Housing Doom

Hat tip to DollarCollapse for the link to the EconomicRot.

.

.

.

.

.

.

embed from "Elizabeth Warren (with Charlie Rose) on Commercial Real Estate"

Banks have been going under at a rate not seen in years, leaving the FDIC short of funds and long on assets.  They are trying to alleviate the problem by auctioning off these assets, but that's leaving surviving banks unhappy: [Thanks L!]

March 8 (Bloomberg) — A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month, including a loan to build a W Hotel in Atlanta, may trigger writedowns that weaken lenders nationwide.

Almost half of the loans were originated by Silverton Bank N.A., whose collapse last May was the biggest in Georgia history. Community banks that joined Silverton in providing $80 million for the 237-room hotel and condominium complex, as well as backing for 39 other projects, could be forced to write down their stakes to reflect sale prices.

The auctions may have wider repercussions. Of the $41 billion in assets seized from failed banks held by the FDIC as of the end of January, $15.6 billion are real estate loans and about 4 percent of those involve participations by other lenders, according to agency spokesman Andrew Gray.

“These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,” said Robert Reynolds, a lawyer at Reynolds Reynolds & Duncan LLC in Tuscaloosa, Alabama, who represents 25 lenders that took part in financing the W Hotel. “Our banks just cannot believe they’re being treated in a way that ultimately hurts the FDIC’s insurance fund, because some of them are right on the edge.”

It's easy to understand the position of the lenders, who've been fighting writedowns ever since the housing market started to fizzle.  Auctions in this market are unlikely to fetch top dollar.

Read the rest of this entry »

The old definition of banks, "take demand deposits and make commercial loans," has been changed in practice to a new one: "borrow money guaranteed by the government and make real estate loans." The implications of this structural shift for systemic financial risk have yet to be worked out. – Alex Pollock¹

Pollock's merry band of alarmists (very much a minority view at the American Enterprise Institute) became seriously concerned about subprime in late '06, just about the time the penny dropped for "Crispy" in Bakersfield CA, Aaron Krowne, Russ Winter and a few others among our blogging colleagues, readers and to be fair some MSM types and analysts.  Indeed I've spent more hours than I care to contemplate since March 28, 2007 documenting their AEI-based seminars on the issue.  Although they often display some right-wing / conservative bias this is largely offset by the little matters of training, long experience and access to some pretty heavy resources.

This latest short article is fairly important in that it summarizes what is almost certainly a key element of our present dilemma, the long-term change of banking away from a business model that used deposits to fund productive activity.  Pollock summarizes this with a single chart (go to original for sharper image).

Doomers should stare at that chart in its original context and read the whole article.  We have landed in a systemic configuration that can't possibly be sustained, and it's not going to be pretty when it starts to revert.

Read the rest of this entry »

Consider this from Clusterstock:

Today the St. Louis Fed released its latest monthly look at commercial and industrial loans at major banks — a measure that some would say represents the essence of the US banking system.

As you can see, this measure is still falling like a knife — a bad sign for the ongoing health of the economy.  (And also not what we were promised when we bailed out the banks.)

In some respects, this is a good thing for the residential and commercial markets.  L has often told me that the homebuilders back in the '80s kept on building until the banks took away their nails- even when the recession meant there was a glut of properties on the market. Given the glut of both residential and commercial properties out there, a slowdown would be a good thing. That said, there are still worthwhile business projects out there that won't be happening due to a lack of cash.

So why are banks not lending? [Besides the fact that in a deleveraging world, there are a lot of projects out there not worth funding.]  According to Mike Larson of Weiss Research: Read the rest of this entry »

The Congressional Oversight Panel issued a report on the state of commercial real estate, and they are worried: [Thanks L!]

Over the next few years, a wave of commercial real estate loan failures could threaten America‘s already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation‘s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.

I'm convinced that the FDIC has to be at least as worried as the COP, but the Wall Street Journal doesn't seem to share my sentiment.  They asked yesterday Is the FDIC bullish on commercial real estate?

For all you vulture investors expecting a repeat of the RTC fire sales of commercial real estate of the early ‘90s don’t get your hopes up.

Home builder Lennar’s recent purchase of $3.05 billion of land and unfinished housing developments from troubled banks with government financing shows that the Federal Deposit Insurance Corp. isn’t selling at rock-bottom prices.

The sale may prove an important bell-weather transaction for home builders and other opportunistic investors looking to take advantage of the housing carnage and snap up land on the cheap. But it may not provide much clarity about the value of commercial real estate clogging the books of the nation’s banks.

That is because the FDIC has provided 0% financing for the deal and is taking a $365 million equity stake. Lennar is kicking in $243 million. That means Lennar could arguably afford to pay more than fair-market value given the government subsidies involved.

