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Is Fed Abandoning Bailout Of Commercial Real Estate
In what could have been the biggest piece of news today, yet making little headway into the media, the Fed announced that it is adopting a policy statement supporting "prudent commercial real estate loan workouts." And even though in traditional Fed fashion, the statement says a lot but is even more vague, some of the implications from a more nuanced read have very serious adverse implications for commercial real estate. The section:
Financial institutions that implement prudent loan workout arrangements
after performing comprehensive reviews of borrowers' financial
conditions will not be subject to criticism for engaging in these
efforts, even if the restructured loans have weaknesses that result in
adverse credit classifications. In addition, performing loans,
including those renewed or restructured on reasonable modified terms,
made to creditworthy borrowers, will not be subject to adverse
classification solely because the value of the underlying collateral
declined.
seems to imply that the Fed is now encouraging active loan workouts as a matter of policy. The other implication is that firms with CRE exposure can no longer rely on the Fed as a perpetual guarantor of risky exposure. Not only that, but in adopting a new policy strategy, the Fed is acknowledging the major problem that CRE writedowns will represent for banks, yet is telling banks to resolve problems on their own, while subsequently they will "not be subject to criticism for engaging in these
efforts."
The implications of this Fed action for the economy could be staggering as the $3.5 b,quadr,trillion CRE market will likely not receive the same largesse that residential real estate has been the recipient of ever since the conservatorship of the GSEs. And the biggest loser in all of this will be banks that still have not used the massive risk rally to offload whole loan and CMBS CRE holdings, and moreover, still have these marked at par or close thereby.
As Wilbur Ross and George Soros pointed out earlier, the trouble for CRE is just starting. If the Fed is unwilling to recreate QE for CRE, in the same way that it continues to bail out residential exposure, then look for a major double dip in the economy. The only wild card is why the Fed is letting this happen, although if the political backlash against just QE 1 is any indication, then it likely would not have been able to pass additional liquidity measures regardless.
Full Fed policy statement can be found here.
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about time the Fed stepped away from controlling something
I disagree with the assessment. They are suggesting a conspiracy of collusion with the banks.
this why REITs rallied hard in last hour of trading eh?
Yeah, what the fuck was that about? The chart is unreal in the last 20 minutes.
What I read from this statement is that financial institutions who have exposure to real estate will be allowed to extend loans regardless of value so long as the "terms" are reasonable with respect to coverage ratios (ie. NOI / debt service > 1.0x). What this allows banks to do is to extend loans which may be otherwise at a loan-to-value greater than 100% without any fear of negative issues from the OCC or other banking regulator. Apparently "extend and pretend" is now a government policy.
Ya I think it leans that way too...the only good thing is it seems to put the onus on the banks to extend and pretend, instead of getting a bailout and dumping the losses to the taxpayers immediately.
Exactly. There is no way politically they can start this crap (TARP II) for CRE. The Fed is saying if you doctor the books (have under collateralized real estate loans that will be completely mismarked) we are not going to go after you. In my mind I view this as collusive. This is going to be very, very ugly for the longs.
That's also how I read it. As long as the owner can pay interest, even at a reduced rate, a loan on a property that was 80% LTV and is now 130% LTV does not have to be written down on the balance sheet and charged against earnings. So banks with deteriorating commercial loan books who can pull off extend and pretend will be under less pressure from regulators to raise additional capital.
Exactly. What this does is eliminate the need for banks to write down or charge off their real estate assets based on value so long as interest is paid current. Based on this rule, the banks will not raise new capital or realize marks on their direct holding of real estate loans. This rule however, has no impact on the value of the real estate of course.
"Apparently "extend and pretend" is now a government policy."
Correct... soon to be supplanted by "Don't ask / Don't tell" no doubt.
Which has already been supplanted by don't look don't find. However, since you banks are so scared you have violated the don't ask, don't tell policy we will let everyone know that if you do your job and paper these monsters appropriately the fed will have your back.
