2houndz's Comments

With $770B of the $1.4T in commercial mortgages maturing in the next five years currently underwater, FDIC revises its rules (.pdf) to allow banks to keep loans on their books as 'performing' even when the underlying properties no longer cover the outlay.

Sun, 01 Nov 2009 13:30:53 -0500

@bbro - Great comment, but keep in mind that market rent is whatever a property will sell for on the open market, so this suggests that nearly everyone in the business of buying CRE had blown a bubble in the market. If a handful of buyers had paid above the market the whole sector would not be in this mess.

I took your scenario a step farther and applied some rough numbers to it. I don't necessarily agree with your assumption of 75% ltv - I think it was typically higher than that, which magnifies the problem even further, but I used what you have started.

I did this quickly with a sheet of paper, so I took liberies in the rounding. If a $10MM loan was used to purchase an asset for $13.3MM, and assuming a 7% CAP rate the Net Operating Income (NOI) would have been $930K and the debt service would have been 720K at a 6% rate, resulting in net cash flow of $210K. I assume that NOI is made up of just over $1MM income and 100K of non-recoverable costs (10% of income).

Now lets assume that the rent drops 17%, which is what we have been seeing in the office sector. That would be 860K in income and the non-recoverables would not change very much. In fact they might increase due to increased marketing, a shouldering of the utilities cost that may have been paid by the former tenant, etc. NOI is now $760K and the income now barely covers the debt service (it probably doesn't at the end of the day by the time we clean up my rounding and throw in other non-recoverables that I ignored for the sake of simplicity). The CAP rate may now be 9-11%, which we are clearly seeing throughout the industry. If we take the better end of that at 9% our value based on income is now $8.4 MM. It is easy to see why an owner with non-recourse debt would consider walking away.

Now going back to my original statement we realize that an entire industry fell into this trap. We are not talking about a few that paid above market. Over the next few years as these loans roll over this will play out over and over and....

On Nov 01 12:32 PM bbro wrote:

> A 10 million loan implies the property was worth 13.3 million
> (75% LTV) and the property is now worth 6 million...55% decline in
> value...they must have bought higher than the market highs....

California: Entering Inflationary Depression

Thu, 29 Oct 2009 16:58:09 -0400

Wow, these comments are negative. While reading them I couldn't help but imagine the Joad family loading the truck and heading back to Oklahoma. Actually, they may have better luck finding a job in OK.

This is one of the better summations of the CA situation that I have read. Thanks for putting it together.

The Wal-Mart Economic Stimulus Plan

Thu, 29 Oct 2009 16:46:25 -0400

But don't expect them to get an ounce of credit, since they are doing this in the name of the dirtiest word of all - to make a PROFIT. Can you imagine?? Isn't it common knowledge by now that anything done for profit is wrong-headed?

WM is also leading the way among retailers in the practical use of green technology as well, but they seldom receive kudos, since they are implementing the changes based on the "P" word above.

Now that jobs are scarce, some communities who would not allow the stores in their towns two years ago have changed their tunes, but still plenty are running these greedy capitalists out on a rail.

Without another round of stimulus, NY Times says, the best we can hope for is the weakest recovery in modern history. Mark Thoma agrees, but thinks the chances are slim given the political climate.

Tue, 27 Oct 2009 11:34:44 -0400

I wish that I could tell the difference....

On Oct 27 11:30 AM Wildebeest wrote:

> Its not the communists its the plutocrats that are bleeding the country.
>

First-Time Home Buyer Tax Credit Fraud Called 'Disturbing?'

Fri, 23 Oct 2009 07:55:06 -0400

A few months ago I was disturbed by the number of people who seemed willing to steal money thru these schemes, walk away from their mortgages, or run their credit card debt sky high just to walk away a month later, but now I see that this is simply the culture we have created. And while I can't imagine myself ever doing these things I have to ask "why not"?

If our government is going to hand out money by the boatloads to those on Wall Street who are politically connected, set it up with no strings attached, then sit back and watch them take it and run, then it's hard to blame an individual who is in dire straits for doing essentially the same thing. Sure, I know that this is fraudulent and illegal, while the bankers have the cover of some fabricated law, but we all know that its the same thing. One group receives the blessing of Congress while the other will receive a criminal investigation. All depends on how much you helped your congressman get and keep his or her job.

The Muddle Through Economy, R.I.P.?

Mon, 19 Oct 2009 22:08:24 -0400

Go shout your nonsense at HuffPo where they prefer nonsensical baiting and badgering.