The deal values the assets at $1.22 billion, or about 40 cents on the dollar, for a mix of land in California, Nevada and Arizona, ranging from a single house lot in an upscale Southern California neighborhood to raw land out in the desert.

Without that government backing, those same assets would have likely sold for half what Lennar paid.

So why would the FDIC do this?  The WSJ offers two theories:

One theory is that the FDIC is trying to avoid fire sales on the open market so that commercial real-estate values on the banks balance sheets don’t crater further.

Or perhaps the FDIC is bullish about a real-estate recovery and wants to enjoy a piece of the upside when land values recover.

My vote is for Theory #1, although the FDIC might claim differently.

Interestingly, Rialto Capital Advisors, a subsidiary of Lennar is managing the portfolios for Lenna.  Rialto Capital Advisors was one of the firms selected by the Treasury to participate in the Legacy Securities Public-Private Investment Program (PPIP) and the Legacy Loan Program (LLP).  While this is not being announced as a LLP deal per se, this deal looks remarkably similar to the way LLP was to be structured: Read the rest of this entry »

Feb. 11 (Bloomberg) — Commercial real estate loans have the potential to go sour and wreck the U.S. economy unless regulators prepare now, according to a report today from a watchdog Congress created for the government’s financial bailout program. – BL¹

… potential my right-only DSK, Elizabeth.  Anyone who's followed Dow / WSJ ace Lingling Wei with any attention over the last year is all too aware that the ticking is already clearly audible from Manhattan itself.

As they always say at the hurricane center, preparations to protect life and property should already have been completed.

Read the rest of this entry »

The document was an annual report on [minister Christian Paradis'] Public Works' massive real-estate portfolio, which contained factual information on high vacancy rates and weak returns on investment. Such reports had never been made public before. // The department's real-estate branch had consented to the full release, and the Access to Information office at Public Works had determined after extensive consultation that there was no legal basis to withhold any of the report. [however ...] – Canadian Press¹

This rather creepy straw-in-the-wind showed up as front page news this morning on Doom North's snowy front doorstep.

Read the rest of this entry »

Oh the irony.  The Mortgage Bankers Association just unloaded their headquarters- and boy were they upside down:

Like millions of American households, the Mortgage Bankers Association found itself stuck with real estate whose market value has plunged far below the amount it owed its lenders.

But the trade group for mortgage lenders is refusing to say exactly how it extracted itself from that predicament.

On Friday, CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA's 10-story headquarters building in Washington, D.C., for $41.3 million. The price is far below the $79 million the trade group says it paid for the glass-walled building in 2007, while it was still under construction. The price also is far below the $75 million financing that the MBA received from a group of banks led by PNC Financial Services Group Inc. to finance the purchase.

John Courson, chief executive officer of the trade group, declined in an interview Saturday to say whether the MBA would pay off the full loan amount. "We're not going to discuss the financing," he said. A spokeswoman for the MBA added that the MBA has reached "an agreement with all relevant parties" regarding the outstanding amount on that loan but declined to provide any details.

What were they thinking?  For one thing, here's their economic outlook from the Q1 2007 MBA data book:

While the outlook for the housing industry and the overall economy is still a bit cloudy (there are never any certainties in an assessment of the economic future), it still seems a good bet that a soft landing is achievable, and that is the judgment that has, and still does, underlie our forecast.

Apparently, like many Americans, they were a little too optimistic about the future of real estate.  They weren't counting on their property depreciating 48% in three years, or their own financial situation taking such a big hit.

In December the MBA's CEO John Courson was asked about the morality of walking away from a mortgage:

“It’s not for me to judge morality,” he says. “You probably have a legal obligation.” But, Mr. Courson says, defaults hurt neighborhoods by lowering property values and leaving homes abandoned and derelict. He says those considering a strategic default also should ask themselves this: “What about the message they will send to their family and their kids and their friends?”

So Mr. Courson, what is the message we should take away here?

UPDATE (John M): Take it away, Έλενα Παπαρίζου …

Yesterday Lingling Wei and Mike Spector reported on a $4.4 billion dollar default in New York City:

A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom.

The decision comes after the venture between Tishman and BlackRock Inc. defaulted on the $4.4 billion debt used to help finance the deal. The venture acquired the 56-building, 11,000-unit property for $5.4 billion in 2006—the most ever paid for a single residential property in the U.S. The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments.

So does Tishman Speyer need to mail back the keys to survive?

The Stuyvesant Town deal is one of several Tishman Speyer did at the top of the market that the company is trying to save. But the company itself isn't threatened. It took advantage of easy credit and investors' eagerness to buy into real estate during the good times. As a result, it didn't put much of its own cash into deals.

