Citigroup, Capital One See Increasing Risks in CRE [Housing Tracker]

Commercial Real Estate 

Citigroup, Inc. F2Q08 (Qtr End 6/30/08) Earnings Call Transcript. “Citigroup CFO Gary Crittenden: “Excluding interest earnings we recorded a $545 million write-down net of hedges on the [commercial real estate] portfolio… The area where we continue to see risks… [includes] the commercial real estate industry.” (Seeking Alpha, July 18^th) 

Capital One Financial Corporation Q2 2008 Earnings Call Transcript. “Richard D. Fairbank - Founder, Chairman, and CEO: In our $28 billion commercial loan portfolio, we have less than $3B in construction loans and only about half of that amount is for residential for sale construction. And although we've observed increasing risk in our legacy Greenpoint small-ticket commercial real estate loans, it is a small $2.8B portfolio from a business we've discontinued and it's in runoff mode… We expect loan growth to remain flat for the remainder of 2008 as growth in commercial loans continues to offset the expected runoff of residential mortgages in the small-ticket commercial real estate portfolio… We have no CDOs or SIVs, and no exposure to leveraged loans.”  (Seeking Alpha, July 18^th) 

Commercial Real Estate Securities Defaults Rising, Slowly. “S&P: “Deteriorating standards for loan underwriting and origination, as well as a rise in frothy property valuations over the past few years, could undermine the performance of commercial mortgage loans and lead to gradually increasing defaults and loss severities, especially over the next 12-24 months… North American CMBS performed well in 2007, but credit performance was not as strong as in 2006… Last year saw 257 new loan defaults, up from 195 in the previous year. Despite the rise in new defaults between 2006-2007, the numbers still reflected notable declines from both 2004 (334) and 2005 (319).” At year-end 2007, the overall default rate for North American CMBS by loan count was 4.25%, down from 4.60% at year-end 2006. By principal balance, the rate was 2.1% at year-end 2007, compared with 2.4% at year-end 2006. While an improving default rate is positive for the sector, the decline was largely caused by the elevated amount of new issuance that entered the CMBS market in 2006.”  (Research Recap in Seeking Alpha, July 17^th) 

Merrill Lynch SEC Form 8-K Q2 and H1’08 Highlights. “Significant progress in balance sheet and risk reduction during the quarter, including reductions of 51% in U.S. Alt-A residential mortgages and 29% in U.S. sub-prime residential mortgage net exposures, 47% in leveraged finance, and 17% in commercial real estate net exposures, excluding First Republic Bank… Q2’08 net exposures related to commercial real estate, excluding First Republic Bank, totaled approximately $14.9 billion, down 17% from Q1, due primarily to sales, particularly for whole loan/conduit exposures in the U.S. and EMEA. Net exposures related to First Republic Bank were $2.7B at the end of Q2, up 3% from Q1.”  (Sydney Morning Herald, July 17^th) 

Fitch Places 1 Class of Gramercy RE CDO 2007-1 on Rating Watch Negative.  “Fitch has placed one class on Rating Watch Negative and has affirmed 14 classes of Gramercy Real Estate CDO 2007-1 Ltd./LLC… The placement of class J on Rating Watch Negative stems from two cross-defaulted loans representing 6.3% of the collateral pool that are now 60 days delinquent and whose borrower has filed for bankruptcy… Significant losses on these loans would cause erosion of credit support to class J… Gramercy Real Estate CDO 2007-1 (Gramercy 2007-1) is a $1,099,933,197 revolving commercial real estate cash flow collateralized debt obligation that closed on August 8, 2007. As of the June 2008… the CDO was substantially invested as follows: CMBS (68.6%), commercial real estate whole loans (14.1%), mezzanine loans (11.8%), and B-notes (5.5%).”  (MarketWatch, July 17^th)

 

Seeking Alpha's Housing Tracker is a collection of housing-related excerpts from various sources, grouped by topic. Feel free to post any interesting links on the subject in the comments section below.

Get Seeking Alpha's housing market coverage by email -- it's free and takes only seconds to sign up.

Comments

[johnthebear]

Thanks Judy, the quotes you cited reflect the weak state of the commercial mortgage backed securities (CMBS) and other CDO's.

"While an improving default rate is positive for the sector, the decline was largely caused by the elevated amount of new issuance that entered the CMBS market in 2006.”

I am really worried about how the market will adjust to the huge write-downs in the commercial mortgage sector. It was amazing how much IYR declined with the Fed's first mention that "commercial real estate was slowing." The Fed must be very careful here to not state the truth too clearly. They walk a very narrow path. I would hate to be in their shoes these days.