CMBS Delinquencies Rise: Should the Government Step In? 8 comments
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Remember back to the heady days of late 2007 when all was warm and cozy inside the real estate bubble and then out of nowhere the floor dropped out? Well, a precursor to the drop was a rise in delinquency rates on residential real estate loans. The Federal Reserve has kept tabs on delinquency data since 1991, the last time a real estate bubble caused a recession. Can anyone say Keating Five?
click to enlarge
The above chart illustrates that in the latter half of 2007 the delinquency rates on residential real estate loans held by major banks began to increase dramatically. In fact, it reached levels not seen since the S&L crisis. Of course, we all know the next plot point in the story. Now look at another chart:
click to enlarge
This chart shows commercial real estate delinquencies through Q3 ‘08, and should look familiar because it appears eerily similar to the residential chart circa Q3 ‘07. In fact, commercial real estate delinquency rates have been increasing by an average of 20% quarter over quarter since Q2 ‘07. Until recently, this rate of delinquencies has had limited impact on the $800 billion commercial mortgage backed security market (CMBS). However, two developments could change all that: rising CMBS delinquencies and a record amount of commercial refinancing.
In November 2008, two loans made by JPMorgan (JPM) and repackaged into CMBS, defaulted. This led to an increase in the delinquency rate on CMBS. Realpoint Research reported that through November the delinquent unpaid balance for CMBS increased by $1.63b to $7.026b. This represents a 122% increase from January 2008 when delinquent balances were $3.16b. This matters for two reasons: banks still hold large portfolios of CMBS (in November Citi (C) received TARP funds for its bad CMBS portfolio) and REITS have a record amount of refinancing to complete in 2009.
The nature of commercial real estate loans require REITS (and other borrowers) to finance for shorter periods of time (5-10 years) with a balloon payment often attached. Foresight Analytics and the Real Estate Roundtable estimate that between $160 -$400b needs to be refinanced in 2009. Typically, REITS could borrow money from their investment banker; the banker would package the loan into a CMBS and move to the next deal. Unfortunately, due to the credit crisis and rising delinquencies, the CMBS market has virtually shut down. Left unattended this could be the next WMD for the financial markets. As the economy weakens, REIT cash flows will suffer at the exact time that they need cash flows to support new debt.
The fact that commercial mortgages are in trouble has not been lost on the markets. Since the Fed et al have pumped liquidity into the system, virtually all credit spreads have eased. The TED spread, LIBOR and even 2-year swap rate have begun to “normalize” signaling a thaw in the credit markets…with one exception. In November, the cost to insure $10 million in CMBS exposure soared over $800,000 from $200,000 in September.
click to enlarge
According to Markit, the cost to insure the CMBS retreated to $550,000 and recently has begun to increase. Now, I did read Bill Gross’s suggestion about buying what the government is going to buy, just do it before the government does. I certainly do not want to take the other side of a Pimco trade, and I do think the government will eventually purchase distressed CMBS, but to date, the government has to be reactive as opposed to proactive and it would be political suicide to bail out Donald Trump before Joe the Plumber. It will take a major default or bankruptcy before the government steps in and saves the sinking ship.
Disclosure: I am long SRS.
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This article has 8 comments:
My disclaimer: I am a very inexperienced investor and I am long URE so take this with a grain of salt!
We need Mealer Companies...
That's means me and my plan and McCains 3R Economic Energy plan.
Ego aside... We will get this done and the USA back on track.
Your definition on the cost of insuring CMBS is wrong. Please refer to markit.com.
But you made a valid point that there will be issues, especially if the gov. rescue a few asset classes but not CRE. CRE will become the victim of gov. intervention. Since the gov. has started playing God, the love should be spared with the CRE sector as well.
online.wsj.com/article...
So when you remove the construction loans the dq rate on CRE is lower than the Fed's number, but still increasing. As you point out, without the gently hand of Uncle Sam there will be problems.
On Jan 10 12:02 AM CMBS wrote:
> Your resi dq numbers look too low and CRE dq numbers look too high.
> Check your data source: does the CRE dq include condo construction
> loans? I think that it is the case.
> Your definition on the cost of insuring CMBS is wrong. Please refer
> to markit.com.