Here's where I think the story gets funny.  There has been a lot of controversy over the morality of "strategic default".  Note how much nicer it sounds when a major company does it:

"It has become clear to us through this process that the only viable alternative to bankruptcy would be to transfer control and operation of the property, in an orderly manner, to the lenders and their representatives," the venture said in a statement to The Wall Street Journal. "We make this decision as we feel a battle over the property or a contested bankruptcy proceeding is not in the long-term interest of the property, its residents, our partnership or the city."

Are these guys selfless, or what?

MORE (John M): Big hat tip [oops! not "big hat", unless we start awarding prizes for tips -- which would just annoy Cass anyway ] to Doomer arizonaslim for showing us that HuffyPo's on the same page¹ with the Two-Tier Morality story

On Wall Street, it's okay to walk away from your mortgage.

"We basically walked away from it," said Clark McKinley, a spokesman for the California Public Employees' Retirement System [CalPERS], the nation's biggest municipal pension fund. CalPERS, one of several investors in the venture, wrote off its $500 million investment, McKinley said.

"It's underwater, anyway, so we've lost it," he added. "We took our medicine, and we're learning from it."
…

So if Wall Street can do it, why can't homeowners?

Two and a half years ago super-bear investor Kyle Bass saw this coming and suggested leveling the playing field by treating Joe Sixpack more like Tishman and BlackRock.  Doom covered that at the time in post "Personal Chapter 11 — The K-BASS Proposal" (Aug 25, '07), and my then-objections to the plan seem to have (**ahem**) largely evaporated since then

What little has emerged about Bass’ Personal Chapter 11 proposal leaves more questions than answers. How can the big GSEs possibly shoulder this burden with their huge, but still limited capitalization? Wouldn’t the present implicit guarantee on their senior debt need to be strengthened to full faith and credit? And would this further imply a closer relationship with the government, even up to F&F reverting back to the US agencies they once were? Housing Doom is waiting with anticipation for further details filling out the proposal, whether supplied in parts of the newsletter that haven’t yet come to light, or in further discussion by Mr. Bass.

AEI's banking analysts have been worried for years that the general public would discover and reject this two-tier morality.  This concern is well documented in posts under Doom's Recourse Mortgages category.  In Doom's Sub IV transcript you'll see where UBS' Tom Zimmerman is concerned about Augustine home sales, a particularly egregious practice where some home buyers were actually flipping out of their existing places into similar homes just down the street with (since the crash) lower prices.  Tactically strategic default?

But the rubber really hit the road a half year later with this late question (by someone who I'm pretty sure is an Elizabeth Warren protegé) in Sub V, and especially Chris' reply.

…

Nick Smyth: … yes, so the question is about why you think that we can have bankruptcy for Chapter 11 for AIG, but you see it as an unfair breaking of a contract for a homeowner. I just … I don’t get why we should have bankruptcy for corporations, but not for individuals.
…

Chris Whalen: If that legislation is passed, you will never have a securitization market in this country again. The other issue you have to understand is that most loans, you cannot legally get control of them so you can modify them.

I have a loan that was originated by Bank of New York. It was bought by Lehman Brothers. It was sold into a securitization. I know where it is. I know where it is. I can’t get to it, though.

Lehman cannot modify my loan. I’ve already asked them. They can’t. It’s legally impossible, so this is a — it’s an absolute illusion that comes out of a city where every day is Halloween … [laughter] … All right? That you can modify existing State Law contracts. You can refinance them, but remember you have an agency structure here. If you were the banker, and I was your borrower, and you were servicing the loan, then yes, we could do it. But not in a disaggregated agency.

… so the bottom line is that this is one awful mess.  Before her untimely death from cancer, Calculated Risk's Tanta had a number of articles discussing how to modify securitized loans.  However, I don't think even she made very much progress on the issue.

Read the rest of this entry »

The state of Arizona is desperate for money, and has started to sell everything that’s not nailed down.  Strike that- I imagine these properties are securely attached to the ground:  [Thanks L!]

Arizona’s state buildings will go on the market next week, as state officials look to raise $735 million to boost the state’s depleted coffers.

The offer, which includes Veterans Memorial Coliseum on the state fairgrounds, the headquarters of the Department of Public Safety and legislative buildings, will go on the market Tuesday and Wednesday, said Alan Ecker, spokesman for the Department of Administration.

Investors can buy certificates of participation in the buildings in $5,000 increments by working through the state’s underwriters, Morgan Stanley and Citi. Ecker said the certificates, which are tax-exempt, will likely carry an interest rate of 4 percent to 5 percent. Read the rest of this entry »