Commercial Mortgages and Mortgage Resets to Trigger Next U.S. Downleg

Includes: DIA, SPY, XLF
by: Jeff Nielson

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”.