Real Estate Funds Collapse 13% in a Week

The average real estate fund tracked by TheStreet.com Ratings collapsed 13.4% in the week ending Thursday, Feb. 19, dragged down by some of the worst housing reports in decades.

The Commerce Department's January reading of housing starts slid 17% to the slowest pace in more than 50 years. Single-family home construction shrank 12%, while multifamily apartments and townhouses plunged 28%. Why build when the real estate market is being flooded with distressed sellers and foreclosed properties available for a fraction of their previous sale prices?

To loosen up credit and stem the tide of foreclosures, President Barack Obama released details of his $275 billion plan to help Americans stay in their homes by reducing their mortgage payments to 31% of their monthly income. It would work by giving banks the incentive to absorb the cost of lowering payments to 38%, and the government would pick up the tab for the gap to 31%. Obama estimates that 9 million mortgages could be kept current under this plan.

For homeowners who won't qualify for government-subsidized mortgage modification, Obama called on Congress to pass legislation to allow bankruptcy judges to restructure mortgages, reducing the principal balance owed to the current value of the property. This cram-down provision provides hope to homeowners who owe more than the property is worth. It is also meant as a warning to mortgage lenders to get busy refinancing struggling borrowers or else risk this "nuclear option."

The worst-performing real estate fund last week was a closed-end fund, Cohen & Steers Premium Income Realty Fund (RPF Quote - Cramer on RPF - Stock Picks), at minus 31.9%. Instead of paying regular monthly income to shareholders, the new quarterly income expected at the end of March is smaller than one month's payout from last year. Some of the fund's losing positions include Colonial Properties Trust (CLP Quote - Cramer on CLP - Stock Picks), down 28%; Cedar Shopping Centers (CDR Quote - Cramer on CDR - Stock Picks), down 25%; and Vornado Realty Trust (VNO Quote - Cramer on VNO - Stock Picks), down 21.6%.