Commercial Mortgages and Mortgage Resets to Trigger Next U.S. Downleg 22 comments
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A brief news item in Reuters noted that commercial mortgage defaults just hit a 20-year high, on the way to new all-time records – like all other categories of U.S. debt. As a starting point, this confirms that the claims of financial “health” by the members of the U.S. financial crime syndicate are nothing more than hot air and fraudulent accounting.
The U.S. commercial mortgage market is huge. With a total size of $6.7 trillion, the commercial real estate market accounts for 13% of total GDP, all by itself. In comparison, the (total) U.S. residential mortgage market is roughly twice as large. However, what must be noted is that the U.S. real-estate crash was caused almost entirely by the sub-prime real estate market. It's only this year that “alt-A” and now “prime” mortgages are also hitting record default levels.
By itself, the U.S. sub-prime market is less than 1/3 the size of the commercial mortgage market. Thus, as this market descends into its own collapse, the consequences to the balance sheets of U.S. banks will be horrendous. Keep in mind that a major component of the U.S. commercial real estate market are mortgages for U.S. retailers.
The retailers themselves have already acknowledged that they are in a downward spiral which will be measured in decades, rather than years. The 2nd largest mall-operator in the U.S. already went into bankruptcy months ago, along with more than one hundred of its malls.
As I pointed out in yesterday's commentary, “Another state descends into Financial Crisis”, somewhere around $2 TRILLION in spending-power has been lost from this consumer-economy – like a race-car with no gasoline. This can only mean an endless series of retail bankruptcies, and an endless series of multi-billion dollar losses for U.S. financial institutions.
This brings us back to the residential mortgage market, where all categories of mortgage-defaults are already at all-time records – just as the U.S. mortgage market is about to see a large spike in mortgage-resets on “adjustable-rate mortgages.” This means that foreclosures, which set new all-time records almost every month, are going to keep going up for at least another two years.
Meanwhile, U.S. banksters have been holding millions of foreclosed properties off of the market, fooling the brain-dead media talking-heads into believing that “home inventories” are 'only' near all-time records – rather than already being double the previous all-time record. It is on top of this enormous inventory that millions more foreclosed properties will be dumped.
To add to this generational glut in U.S. residential real estate, retiring baby-boomers will be forced to dump another $1 to $2 TRILLION in real estate – in order to fund their under-funded retirements. This guarantees no possible recovery for the U.S. real estate market until at least the middle of next decade, and likely many years beyond that.
I won't even start to get into how the collapse in U.S. employment will exacerbate all these other real estate trends, since I've written about that side of the equation frequently. Suffice it to say that unemployment alone makes any talk of a “U.S. economic recovery” nothing but a ludicrous fantasy.
The bottom-line is that the U.S. financial sector has only seen the tip of the iceberg in loan losses and defaults, and just that tip necessitated over $10 TRILLION in hand-outs, loans, and pledges from the U.S. government. Yet, “stress-tested”, the U.S. financial sector is now “healthy”?
I hope the American public actually remembers the claims of “financial health”, and the vows of new, record “bonuses” from U.S. bankster-oligarchs – when they come crawling back to the U.S. government for yet more trillions, a few months down the road.
...And when that day comes, hopefully FDIC-chief Sheila Bair will remember her own words from this spring: “too big to fail means too big to exist”.
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For residential real estate, it's the 20 million empty homes, endless selling pressure, under-water mortgages, and retiring "boomers".
For the commercial real estate market, the GENERATIONAL shift in U.S. consumption means DECADES of weakness for U.S. retailers - meaning even after hitting "bottom", the market will remain at the bottom for MANY years.
Karen, sorry about your personal situation. As usual, the U.S. media are ignoring people like you with their "economic recovery" hype.
Yes, NO ONE in the mainstream media is factoring-in the people going from $20+/hour jobs to $10+/hour jobs.
For retailers, this means WalMart thrives, while almost all other retailers steadily shrivel up - trying to avoid bankruptcy.
On Jul 20 11:33 AM RiskReturnOptimizer wrote:
> Timing is everything. Any sense on how long it will take for your
> various scenarios to play out -- collapse of commercial real estate,
> etc?
>
> It seems like everyone is aware of the issue and severity, but disagree
> on the timing of when things will hit the economy.
>
> It would be great to hear your projections on timing as well as severity
> of impact during each phase.
This nasty little fact will make it tough for CRE loans, which tend to be short-term in stucture, to be rolled over becasue of the decline in equity, tightening lending standards and the imperative to have 30% equity in the deal.
Let's say a $1000 building was financed with a $700 five year loan which comes due later this year. If the building is now worth $660 ( 66%x$1000 ) and the bank will only loan 70%, this means the bank will only lend $462 ( 70%x$660 ).
All of this means the owner will need to come to the table with $238 or close to 24% of its original purchase price. With everyone living on the precipice of existence and cutting rents amid high vacancies, few will be able to do this.
ftalphaville.ft.com/bl...