I come to this website to read articles by the likes of John Maulden, and to read comments by those who have something meaningful to add.

If you don't mind, I'd like to have back the three minutes of my life that I spent reading your drivel. You don't even have a point to make.

On Oct 19 07:59 PM dracula99 wrote:

> Obama has been in office 10 months, you morons!The Wall Street abuse
> has been encouraged by the so call free-market idiots like you. You
> bow to the free- market ideology, but you forget that the world has
> caught up to the rape perpetrated by the good ol' US of A after wwII.
> Time to think of how to invest in your country instead make a quick
> buck from the ebbs and flows of this travesty called the stock market.

September Retail Data Demonstrates Stupidity of 'Cash for Clunkers'

Thu, 15 Oct 2009 22:27:14 -0400

It transferred more money from my pocket and yours to an industry that supports the UAW voting machine. That was the only intention. Don't fool yourself into thinking that anyone in Congress or the Executive Office burned a lot of brain cells in figuring out how it would help the economy, the consumer and certainly not the taxpayer - only how it would help their job security.

Oh, and before you ask about the loan mod program - same thing.
Just another way of getting money from us to support the bankers while making the rest of us feel like they are doing us some kind of favor.

The financial sector's five fatal flaws have created a monster that is draining the lifeblood of the real economy, professor William Black says: "The focus on finance carries a grave risk. Remember, the sole purpose of finance is to aid the real economy. Our ultimate focus needs to be on the real economy, which creates goods and services, our jobs, and our incomes."

Wed, 14 Oct 2009 18:33:05 -0400

But the "real economy" does not own members of Congress and the Executive Branch the way the financial sector does. Risk or not, politicians both liberal and conservative know who butters their bread.

Retail Sales Recovery Isn't So Clear

Sat, 10 Oct 2009 15:08:12 -0400

Captain - how is fewer retail employees and less inventory going to help sales comps? Agreed that it should help the bottom line look better, but we are talking here about sales. That's unless of course, in addition to a "job-less" recovery we are now talking about a "revenue-less" recovery, which really would not surprise me one bit. I have myself started expecting a "recovery-less" recovery, where nothing actually improves except government transfer payments that keep pumping up the markets.... but I digress....

Markos,
You wrote above:
"Most would use caution in predicting recovery based on such a small increase, and on preliminary data nonetheless!"

I am in agreement with you and thank you for your post, but keep in mind that most revisions downward are simply overlooked. If a data point, preliminary or otherwise is encouraging, it is a "surprise" and is leading data. If data is negative or if a prior announcement is revised down it is lagging, was expected, and is already priced into the market.

Again I appreciate your objectivity, but you cannot win at this game.

Countrywide / Bank of America REOs Fall to February 2007 Levels

Sat, 10 Oct 2009 14:40:22 -0400

DuetscheBank research is estimating that half of all American MORTGAGEES will be underwater by 2011, as opposed to half of all homeowners. Obviously, the few that own their house outright cannot be underwater. The house cannot be worth less than nothing.

www.reuters.com/articl...

General Growth Properties Bankruptcy: Not the End of Malls

Sat, 10 Oct 2009 14:28:57 -0400

Todd -
You cannot look at where an anchor tenant such as Dillard's stacks up in a mall owner's portfolio in terms of income and say "see - they are not a significant poportion of the income, so no worries if they go belly-up." In all the development and redevelopment deals I've been a part of along with Dillard's, I remember none where they paid significant rent, and few where they paid their fair share of the operating costs. Anchor stores were supposed to be loss leaders. They usually pay next-to-nothing, build their own stores and are suposed to drive traffic in the center.

Now one cold argue that Dillard's for instance has not really been driving traffic for years, and since their presence does little for the center's bottom line, the developer would be better off without such a horrible retailer as they could then do something else with the space. But we all know that's not the case for C malls right now. I've done enough Steve and Barry's deals in those vacant doors for $7 rent, 7 years and $42 in cash payment (yeah - get your calculator and figure the NPV on that pile of crap) just to see them go under in record time.
Dillards and BonTon are absolutely dismal companies that deserve to fail, but make no mistake that another dark anchor in an already struggling mall could mean death to that development. If you don't think so I could take you on a tour in Ohio, Florida, New Orleans and several other areas and show you the failures that have already occured.
And another thing on these cap rates. Show me a willing buyer at ten or less, and I'll show you people who are ready to make a deal, assuming they are not underwater at ten. Maybe GGP is big enough to twist arms, but in my world of smaller players (but still my world includes publicly traded REITs), this stuff is not even getting refinanced at sub-12%, so I doubt if the buyers exist at 7 or 10, regardless of what the owners and bankers fantasize and tell the investing public.

