Mortgage Delinquencies Set Record; Commercial Real Estate Resumes 'Steep Decline'

As far as I can tell, most analysts now concede that the bursting credit and real estate bubbles played a key role in bringing about the devastating downturn of the past two years.

Logically, that would suggest that a sustainable recovery is going to require some degree of stability -- no, normalcy -- in these two areas. Yet by most accounts, credit markets are on life support, dominated by the Federal Reserve and banks with broken business models that are somehow too big to fail.

Meanwhile, the residential property market is still being propped up by all sorts of subsidies -- for more on this, see "Policy and Housing: Someone’s Gotta Give!"-- and the supply-side of the equation remains an ongoing concern, if reports like the following from Reuters, "U.S. Mortgage Delinquencies Set Record," are anything to go by:

High U.S. unemployment keeps pushing up the rate of mortgage delinquencies, which could in turn drive personal bankruptcies and home foreclosures, monthly data from the Equifax Inc credit bureau showed on Monday.

Among U.S. homeowners with mortgages, a record 7.58 percent were at least 30 days late on payments in August, up from 7.32 percent in July, according to the data obtained exclusively by Reuters.

August marked the fourth consecutive monthly increase in delinquencies, and the report showed an accelerating pace. By comparison, 4.89 percent of mortgages were 30 days past due in August 2008, while in August 2007, the rate was 3.44 percent, Equifax data showed.

In addition, the commercial property market is also looking dicey again, as Bloomberg reveals in "Moody’s Property Index Resumes ‘Steep’ Fall in July":

Commercial real estate prices in the U.S. resumed a “steep decline” in July after showing signs of leveling off in June, Moody’s Investors Service said, as credit restrictions curtail lending and push landlords toward default.

The Moody’s/REAL Commercial Property Price Indices fell 5.1 percent in July from the month before, Moody’s said today in a statement. The index is down almost 39 percent from its October 2007 peak. The decline in June was 1 percent.

Commercial property sales this year may fall to an 18-year low. This latest set of numbers suggests no letup in that trend, said Neal Elkin, president of Real Estate Analytics LLC, a New York firm that partners with Moody’s in producing the report.

In sum, it seems like those who see signs of light at the end of the tunnel need to look a bit more carefully at what's really there.

Comments

[conceptwizard:]

A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

Sep 22 03:49 PM

[notsosmart:]

& the band played on.this whole system has become one big joke.already new "paper" is coming out of wall st(casino/ponzi) to fleece the sheeples once again.by the time any new regs are passed,if ever, new instruments will circumvent everything.did the stupes of the world learn anything? i hope so.doubt it.

Sep 22 04:00 PM

[Mark Bern:]

A very good article with dire implications.

Let's think about the real problem facing CRE owners. Usually, CRE owners compile a number of assets within an asset group, such as office buildings, shopping malls or multi-family complexes. The will normally aggregate their holdings over a period of several years, pruning here and there as needed, adding new properties when opportunities pass their way. Now let's assume that a company has accumulated a portfolio of CRE properties that had an aggregate market value of $800 million in June 2007. Let's also assume that the owner, probably a REIT, maintains a debt to asset value ratio of 60%. That would mean they are carrying debt of about $480 million.

Flash forward to September 2009 and consider that with the size of the portfolio, at least 10% of the debt is coming due. Sure it is only $48 million. He needs to roll over the full $48 million. But put yourself in the position of the lender. CRE values continue to fall and the assets available to secure the new loan is valued at no more than $48 million (probably less since the reports noted in the article are a measure of historical values). What will it be worth 12 months from now? Probably less than $48 million. Are you willing to lend the owner the money? Of course not.

Why is the 10% of assets that were worth $800 million in 2007 become worth only $48 million? $800 x 60% = $480. Values have dropped about 40%, maybe more by now.

Can the owner reduce debt by paying down the principal from cash flows? Probably not. Have you visited the mall lately? Notice any empty store fronts? The mall owners are losing stores and having to reduce lease rates to retain the stores they currently have. Their cash flows are diminishing. It's the same in office buildings and apartments, as well. Vacancies are up and rents are down.

Lenders have learned the lesson of making 100% or 125% loan to value loans. They are not willing, not should they be, to go down that path again. So, the path down which this leads the owners is: bankruptcy reorganization. It's not going to be pretty in CRE for the next two to three years.

Sep 22 04:25 PM

[Steve0:]

92% of home owners are on time with their mortgage. Delinquencies have increased 2.6% from the real estate boom to bust and the worst economy since the 1930. Hardly fodder for further negative housing outlook.

Sep 22 08:52 PM

[Carlos Lam:]

On Sep 22 08:52 PM Steve0 wrote:

> 92% of home owners are on time with their mortgage. Delinquencies
> have increased 2.6% from the real estate boom to bust and the worst
> economy since the 1930. Hardly fodder for further negative housing
> outlook.

Overall, you are correct. The "problem" is with the banks and entities who purchased the MBS-es that are comprised of some of these mortgages. The MBS-es should be written down in value to reflect the non-payment of mortgages AND the loss in value of the underlying real estate, but the banks are so leveraged that such a move would make them insolvent. Then the REAL problem is that the government seeks to change the rules, bail them out, and create so much inflation that the value of the underlying properties increases.

Sep 23 07:38 AM