Besides, the fed needs to limit the need for currency swaps and doing this will help. For a time...
for the regionals, this means that they will extend just about anything and the prudent underwriting will go by the wayside, kicking the can once again.
this will end up costing us via fdic more money.
Who gotta match?
http://www.youtube.com/watch?v=_5VRhmgUNtM
most appropriate indeed!
... well unless the OCC and some other regulator comes in and imposes Formal Agreement standards on many of the regionals.
Just because the Fed gives the OK to overlook marking assets and employing underwriting standards, doesn't mean that the OCC/FDIC won't step in. I'd think in many cases, it makes sense for the FDIC to come in a force better risk management and underwriting before they are faced with even more bailouts.
On the other hand, I think you are spot on-- this will still end up costing the FDIC a boatload of money down the road.
Agreed. I cannot but help thinking the Sheila was sending a message Friday night.
I believe you are on the right track here rostholder.
I agree.. this looks very bullish for CRE.
Actually, I think it extends the pain considerably. Look at Japan, they did it and CRE there is still 50% below where it was in 1989.
Agreed. This new policy does nothing to move the problem forward, just keep it where it is - on balance sheets of banks and CRE companies. It's too bad that the debasement of a fiat currency (isn't that redundant) does nothing to aid in halting asset price/credit deflation.
Not necessarily. It can reduce the burden of their debt service, but it will do nothing for CRE cashflow.
Good! Fuck 'em, let the CRE stuff crash!
Having said that, a look at the late-day reaction of VNQ and IYR might suggest a different interpretation.
Looks like when Geithner told them the real debt ceiling number, they balked. I just wish they would get CRE over with and done.
$3.5 billion CRE market? wouldnt that be trillion?
Maybe all the SRS haterz will finally leave the building and let the party start!
I am so in!!!
Not sure how all this bookeeping works, but to this dumbass, it sounds like at some point, we will see bank bailout II.
Basically, more regional banks will go under, power will get more concentrated among the few kingpins.
Isn't it somewhat ironic that we end up at the Swedish Solution by the most convoluted and painful route possible?
the $3.5 billion CRE market
ummm...
Wishful thinking... hey how many brazillions in a quadrillion?
3.5 Billion?? Ya Thats one midtown Manhattan skyscraper... 3.5 TRILLION
How about 100,000.00 under performing malls, and that's just the tip of the iceberg.
Davidowwitz and Associates
I'm so glad they cut down the ungodly trees and vegetation around these parts, and replaced them with empty office space.......
I read that as a positive step for main street. If you look at what took place in the 80's most of the "real damage" took place when bank examiners came in and classified any loans connected with real estate. I am not saying that there are not major CRE issues but on a local grass roots basis banks were being told to cut their real estate loan portfolios and have been refusing ( at least in my neck of the woods ) to renew loans on small office buildings and shopping centers that are performing but because they are regarded as CRE have caused them to set aside extra reserves. Any recovery will need to come from the grass roots rather than from the well connected elites who are tied into wall street. So for my part this means the examiners might start to leave the smaller banks alone for once.
The Fed is dead.......
No no he's not dead, he's, he's restin'!
The difference comes down to this: The household debt was held by very large institutions, the ones large enough to buy their safety from the political maggots that so eagerly provide it; the commercial debt is held by smaller, regional and local, "we-simply-can't-afford-those-kinds-of-payoffs", banks. I mean who from Goldman Sachs works for say, Charter One, for example? These folks get closed, not bail outs.
+1
too small to save....
That may be true but the way the FDIC works currently is to loss share and transfer assets. And where will they transfer to? The currenlty bailed out TBTF and or the FED. Either is will be a reckoning.
Agree with the analysis that "extend and pretend" is now a federal policy.
Extend and pretend is our CRE policy.
Until Goldman tells us otherwise.
BB
Begs the question:
WTF is the Fed doing sticking its wick into CRE in the first damn place ??
Not their yob, man.
yeah, yeah, I know, we are not in Kansas any more.
According to Chris Whalen, JPM has a lot of CRE exposure, and, JPM basically "is" the Fed.
Through nominees of course...