Bottom line at GGP has the same fundamental problem as retail real estate overall - Too much money chasing too little talent. How hard is it to see that these people took enormous gambles with other people's money without understanding leverage, risk, or in many cases basic finance? Sure they may have been great creators of special retail environments or some such nonsense that's so subjective you or I could never question it, but I've been across the table from GGP on deals where they simply did not understand the math or creation of value.

Regardless of anything that I have to contribute here, I see that their stock is on a tear, which I suppose is all that matters. You can't fool all of the people all of the time, but you can in fact fool some of the people all of the time.

Chicago has been eliminated from the race to host the 2016 Olympics, on the first ballot.

Fri, 02 Oct 2009 12:18:13 -0400

Is this really a personal smackdown of Obama by the IOC? I certainly hope not. If he has lost his charisma then he (and we) have little of substance to fall back on.
I thought the trip was a boondoggle and a waste of Executive time as well, but its a far cry better than the way Jimmy Carter handled the Olympics.
Now stand aside for the cry from the media that the IOC is just a bunch of racists. Who could have known that?

Real Estate Question of the Day

Mon, 28 Sep 2009 11:03:30 -0400

I could draw a map of the interstate system using those dots. Especially across the west.

Chris - many of those areas with no dots also have no people. Ever seen the movie "The Coca-Cola Kid"?

Palm's (PALM -4.7%) high-stakes Pre smartphone faces a setback, as Verizon (VZ) decides not to support the phone in January as expected. The Pre has been exclusively offered on the Sprint (S) network; sources say less-than-blockbuster sales of under a million units are partly to blame.

Thu, 24 Sep 2009 20:29:17 -0400

Ryu - I agree. When this stock went to the moon I was amazed. The company generated lackluster products and vision for years while competitors stole their lunch. The Pre is too little and too late to the game. I traded the chart on this all the way thru, but to buy it on fundamentals was foolhardiness and wishful thinking.

More Good Quarters for Apparel Retailers Ahead?

Wed, 02 Sep 2009 06:56:37 -0400

A war of attrition is a war that will eventually be lost.

Real Estate Exposure Hurting Regional Banks

Mon, 31 Aug 2009 19:53:46 -0400

Hardwood - I wasn't trying to make any connection at all. It just seemed noteworthy how similar the two maps are when you compare the one above with the University of Michigan Red/Blue cartogram from the 2008 election. I consider myself a student of trends and I tend to notice things like this. If I see two other similar references in the next two weeks maybe I can begin to guess at a reason for it.

Real Estate Exposure Hurting Regional Banks

Sun, 30 Aug 2009 12:08:38 -0400

I was in commercial RE awhile back and helped several start-up banks find their first locations. They were all in the business to get a bank or S&L up and running, then sell it off to a conglomerate and make enough to to retire in style in short order. I have also read several investment articles from a few years back describing how the average investor coud get involved thru manged mutual funds that specialized in this speculation.

Just a coincidence I'm sure, but the bubble map above looks a lot like the map of 2008 Presidential election results by county.

Is the Savings Trend Dead, Or Sleeping?

Sat, 29 Aug 2009 07:21:09 -0400

Paying down debt is boring. It takes a long time. Also it doesn't impress friends, neighbors and people you don't even know who are sitting next to you in traffic looking at your older car.

I hope Carlos is right, but a year ago I said that the American consumer will stop spending when his creit card is ripped from his cold, dead hands. From a cultural point I'm sticking by that. On the other hand, with the vast amount of debt, I don't see how a continuation of every one of us chasing the luxe life is possible. The TV commercials from BAC and Allstate heralding the beauty of a simpler life are very heartwarming, but in my opinion, Americans want another Gucci purse or another Harley or BMW or whatever.

For the next couple years the cold dead hand theory probably wins . IMO consumption will stay lower but only because the average person cannot stay on the borrow/spend treadmill at 2006 rates. Besides, when we talk about personal savings it sounds like people are actually saving money in a piggy bank. For the most part they are not. They are simply paying down the debt they accumulated during the last bender. Once it is paid down to reasonable levels, defaulted off the books or paid down by the government and our grandkids, the floodgate of pent up demand for granite countertops and $2,000 refrigerators will be opened for sure.