> But you made a valid point that there will be issues, especially
> if the gov. rescue a few asset classes but not CRE. CRE will become
> the victim of gov. intervention. Since the gov. has started playing
> God, the love should be spared with the CRE sector as well.
Either you are thinking of some different impact than I am or I dont buy this AT ALL. It contradicts your spread chart as obviously the credit markets and CMBS conduit markets have dried up and spreads are super-wide. Now in fact this has been going on since last year. I was getting conduit loan quotes 18 months ago of 185bps for 80% LTV loans and now such loans do not exist. They havent since fall 2007. What it means for commercial real-estate buyers is lower LTV loans and go to banks for loans. I dont doubt that delinquencies and foreclosures will rise, especially in retail. But it surely looks like this rates of foreclosure are more than priced in, when debt is at 75% for an average 70%, you are buying debt at little more than half the asset value, and you are buying debtors in a different level from homebuyers. Since commercial RE didnt have much of a bubble to start with, you really have priced in most of the downside already.
It also is wrong to imagine that Government intervention is needed, useful or helpful. Why? To prop up CBMS assets? To revive a conduit market that has been dormant since 2007 anyway? Again, why? Govt cant get cap rates down without helping the 'risk economy'. If Government wanted to do some good, it should allow for accelerated depreciation and lower cap gains tax rates. That would revive asset values at near zero long-term cost to Government. Such thinking is alien to the socialists running the Federal Govt right now. The only reason to buy CBMS paper right now by the Govt that I can think of is the fact that it is probably undervalued given the asset numbers I mention above.
Also, why the delinquency rates have had large gains % wise - the absolute gains are still somewhat minor (CMBS delinquencies are @ 1%).
So bottom line if you are going to compare apples to apples than you have to compare CMBS to RMBS and even those two ABS products are completely different - even though they are both real estate. So the comparison makes little sense.
anonymousbanker.com/?p...
With apologies, I had difficulty getting the links to connect into this comment. Please go to original article for links to supporting documents.
I hate the TALF program. It is going to come back to bite each and every one of us .... the taxpayers. First it was designed to get our securitization market flowing again, presumably to unfreeze the credit markets. It is to be a mechanism for the Treasury Department to guarantee, with our tax dollars, toxic loans stripped from the Banks' balance sheets. It is duplicitous and it was designed to be that way. Now, in addition to subprime credit cards, subprime auto loans (FRBNY's words, not mine), student loans, and small business loans, they've tagged on Commerical Mortgages.
So I went to the FRBNY's website to read up on the terms and conditions and found that the FRBNY has hired a collateral monitor, a company by the name of Trepp LLC. And I was simply curious to find out if I could find out who really owned Trepp and if it's involvement is as "arms length" as one would expect it to be.
Here is an interesting interview by CNBC with Tom Fink, senior vice president of Trepp. I noticed that CNBC never once asked him if there could be any perceived conflict of interest with Trepp accepting this position as "The Feds new Toxic Avenger".
So, I pose this question to the blogging universe and to our leaders on the Hill and to President Obama:
How many Commercial Mortgages will Chase Bank be allowed to unload through TALF, a government program that has hired as its collateral monitor Trepp LLC whose UK Parent company utilizes, as their stockbroker, a company that is owned 50% by JP Morgan Chase.
Does anyone else see this as a conflict of interest?
Here's the back up data to this question. Read it and decide for yourself. If you think I'm wrong, I'd love to hear you tell me why you think I'm wrong.
About Trepp, LLC
Trepp LLC, headquartered in New York City, is an established independent provider of CMBS and commercial real estate information, analytics and technology in the securities and investment management industry. Trepp serves the needs of both the primary and secondary markets by providing one of the largest commercially available trading quality CMBS deal libraries, as well as a suite of products for the CRE derivatives and whole loan markets. Trepp's clients include broker dealers, commercial banks, asset managers, and investors.
About PPR
PPR, headquartered in Boston, is an established provider of independent global real estate research and portfolio strategy services to the institutional real estate community. PPR provides views on markets in North America, Europe and Asia and offers expertise in real estate markets, real estate portfolio analysis, mortgage risk, and the design of real estate investment strategies. Clients include commercial banks, insurance companies, Wall Street firms, rating agencies, government agencies, pension funds, investment advisors, real estate investment trusts, and private investors.