Today our debt level is WORSE than that shown in the link. And there is no inclination by our leaders to make the tough decisions. Instead, they’re expanding our social programs while penalizing workers and business.
It seems more probable than not, that we will continue on until crisis forces a change of course. I’d rather acknowledge our circumstances and at least try to prepare where possible, than wish it wasn’t so.
Good article. I am curious, like you I have pegged CRE as economic KRYPTONITE. Aside from local "space available" signs at malls, I have even noted that amusement parks and tourist cities are well off even last year's numbers.
However, in your humble opinion is there anything that would keep a CRE Doomsday scenario from playing out? Can the administration create programs for CRE as it did for RESIDENTIAL? Is there a paradigm shift that we are missing where the investment community is willing to accept this as part of the new financial landscape?
Thanks,
1. CRE investors are more fiscally responsible, most typically do their investment homework, and simply have more cash than those in residential markets. Having cash lets you survive longer, and right now its a matter of trying to ride out the recession long enough to get out of the red.
2. Commercial RE is typically a cashflow business. The income helps as long as the tenants are solvent. Retail implosion will likely precede a CRE catastrophe.
3. CRE investors are flat out more savvy than those involved in the residential mess. This means that lease renegotiations, mortgage renegotiaitons, and debt restructuring is not just more available, it is also more likely.
Bottom line: CRE investors are trying to hang on long enough for values to increase, for the markets to turn, for the recession to 'go away', so they are burning through cash, equity, and debt.
It comes down to one thing really. LENDERS. If lenders don't work with us or continue to ask for ridiculous terms they will crash CRE and cause more problems for themselves while they think they are protecting their bottom line.
Lenders are scariest issue confronting us right now and whether they are willing to make adjustments to existing loans or help make new ones will be crucial.
The Government is not telling you the truth because they don't believe you can handle the truth. How the hell do you square all this with their GDP statistics?
On Jul 20 03:51 PM basehitz wrote:
> Jeff, I appreciate your work. The concepts you often discuss are
> difficult to accept because of the obvious implications that more
> waves of retrenchment and pain will follow. But your argument is
> intuitive. At every level (federal, state, consumer, business) we
> pushed the envelope on leverage. As a result, our composite balance
> sheet is in shambles.
> ftalphaville.ft.com/bl...
>
> Today our debt level is WORSE than that shown in the link. And there
> is no inclination by our leaders to make the tough decisions. Instead,
> they’re expanding our social programs while penalizing workers and
> business.
>
> It seems more probable than not, that we will continue on until crisis
> forces a change of course. I’d rather acknowledge our circumstances
> and at least try to prepare where possible, than wish it wasn’t so.
On Jul 21 08:41 PM awake09 wrote:
> Jeff: How does Canada stand to fare when these events unfold here
> in the US? Do we act as the biggest domino in the line up, and by
> virtue of our size knock over other economies that might otherwise
> make it?
At least it is hurricane season around here, and even though our property insurance may double this fall... there is forecast for incredible waves! Long food, oil, and drugs.
Part of the lying media's agenda is to convince average americans that the US is still the world's leader in just about everything.
That is far from the case and though (as I like to say) "Things take time to occur", the coming years will show how the US grew itself into its own massive ponzi scheme. Where excess money fueled phony growth, by consumers who used borrowed money to "appear" important and wealthy, rather than actually "being" important and wealthy.
As sure as I am sitting here, I feel confident that as the years go on, the full understanding of the death of US consumerism will take hold. Many stores, malls, strip centers are going to remain vacant and bulldozed to the ground.
People in the US are going to wake up in amazement and other countries, many who do not have the levels of debt and political corruption like we have here, are going to pull far ahead of the US in terms of innovation, education and standards of living.
I have written before about how in our colleges, the majority of students are getting nothing more than liberal arts degrees, spend their time taking hip hop classes, singing lessons, all in the hopes of "making it big" on some reality TV show, instead of being motivated to work hard in a profession or some other job.
Elsewhere in the world, in China and India, their engineering classes are full with long waiting lists, for they can see how the US has allowed its entire culture to erode, and they know they can capitalize on this in the coming years.
"Things take time to occur". My favorite saying which I believe in, and which will doom a majority of Americans who have allowed themselves to be dumbed down by the media and the powers that be.
Honestly.. I don't think resets for Option-ARMs are that big of a deal. As I recall they are based on some percentage + prime, and prime is at 0.25% right now. A historic low.
So no..resets won't trigger another wave of foreclosures. In fact, resets might be a GOOD thing for Option-ARM mortgages.
The biggest problem will be recasts - where negative amortization payment plans are forced into amortizing payment plans on Option-ARMs. This happens, I believe, every 5 years which means we will see the beginning of this in 2010 throughout 2012.
My bet is that the current administration or the banks themselves will remove that 5-year recast point and only shift Option-ARMs from neg. am payments to full amortizing payments if and only if the principal of the mortgage grows to be greater than 126% of the original mortgage principal.