State and Local Governments Increase Jobs: Even the Experts Are Shocked

Mon, 24 Aug 2009 06:40:27 -0400

"but then again many states are using "stimulus" money to make up shortfalls, so I suppose through the backdoor, the federal government is really adding these jobs."

This is exactly what the handful of state Governors who tried to stop some of this "stimulus" plan were afraid of. Of course they were promptly thrown under the bus, and rightly so. If someone else is getting a handout from future generations, then I should get my fair share as well. Nevermind the future of the country - what's in it for me? It's the American Way.

On Friday, Geithner formally asked Congress to raise the $12.1T debt limit so "investors here and around the world can remain confident that the United States will always meet its obligations." The existing limit could be breached as soon as mid-October.

Mon, 10 Aug 2009 06:59:10 -0400

Maybe people whose debt load looks suspect should borow more money. If a guy is having trouble paying his $400K mortgage then clearly he should borrow another $200K. This will help the lender rest easier and with more confidence.

Whole Foods: Gaining Steam, Not Weight

Sat, 08 Aug 2009 20:52:59 -0400

The "philosophy" that Mackey latches on to right now is whatever sound bite or "altruistic" idea that has impressed him the most in the last five minutes.
While it may be altruistic to focus on their roots and return to healthy food, most of the company's infrastructure in terms of number of doors, locations, rent and store size is grounded in all those "foodies" spending vast amounts of money in his stores for things like "artisan" beer, wine and all those cheeses that most of us never heard of until Mackey and his team showed up in our city.

Now that keeping the job, making the mortgage and paying for the kids' education is front and center, most folks don't seem as convinced that Kroger, Safeway and WalMart are trying to poison their children. The problem with the business model is that, now that levered dollars are not exploding from the wallets of the middle class, and they choose to downscale their shopping experience, Whole Foods is left high and dry.
It is exactly the opposite from 2002-2004 when stores like Ames went out of business. As everyone scaled up, WalMart became low end and the weak players below that level failed. I'm not suggesting that WFMI will ultimately fail, but to say that the people who truly appreciate wholesome, organic, "healthy" food can support all that infrastructure and fixed costs is just not believable. Especially with a leader who constantly changes the company direction and mission. The company and the stock may perform, but with all those investment opportunities out there it seems easier to buy a company today whose leader will have the same basic philosophy when he rolls out of bed tomorrow.

Brinker Int'l Sees a Difficult Quarter Ahead

Sat, 08 Aug 2009 20:26:38 -0400

So they engineeered good numbers thus far by severely cutting expenses and now they have to fess up that a war of attrition cannot be won. Gee- who would have expected this?
In Q3 this news will become a broken record. Hats off the EAT for the warning.

Chrysler changes its mind, as the PT Cruiser: not dead yet.

Fri, 31 Jul 2009 16:08:08 -0400

I don't get it. Is the PT Cruiser really what America wants in a vehicle, or am I that far out of touch? Last time I traveled and rented a PT I felt like I should be wearing a red rubber nose and big, floppy shoes on my way to a birthday party for a five-year-old. I checked the horn to see if it went "OOOOOGA" or played Camptown Races.
I never rented one again.

Everybody Hates Leveraged ETFs

Thu, 30 Jul 2009 09:22:16 -0400

Soon they will be available only to daytraders, which is the intended use anyway. I'm not saying that's a good thing, just an observation. I thought business in America was about choices and freedom, but I think I'm wrong on that one. Seems like a good product as long as they are closely managed by a trader who understands their purpose.

Having said that, if one likes leverage, why not trade the e-mini futures? The leverage is even higher, and TF and YM are easier to trade than say, FAS or SKF, in my opinion.

Housing Bottom: Is It the Foreclosures, Stupid?

Thu, 30 Jul 2009 07:18:49 -0400

I hope the scenario above is correct, but here in small-town SC we have the feeling that the worst is yet to come for above-average priced homes. I hear similar stories from other areas.

The subprime stuff seems to be behind us, but people who were subsidizing their luxe lifestyles with debt and now have less income are beginning to hit the skids. I'm watching houses that listed for $675K get the ask price reduced by $100K, then another $10K every few weeks. If I charted the price changes, it would look like sheer desperation. And the quantity is very large - several per block. One just sold for $410K across the street from another that had listed for $640K. When I see price dicrepancies like that, it tells me that the market is currently broken.

