reach barely half that amount.
The pullback has played havoc with the association's membership and budget. A year ago, it had more than 3,000 member companies. Now, it has about 2,500, a 17 percent decline, Quinn said.
As a result, the group's income has been squeezed. Quinn predicted that the association's revenue will fall 10 to 15 percent this year from last year. Its annual budget in 2006, the last full year on record, was $47 million.
The association laid off some employees this year, but won't say how many. It also recently lost two senior vice presidents to other jobs in the real estate industry.
The financing for the new building has become more costly. The meltdown in the credit markets has made lenders more risk-averse and less eager to loan out their capital, said Paul J. Collins, senior managing director of developer Cassidy & Pinkard Colliers. As a consequence, they are demanding higher interest rates on commercial loans -- by a percentage point or two -- than they did a year ago.
Lenders are also trying to reduce their exposure by asking borrowers to put more money down. Quinn said the association will have to put down about 10 percent more that it had planned.
The lack of tenants has also been an expensive burden. The fact that the association does not have any income-producing lessees has compelled its lender to increase the financing costs slightly, Quinn said.
Quinn said the association is not worried about the pace of leasing. He said it may take until next year to fill the building. But developers said Washington's rental market is weak and that the association will likely take longer than usual to lease the two-thirds of the building that it is not using itself.
"By this time, I would think they would have had another tenant or two," Collins said. "But with the overall negative feeling about the economy out there, leasing has been slower."
Quinn said the association's financial condition remains strong, and the purchase of the new building will benefit the mortgage bankers for a long time. "It was an important employee morale issue" to acquire new space, he said.
To make ends meet in the meantime, the association is doing what any strapped mortgage holder would do.
"We're looking at [cutting] expenses across the board," said Cheryl Crispen, the association's senior vice president for communications. Among the options: hosting fewer in-person seminars and eliminating Teleprompters at the annual meeting.