The fed just added some mass and momentum to the avalanche...
Zo, to all youse Senators out dere, dat want to fk wit the Fed, the Man...dis is wat ya git, capiche?
YouKnowWho
This will bring a spotlight to the dire shape the banks and CRE is in. We will see CRE implode in the coming weeks. God help us. (Not the bankers)
Fannie monthly portfolio.
I am not great at calculus, but I am pretty sure even the second derivative of serious delinquencies got worse (table 9).
Any math majors out there who can help?
http://www.fanniemae.com/ir/pdf/monthly/2009/093009.pdf
On a percentage basis, the 2nd derivative didn't get worse. This charts out at a fairly straight line.
However, on a 2nd derivative basis, August DID get a little bit worse than July.
More importantly, this trend is VERY stable and strong! No slowdown! Delinquencies at 4.45% and growing!
With leverage at 30-50 times, doesn't this indicate insolvancy?
It has been unfortunate that bank examination decrees from Washington ( up and until now ) have dictated that all main street banks throught out the country should be treated the same so areas where CRE hardly went up in value at all are treated in the same way as areas where it went up several hundred percent. Main street CRE in Texas, as an example, is much more viable than it is in California but they have been treated as being the same. This has meant that the smaller banks have been frozen in the headlights and afraid to do anything. Wall St. has access to all the lending mechanisms. Main Street is entirely dependent on a thriving loan market from small banks and this is what needs the fix and hopefully this is what the Fed is now doing.
Sorry Dudley, i live in the great state of Texas, and it is anything BUT viable.
We got more empty brand new space around here, than a spider has legs. The difference is, this is just now hitting us. When oil was 147.00 / bbl, we got paid, which in effect, greatly slowed our slide down as opposed to the rest of the nation. Granted, we are not California, but we are just beginning to see the effects now. Also keep in mind we are very conservative.
We all know it's going get worse in the future ( here ).
You also have a bit of flat dirt in Texas, no? The entire population of the US could easily fit in half of Texas.
Barrier to entry = zero.
Brand space is located in large malls financed by what were conduit loans ( now extinct ). Main street banking I was talking about does not come close to this type of market. Try borrowing for normal CRE from banks around Houston ( one of the stronger areas )and they will tell you to take a hike. They have been told to significantly reduce their RE exposure. These new measures should allow more normal lending to resume.
MET, PRU, HIG have been very weak lately. Wondering if they have any CRE exposure?
Or if they can't pay contract interest loans will be
re-cast as performing Neg-Am.
Tactical retreat only i.e. optics
CRE will be bailed just like Barney and friends will slip through an extension of Cash for Cul de Sacs and just like GMAC will again feed at the public trough
and the markets were down today because Sigma X had a stack overflow doing bonus calculations
[Sigma X had a stack overflow]
+1 funniest post today
+100. Damn, they should have gone 64-bit last year.
if loan repayments are just suspended/extended rather than written down, it only serves to replace sudden death with death by 1000 cuts, as the banks customers gradually default
BEN be fired, and sent to some where in IRAQ to fight the real fight.
He is not a FED chairman, but a DOG in dog fight game of dems.
I saw large CRE deals in texas selling at 4% cap rates with 20% vacancy in 2007 so it's tough to say that Texas was more conservative. It just hasn't hit yet. I think Blackstone sold some buildings at idiotically low caps in TX back during the boom.
I'm completely confused.
The press release reads like they are giving the CRE-holding banks a pass (chance to "pretend/extend.")
Is this just lip service or a life line for them (banks/CRE?)
I admit, I still hold some shares in SRS and didn't want to cut them loose too soon, so I am asking for a specific reason.
Thanks in advance.
Look to me like I and my large SRS position just got fucked by the fed. To exhausted to thing right now.
http://www.chicagotribune.com/business/chi-fbop-seize-oct30,0,502486.story
FBOP Corp going down
Are you kidding? The Fed can no more quit now than pigs can fly. Expect a bailout of the bankers CR problems, and another round of car house and dishwasher subsidies. And don't forget my cheque for being me.