Don't Worry, the Government Will Pay Your Rent or Mortgage

Thu, 16 Jul 2009 20:54:59 -0400

AL-US
Your understanding of economic history is baffling, to say the least. Did you completely make this $%#* up, or are you referring to something from another planet or another dimension? Either way, try lining your hat with tin foil and those voices will probably stop.

"Nothing has changed, what was true of capitalism from its creation out of the cesspool of Feudalism, with its economics of serfs tied to the land and their Lord, continuing into the 1800's, is true today: socialism for the wealthy elites..."

Don't Worry, the Government Will Pay Your Rent or Mortgage

Thu, 16 Jul 2009 11:00:33 -0400

This has little to do with subsidizing homeowners and everything to do with subsidizing banks. That was the purpose of the first two mortgage bailouts (Obama and Bush plans), but the only way to avoid shoveling more to banks without a public outcry is to make it appear as if they are trying to help the cash-strapped "little guy".

Capital One's (COF +9.4%) chargeoff rate rises to a frightful 9.73% from 9.41%, but deliquencies declined for the fourth straight month to 4.77%, which may be the proverbial light at the end of the tunnel. Institutional chargeoffs were down to 9.26% from 9.77% in May. (8-K) COF's peers are broadly higher: AXP +6%. DFS +4%. MA +2.8%. V +2.7%.

Wed, 15 Jul 2009 12:24:48 -0400

So almost 10% of their loans are garbage, and the stock price jumps almost 10%. Will someone please tell me how to get back to the other side of this looking-glass?

Some good weekend reading: USA Today's detailed but clear look at how banks are leaning on overdraft fees - or "courtesy loans" which can have effective APRs of more than 3,000%. “If it weren’t for overdraft fees, 45% of banks and credit unions wouldn’t have made money in 2008.”

Sun, 12 Jul 2009 10:31:19 -0400

And the payday loan operators have been incredibly maligned in recent months. I can't see much difference.

2houndz's Comments

With $770B of the $1.4T in commercial mortgages maturing in the next five years currently underwater, FDIC revises its rules (.pdf) to allow banks to keep loans on their books as 'performing' even when the underlying properties no longer cover the outlay.

California: Entering Inflationary Depression

The Wal-Mart Economic Stimulus Plan

Without another round of stimulus, NY Times says, the best we can hope for is the weakest recovery in modern history. Mark Thoma agrees, but thinks the chances are slim given the political climate.

First-Time Home Buyer Tax Credit Fraud Called 'Disturbing?'

The Muddle Through Economy, R.I.P.?

September Retail Data Demonstrates Stupidity of 'Cash for Clunkers'

Retail Sales Recovery Isn't So Clear

Countrywide / Bank of America REOs Fall to February 2007 Levels

General Growth Properties Bankruptcy: Not the End of Malls

Chicago has been eliminated from the race to host the 2016 Olympics, on the first ballot.

Real Estate Question of the Day

Palm's (PALM -4.7%) high-stakes Pre smartphone faces a setback, as Verizon (VZ) decides not to support the phone in January as expected. The Pre has been exclusively offered on the Sprint (S) network; sources say less-than-blockbuster sales of under a million units are partly to blame.

More Good Quarters for Apparel Retailers Ahead?

Real Estate Exposure Hurting Regional Banks

Real Estate Exposure Hurting Regional Banks

Is the Savings Trend Dead, Or Sleeping?

State and Local Governments Increase Jobs: Even the Experts Are Shocked

On Friday, Geithner formally asked Congress to raise the $12.1T debt limit so "investors here and around the world can remain confident that the United States will always meet its obligations." The existing limit could be breached as soon as mid-October.

Whole Foods: Gaining Steam, Not Weight

Brinker Int'l Sees a Difficult Quarter Ahead

Chrysler changes its mind, as the PT Cruiser: not dead yet.

Everybody Hates Leveraged ETFs

Housing Bottom: Is It the Foreclosures, Stupid?

More Questions About Bollinger Bands and the VIX

Don't Worry, the Government Will Pay Your Rent or Mortgage

Don't Worry, the Government Will Pay Your Rent or Mortgage

Some good weekend reading: USA Today's detailed but clear look at how banks are leaning on overdraft fees - or "courtesy loans" which can have effective APRs of more than 3,000%. “If it weren’t for overdraft fees, 45% of banks and credit unions wouldn’t have made money in 2008.”