Trepp and PPR are each wholly owned by DMG Information, Inc., the business information division of Daily Mail and General Trust, plc (DMGT).
And here's information on the parent company: Daily Mail and General Trust , plc (DMGT)
and their "stockbrokers"
Stockbrokers
JPMorgan Cazenove Ltd
20 Moorgate
London
EC2 6DA
Great Britain
www.cazenove.com/
Cazenove Group is a private company, registered in Jersey, which holds the 50% interest in J.P. Morgan Cazenove, the joint venture with J.P. Morgan. J.P. Morgan Cazenove is one of the UK's leading investment banks. Jointly owned by J.P. Morgan and Cazenove, it combines innovative and impartial advice with a broad range of capabilities and proven execution skills.
anonymousbanker.com/?p...
With apologies, I had difficulty getting the links to connect into this comment. Please go to original article for links to supporting documents.
I hate the TALF program. It is going to come back to bite each and every one of us .... the taxpayers. First it was designed to get our securitization market flowing again, presumably to unfreeze the credit markets. It is to be a mechanism for the Treasury Department to guarantee, with our tax dollars, toxic loans stripped from the Banks' balance sheets. It is duplicitous and it was designed to be that way. Now, in addition to subprime credit cards, subprime auto loans (FRBNY's words, not mine), student loans, and small business loans, they've tagged on Commerical Mortgages.
So I went to the FRBNY's website to read up on the terms and conditions and found that the FRBNY has hired a collateral monitor, a company by the name of Trepp LLC. And I was simply curious to find out if I could find out who really owned Trepp and if it's involvement is as "arms length" as one would expect it to be.
Here is an interesting interview by CNBC with Tom Fink, senior vice president of Trepp. I noticed that CNBC never once asked him if there could be any perceived conflict of interest with Trepp accepting this position as "The Feds new Toxic Avenger".
So, I pose this question to the blogging universe and to our leaders on the Hill and to President Obama:
How many Commercial Mortgages will Chase Bank be allowed to unload through TALF, a government program that has hired as its collateral monitor Trepp LLC whose UK Parent company utilizes, as their stockbroker, a company that is owned 50% by JP Morgan Chase.
Does anyone else see this as a conflict of interest?
Here's the back up data to this question. Read it and decide for yourself. If you think I'm wrong, I'd love to hear you tell me why you think I'm wrong.
About Trepp, LLC
Trepp LLC, headquartered in New York City, is an established independent provider of CMBS and commercial real estate information, analytics and technology in the securities and investment management industry. Trepp serves the needs of both the primary and secondary markets by providing one of the largest commercially available trading quality CMBS deal libraries, as well as a suite of products for the CRE derivatives and whole loan markets. Trepp's clients include broker dealers, commercial banks, asset managers, and investors.
About PPR
PPR, headquartered in Boston, is an established provider of independent global real estate research and portfolio strategy services to the institutional real estate community. PPR provides views on markets in North America, Europe and Asia and offers expertise in real estate markets, real estate portfolio analysis, mortgage risk, and the design of real estate investment strategies. Clients include commercial banks, insurance companies, Wall Street firms, rating agencies, government agencies, pension funds, investment advisors, real estate investment trusts, and private investors.
Trepp and PPR are each wholly owned by DMG Information, Inc., the business information division of Daily Mail and General Trust, plc (DMGT).
And here's information on the parent company: Daily Mail and General Trust , plc (DMGT)
and their "stockbrokers"
Stockbrokers
JPMorgan Cazenove Ltd
20 Moorgate
London
EC2 6DA
Great Britain
www.cazenove.com/
Cazenove Group is a private company, registered in Jersey, which holds the 50% interest in J.P. Morgan Cazenove, the joint venture with J.P. Morgan. J.P. Morgan Cazenove is one of the UK's leading investment banks. Jointly owned by J.P. Morgan and Cazenove, it combines innovative and impartial advice with a broad range of capabilities and proven execution skills.