They don't need a bailout if you look the other way... isn't this the same playbook, they learned their lesson.
I got a feeling the banksters are gonna sell off the market and hold a gun to the politicians head for a bailout of CRE. Looks like it's deja vu all over again.
My GUESS is that the market will do a mini-selloff in Nov, then we'll have the X-mas rally sometime in December. After New Year's Day, when the Wall St. bonuses are safely tucked away, is when it will really hit the fan.
Tyler, please please change your headline. This Fed missive replaces a policy that has been in place since 1993 and is Fed approval to lie, mislead and obfuscate (shocker). I haven't finished reading the whole thing, but it's full of absolute pearls. Love this one:
"A new appraisal may not be necessary in instances where an internal evaluation by the institution appropriately updates the original appraisal assumptions to reflect current market conditions and provides an estimate of the collateral’s fair value for impairment analysis."
What a f'ing joke!!!! Giving banks permission to do internal appraisals on their crappiest credits while simultaneously telling examiners (and banks) to pay no heed to collateral value in determining whether the loan is performing or not.
What is 5%, 5%, 3% and 6-7%? And the answer is......typical underwriting assumptions for your 5-7 year hold acquisition model two years ago and in this order: vacancy, rent growth(maybe even higher for years 1-3), expense growth, and exit cap rate (may have been lower). As we all know they are going to miss those numbers by a wide deviation. What they are really addressing is the exit cap rate assumption as they cannot change the others.
The real question is what happens to the 10 yr T (or LIBOR) between now and 2012? The Fed will have to do everything it can to artificially maintain this rate. If rates spike there is no way you get to a 1.1 DCR (should be 1.2). Forget about the value of the reversion and its negative equity implications. Typically CMBS loans had prepayment penalties (% fee, defeasance or some other onerous fee structure) . Will they waive it? One would think so, but probably more on a case by case basis as they would get a reduce income stream from debt service payments. Maybe some income is better than none but if you end up with the deteriorating asset 2-3 years later are you better off? Either way my guess is many owners will at some point bleed the cash flow and give it back in a more physically distressed state in the future.
Going forward what ownership entity is going to come out of pocket to meet debt service when the value of your asset is unlikely to recover in the foreseeable future? Additionally where does the money come from to cover Cap Ex items even if you can stabilize your NOI to perform based on your workout assumptions? It will be interesting. But once again the main street investor is the one that will get screwed. There will be no workouts for your strip mall, 10-50 unit apartment bldg, and/or your 15,000 SF office building in suburbs. You get screwed.
What happened to REITs in the last 30 minutes? How about a 2-3 days for the shorts and not wanting to go into the weekend exposed. Interesting to see what happens next week and if those positions are reestablished.
will not be subject to adverse classification solely because the value of the underlying collateral declined. I take that to mean that when regulator assess a banks loan it will only look at whether the debtor seems likely to keep paying over the short term and ignore the fact that the debtor is deeply underwater. I persoanlly think this is not prudent and ignoring the probability of default due to being underwater is a bit like fair value accounting. Financial institutions that implement prudent loan workout arrangements. This is a bit like giving banks a free pass providing they have made some effort to restructure loans. These are direct instructions from the FED to regulators to ignore potential losses and to not close banks until it is way too late and the taxpayer faces a huge bill.At the end of the day ignoring potential losses will not stop them happening.In theory restructuring loans could help but the reality is that banks will take a look at bad loans earlier than they would have with the result that losses will rack up quicker.
The poor CRE market is capitalized SQUAND. It won't ever be liquid again.
http://www.youtube.com/watch?v=prMOfdjyFK0
Sorry to be cynical, but Federal Reserve is bailing-out banks with mortgage exposure, big banks, too big to fail banks, banks who's CEOs sit on the Federal Reserve board of directors (governors). Most commercial real estate is held by regional and community banks. These are banks that the TBTF banks wish to acquire at cheap prices. By allowing these banks to weaken themselves with CRE loan modifications, it sets the stage for their acquisition. This consolidation of banking into the large banks is EXACTLY the same thing that happened during the great depression. The Federal Reserve is repeating its own history. This consolidation restricts lending to small businesses, who are the engine of our economy. The central bank wishes to usher in another great depression based on its actions, which are contradictory to its words.
