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Sometimes,
connecting the dots doesn't require too much knowledge, education, or
analytical ability.
For
example, when you read reports like the following from Bloomberg, "Commercial Real Estate Is a ‘Time Bomb,’ Maloney
Says" --
The
$3.5 trillion commercial real estate market is a ticking “time
bomb” that may lead to a second wave of losses at large U.S. banks,
congressional Joint Economic Committee Chairwoman Carolyn Maloney said.
About
$700 billion in commercial mortgages will need to be refinanced before the
end of 2010 and “doing nothing is not an option,” Maloney, a New
York Democrat, said at a committee hearing today. This “looming
crisis” may lead to significant losses for banks, force shopping center
and hotel owners into bankruptcy, and impede economic recovery, she said.
The
response by banks to this “growing threat has been slow and
inadequate,” said James Helsel, a partner at RSR Realtors in
Harrisburg, Pennsylvania, and treasurer for the National Association of
Realtors. “The lack of liquidity and banks’ reluctance to extend
lending are also becoming apparent in the increasing level of delinquent
properties.”
There
were 5,315 commercial properties in default, foreclosure or bankruptcy at the
end of June, more than twice the number at the end of last year, with hotels
and retail among the most “problematic,’ Real Capital Analytics
Inc. said in a report yesterday. Losses on commercial mortgage-backed securities,
or CMBS, will total 9 percent to 12 percent of the market, or as much as $90
billion, said Richard Parkus, a research analyst for Deutsche Bank Securities
in New York.
Bottom
Not Near
The
bottom is several years away, and it will be at least 2012 before there is
“palpable improvement” in the commercial real estate market,
Parkus told lawmakers at the hearing. “It’s hard to imagine
fundamentals improving in an environment where we are beginning to see
massive increases in defaults.”
The
largest concentration of distressed properties is in New York City, Helsel
said. Las Vegas, Los Angeles, Detroit, Phoenix, Chicago, Dallas and Boston
also have high distress rates, he said.
A
tightening in issuance of CMBS, which used to account for about 30 percent of
financing, has exacerbated problems, Jon D. Greenlee, the Federal
Reserve’s associate director for banking supervision and regulation,
said in prepared testimony today. A disproportionately high number of small
and medium-sized banks have “sizable exposure” to commercial real
estate loans, and delinquency rates at around 7 percent in the first quarter
are almost double from a year ago, he said.
“Market
participants anticipate these rates will climb higher by the end of this
year, driven not only by negative fundamentals but also borrowers’
difficulty in rolling-over maturing debt,” Greenlee said. “In
addition, the decline in CMBS has generated significant stresses on the
balance sheets of institutions that must mark these securities to market.”
Fed
Programs
The
Federal Reserve has expanded its Term Asset-Backed Securities Loan Facility,
or TALF, to new and existing commercial mortgage backed securities to jump
start the market. Maloney said the Public Private Investment Program, or
PPIP, may also help with the problem as officials release more details of its
potential use.
Maloney
said the TALF program expires at the end of this year, which may short cut
its effectiveness “just as it begins to ramp up.” She also said
that uncertainty about the future of the PPIP has kept many investors
“on the sidelines, so there’s some urgency to the Treasury
providing additional clarity about the program.”
--
it's not too hard to see why, as the Washington
Business Journal reveals in "Economist: FDIC Gearing Up for Bank Closures,"
things are humming in one particular corner of the financial realm:
The
Federal Deposit Insurance Corp. is gearing up to handle a large number of
bank failures expected as a result of bad mortgages, both in residential and
commercial real estate, an economist said Tuesday.
“They
know they’re going to take down a large number of banks and they
can’t do it until they’re staffed up,” said Mark Dotzour,
chief economist and director of research for the Real Estate Center at Texas
A&M University.
Dotzour
expects federal regulators to establish an agency, similar to the Resolution
Trust Corp. that disposed of assets belonging to insolvent S&Ls in the
late 1980s and early 1990s.
“Once
they start to sell [foreclosed real estate], we’ll find out what the
market really is,” Dotzour told attendees at an economic summit hosted
by a handful of real estate groups in Tampa, Fla.
Dotzour
blamed federal intervention for the lack of commercial real estate investment
activity in recent months, as well as the failure of businesses to make major
decisions.
“Nobody
knows what to do so they’re doing nothing,” Dotzour said at the
luncheon meeting at the Intercontinental Tampa.
Government,
in its quest to help the economy, is causing harm by propping up failing
companies and regularly changing rules, he said.
“No
one can predict what the government will do,” Dotzour said.
“People
are frozen. It’s not that they don’t want to invest in the
future, the rules are unclear,” he said.
He
jokingly called the Federal Reserve “inksters” for routinely
printing money to bail out big business, including banks that are still not
making many loans.
The
government’s role in a capitalistic society, he said, “is to make
the rules and get off the dance floor.”
Businesses
and individuals that can’t pay their bills should resolve their
problems in bankruptcy court, not with money from the government, he said.
It’s a process that has worked for decades, for generations.
“Everyone
has a lesson to learn here, including you and me,” he said. “We
have to live within our means.”
Dotzour
expects foreclosure rates to continue to climb, real estate prices to fall
more and cap rates to rise to at least 9 percent before leveling off.
In
2010 and 2011, interest rates will begin to rise, as will inflation. Once
investors realize the market is at bottom, deals will begin to flow again, he
said.
In the
meantime, he compared the bad loans that remain on banks’ books to a
smelly cat litter box and the feds keep throwing more litter on top
Michael
J. Panzner
Editor, Financialarmageddon.com
Also
by Michael J. Panzner
Michael J. Panzner is a
25-year veteran of the global stock, bond, and currency markets and the author
of Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.
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