According to Wells-Fargo predictions (which has been cross checked in another SA article) - this will happen sometime in 2016.
By that time residential housing will hopefully have stabilized and someone, somewhere will have found a solution to prevent the second coming.
As for commercial real-estate..well that's an entirely different beast.
I wonder.... how much more of this can the U.S take?
-Jason
On Jul 23 08:11 AM Lies and Damned Lies wrote:
>
> Honestly.. I don't think resets for Option-ARMs are that big of a
> deal. As I recall they are based on some percentage + prime, and
> prime is at 0.25% right now. A historic low.
>
> So no..resets won't trigger another wave of foreclosures. In fact,
> resets might be a GOOD thing for Option-ARM mortgages.
>
> The biggest problem will be recasts - where negative amortization
> payment plans are forced into amortizing payment plans on Option-ARMs.
> This happens, I believe, every 5 years which means we will see the
> beginning of this in 2010 throughout 2012.
>
> My bet is that the current administration or the banks themselves
> will remove that 5-year recast point and only shift Option-ARMs from
> neg. am payments to full amortizing payments if and only if the principal
> of the mortgage grows to be greater than 126% of the original mortgage
> principal.
>
> According to Wells-Fargo predictions (which has been cross checked
> in another SA article) - this will happen sometime in 2016.
> By that time residential housing will hopefully have stabilized and
> someone, somewhere will have found a solution to prevent the second
> coming.
>
> As for commercial real-estate..well that's an entirely different
> beast.
> I wonder.... how much more of this can the U.S take?
>
> -Jason
As SRF4Real said the local municipalities taxes are going to double in florida. Wait till the county, states and fed get started on tax increases. With the fed it will be in higher interest payments on the increasing debt.
Our Titanic has only filled up in the front two compartments. We have more compartment to fill before we go down. The rest of the worlds ships have hit the same Iceburg too, I don't think we are going alone.
Doubleguns has a further good point too in that this will badly affect tax revenues, making them even worse than they are now.
With all the other bad issues (jobs, homes, consumer {non-}spending, as examples), how come the media, political and business pundits can continue to spread green shoots theories, and how come the markets are rising despite absence of these green shoots?
I'm buying gold, and going to hide away until some sense comes through.
Brings us back to the old adage: "The market can stay irrational longer than you can stay solvent" .
As the market goes nowhere but up Im begining to wonder - the real esate markets were irrational for a decade before reality struck- when will we see this down leg? It seems everyone following this site is wildly pessimistic. Can we all be rational but wrong? I think not actually, yet I wonder when we will see the carnage so many of us predict is ahead.
archman,dave W.duobleguns + SRF4 are correct . My friend in Fl just had their property insurance go up 50 % last year . Property taxes in Alachua cnty are higher for an old double wide on 5 acres than in metro Atlanta for a fairly nice home on acerage . A state with NO income tax ALWAYS puts it on the homeowners shoulders to BEAR the cost . RETIRED " law inforcement " folks on pensions drive Hummers there + have 3 other Nice , new vehicles . Something Wrong with this picture ! You have to be NUTS to want to live in Florida !
There is much debate about banks etc being to Big To Fail. I think the debate is framed improperly. It really should be labeled To Big To Succeed.
And it’s not just Financial Institutions that are Too Big To Succeed, it is all industries ( think GM among others ).
What drives this phenomenon ?
In the U.S. we pride ourselves on backing free enterprise while other countries are quasi socialists. And the pundits have it right. Socialism in any form does mitigate growth and does curb the flexibility that is needed to have a vibrant society and economy. The point they miss is when you take the referees off the court you no longer have a basketball game, you have a hockey match. In other words power trumps economics.
Big institutions tend to dominate in the non regulated world. And what is wrong with that ? Shouldn’t they be more efficient ?
They should but they aren’t. Here is why and is the vital point.
Once a company becomes to big it no longer operates as a business it becomes a political entity. Ask the millions of entrepreneurs that left corporate America and they will almost without exception tell you that in the big corporate environment the best and the brightest were shunted aside as not to threaten the power seekers and players within the organization. This can only occur in a large organization where results can be modified, hidden and aborbed into a huge vat of data i.e. the spin doctors tend to win.
So we should not be surprised that GM bit the dust. Why did they ignore the obvious ? Because GM was run for management not for shareholders. Self dealing, pure and simple. And the efficiencies that larger companies bring ? Has anyone seen fees go down and yields go up at the biggest banks ? Even when record profits were rolling in this was not the case. Why with all their advantages are the biggest banks in financial trouble ? Where did that profit spread go ? Empire building by the myriad of executives within the organization.
Which brings us to the present. Although Obama is doing a lot of things right. Cancelling non essential fighter planes for example. The proposed tax changes will put a burden on the only part of society that is working. The small business owner. Many of whom I have met and admire. The degree of integrity in this class of society is leap years ahead of all others. That may sound strident but it must be said. The past, present and future of our country depends on this group of working class heroes who have done well.