Sorry to be cynical, but Federal Reserve is bailing-out banks with mortgage exposure, big banks, too big to fail banks, banks who's CEOs sit on the Federal Reserve board of directors (governors). Most commercial real estate is held by regional and community banks. These are banks that the TBTF banks wish to acquire at cheap prices. By allowing these banks to weaken themselves with CRE loan modifications, it sets the stage for their acquisition. This consolidation of banking into the large banks is EXACTLY the same thing that happened during the great depression. The Federal Reserve is repeating its own history. This consolidation restricts lending to small businesses, who are the engine of our economy. The central bank wishes to usher in another great depression based on its actions, which are contradictory to its words.
This is right, but it's not complete. To be perfectly accurate, the Federal government is liquidating its position in American society. Every development is another step in this process, even (? especially!) the strengthening of the dollar. It's an oligopolistic society. Which is why the petit bourgeois philosophy of Zero folks amuses me. Yes, we definitely need to strengthen the dollar--so there can be fewer and more in the hands of richer people. And that is precisely the result of dollar strengthening. And the dollar will strengthen to unimaginable levels.
Indeed, oligarchs always rely on the myopia of the petit bourgeoisie to give a boost to their power. It shows you how bad an analysis this can lead to, when you read this entry above about the government "abandoning" commercial real estate. It's no such thing--it's a move toward commercial and banking monopoly. But favored banks and industries will need money to bring off this further consolidation, so there will be another "bailout," another "stimulus." In short, another round of fascist-corporatist looting.
The sophistication of Obama and his thieves runs rings around the stupid, uninformed Zero analysis. Zero keeps calling it wrong, with its morbid--and WAY misdirected--"moral outrage" which is basically telling us one thing: please replace the set of thieves in Washington now, with the group of thieves known as Zero Hedge--we'd be much more ruthless in killing people, much faster too.
Does anyone know how this affects TALF? Is TALF still alive?
I don't think you all understand. There will be no "pretend." Reality doesn't recognize "pretend." There will be another bailout, around February 2010, to the tune of about $2.4 trillion.
However, it will take some other form than that used for housing loans. I'm not sure of the details yet, in fact, give me some suggestions. If YOU wanted to bail out CRE, but did NOT want to do it the way financial institutions were bailed out previously, what would be the mechanism?
Then that will be the mechanism used.
Anon I suggest you add to your SRS SOON we are going much higher:
#115729
"Look to me like I and my large SRS position just got fucked by the fed. To exhausted to thing right now."
Here's from a blog, and it gives you an idea of how the next "stimulus" package will look:
"For a lot of commercial loans, interest “payments” aren’t actually made in cash. Interest is paid out of a “reserve” that is set up at the time the loan is originated.
(Hopefully informed readers will let me know if my understanding here is incorrect)
Basically the bank sets aside part of the loan amount to pay itself interest due on a loan. Because, for instance, construction loans don’t generate any cash flow until construction is completed and the property is sold/leased/rented/whatever, the bank pays itself interest out of the original loan proceeds. (The money itself is gone, used to finance construction.)
This “interest” is counted as “income” for the bank. If the loan blows up, then any such interest income that wasn’t paid in cash has to be written off.
But as long as banks can pretend the loan is “performing,” they can avoid the writedown."
So, for favored banks, just give them a loan to increase their set-asides, if they run out of money originally set aside. Also, in case this set aside was originally designed to pay only until the building is ready to rent, extend the set aside period beyond that.
You know, something like that. Come on guys, help me out here--it's Hitler we're protecting! So everyone chip in with your ideas!
Can the FED really recreate QE for CRE securities and not kill whats left of confidence in the dollar?
A lot of smaller institutions received TARP money, and the rubber band TARPopotamus will most likely be extended beyond the end of the year. Here is the report.
http://financialstability.gov/docs/transaction-reports/transactions-report_10062009.pdf
I wonder if George has any large USD holdings?
"by Anonymous
on Sat, 10/31/2009 - 11:51
#116119
"Anon I suggest you add to your SRS SOON we are going much higher"
I don't know what to expect at Mondays open. I think net net they will try to goose this sheeet on this intervention.
Sure it might only buy them a few more months, who knows, still haven't got my head around this BS.
Interesting Fed reading but my bet is on the WSJ report--we are sweeping this all under the rug and No One will blow the whistle until we have a systemic failure:
"""Banks have generally been keeping a lid on commercial real-estate losses by extending these mortgages upon maturity. However, that practice, billed by many industry observers as "extending and pretending," has come under criticism by some analysts and investors as it promises to put off the pains into the future.
Now federal regulators are essentially sanctioning the practice as long as banks restructure loans prudently. The federal guidelines note that banks that conduct "prudent" loan workouts after looking at the borrower's financial condition "will not be subject to criticism (by regulators) for engaging in these efforts." In addition, loans to creditworthy borrowers that have been restructured and are current won't be reclassified as "high risk" by regulators solely because the collateral backing them has declined to an amount less than the loan balance, the new guidelines state.
Critics say the new rules are yet another example of a head-in-the-sand approach by regulators, pointing to the relaxed accounting standards last year that enabled banks to avoid marking the value of the loans down. This is doing long-term damage to the economy, they say, because it ties up bank capital, preventing them from resuming lending.
The point is that it is a drop in the bucket. The operative word is "current." But demand is accelerating so rapidly that soon the Government will have to confront the problem direcxtly,and will do so with a $2.4 trillion bailout, full of other bailout--style goodies.
February 2010.
So to all the experts out there, what does the future portend in the immediate term (1-3 days), short term (NOV-DEC 09), and near term (JAN-MAR 2010) for...
SRS?
General Growth Properties (GGWPQ)?
The S&P 500?
Welcome any thoughts since I lost my shirt from OCT08 to present and am trying to rebuild by making more informed investment decisions.
So what does this portend for the immediate term (1-3 days), short term (two months), and extended short term (JAN-MAR 2010) prospects for...
SRS?
General Growth Properties (GGWPQ)?
The S&P 500?
Appreciate any insight from the experts out there, as I have lost my shirt OCT08 to present and would like to start rebuilding my life with smarter investment decisions.
So to all the experts out there, what does the future portent in the immediate term (1-3 days), short term (NOV-DEC 09), and near term (JAN-MAR 2010) for...
SRS?
General Growth Properties (GGWPQ)?
The S&P 500?
Welcome any thoughts since I lost my shirt from OCT08 to present and am trying to rebuild by making more informed investment decisions.
So to all the experts out there, what does the future portend in the immediate term (1-3 days), short term (NOV-DEC 09), and near term (JAN-MAR 2010) for...
SRS?
General Growth Properties (GGWPQ)?
The S&P 500?
Welcome any thoughts since I lost my shirt from OCT08 to present and am trying to rebuild by making more informed investment decisions.
It has always been the case that RRE has priority than CRE when it comes to bailout actions. The big question is: are they postponing the CRE bailout, or is such a bailout getting completely out of the picture? Time will tell
time123
admin: http://inverics.com
Hey, would these guys lie ? If Timmy and Ben say so .. its gospel !!
Banks Can Handle Commercial Real Estate Losses, Geithner Says 10-30-09http://tinyurl.com/ygz8wpw
“That’s a problem the economy can manage through even though it’s going to be still exceptionally difficult,” he said in response to a question at the Economic Club of Chicago.
“You can say now with confidence that the financial system is stable, the economy is stabilized,” Geithner said, noting the report this week that GDP grew at an annual rate of 3.5 percent in the third quarter.
http://www.cbsnews.com/stories/2007/03/28/business/main2619947.shtml
3-28-07
Bernanke: No Recession On Horizon Fed Chairman Tells Congress Economic Expansion Not Running Out Of Steam