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What Is Happening In The CMBS Market And Why Is It Relevant To Recovery?
This article originally appeared in The Daily Capitalist.
Trepp puts out a lot of good data on the commercial (real estate) mortgage backed securities (CMBS) market. They also have a handy page of statistical data regarding CMBS issues. The reason I follow it is that most of the economic problems in the country relate to real estate, and especially commercial real estate. CMBS are those CRE loans that were securitized into big pools of debt and sold off to investors.
If you keep an eye on the status of CMBS you can get a good idea of what is happening in the CRE markets. Also Trepp analyzes bank loan data and has a bank credit watch based on the performance of bank loans, especially their real estate related loans.
Here are some highlights of their latest reports.
The U.S. CMBS delinquency rate in March continued to show signs that the market is healing. Last month Trepp reported that the February delinquency rate, while at a record high, had the smallest monthly rate of increase since mid 2009. For March it is much of the same, with another record high delinquency rate, but an even smaller rate of increase.
In March, the delinquency rate for U.S. commercial real estate loans in CMBS increased 3 basis points to put the rate up to 9.42%. While the delinquency rate continues to level off, it is still the highest reading in the history of the CMBS market. ...
Historical Perspective
– One year ago, the overall U.S. delinquency rate was 7.61%
– Six months ago, the overall U.S. delinquency rate was 9.05%
– One year ago, the rate of U.S. loans seriously delinquent was 6.66%
– Six months ago, the rate of U.S. loans seriously delinquent was 8.31%
Despite Significant Improvements the Multifamily Sector Remains Worst Performing
Major Property Type; Lodging Sector Not Far Behind
– Multifamily rate drops sharply – dips 40 basis points but remains worst major property type with a delinquency rate of 16.21%
– Lodging delinquencies head up – rate up 136 basis points – closes in on multifamily for worst performing sector – rate now 15.97%
– Industrial rate falls 19 basis points – rate now 10.25%
– Office delinquencies up 3 basis points – remains best performing major property type at 7.13%
– Retail rate at 7.72% after falling by 9 basis points
Not a healthy picture, but as they point out, it's getting less worse.
Rate of Failures Slows Sharply – Commercial Real Estate Woes Remain Front and Center
Only 3 banks failed in March 2011, making for the slowest monthly pace since December 2008, when 3 banks also failed. While the reasons for failure were varied, CRE loans represented the largest source of nonperforming loans.
Observations for March include:
- For the group of 3 failed banks in March, commercial real estate (CRE) loans comprised $44 million (or 55%) of the total $80 million in nonperforming loans. Commercial mortgages made up $27 million or 34% of the total, while construction and land loans comprised $16 million (21%) of the total nonperforming pool.
- The residential real estate loan category was second, with $29 million in nonperforming loans, or 36% of the total nonperforming balance.
- The remainder was comprised of C&I loans ($3.3 million, 4% of the total) and consumer and other loans ($4.1million, 5% of the total).
The number of banks on the Watch List remains large, and banks are spending more time on the Watch List. While the pace of closures has slowed, distress at many banks remains high, and these banks will still be in a position of heightened risk until they either boost capital, improve performance, or both. Failure also remains a possibility for these banks.
- Many of these banks are in search of capital to shore up their balance sheets and help absorb losses. Although liquidity has improved markedly from 2009 and 2010, it remains to be seen which banks will be successful in their efforts to raise capital and improve performance.
- We expect more failures during 2011. While the slower pace of closures gives banks more time to raise capital, it could also mean that the process will last longer than previously anticipated.
This is what concerns me about a recovery: the slow pace of bank reorganization. Again, regional and local banks are the main lenders of CRE loans and their balance sheets are suffering from the weight of bad loans. These banks are also the main providers of credit to small businesses (under 250 employees). In order to have a healthy economy, these loans need to be written down or written off and banks must either raise capital or be closed. Only with the dead weight of malinvested capital removed from the economy will new real capital formation ease our credit crunch. At that time, I would expect real capital to improve the demand for credit and provide the foundation for real, organic growth. While I believe that there has been "real" improvement in the economy, our recovery is centered mainly in manufacturing, and a substantial part of that is geared toward exports which are the beneficiaries of a cheap fiat dollars, and such activities rise and fall on Fed money printing.
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Are you really trying to say that these psychics are saying that AIG will survive and continue to be successful they way they were in 2000? Let me know what you have to say, please. My e-mail address is 1990 Toyota Pick-Up Truck AC Compressor
In other words, it's getting less worse and as soon as the QE......pick a number is pulled, boom goes the dynamyte. Of course RE is regional/local so some areas won't take the double dip beating that FL and others will but eventually dynamite might be the cheapest and best answer.
There are millions of homes abandoned/vacant for as long as 2 years. I've looked at some in Florida. The ones I've personally seen will require at least $100k to bring back to decent condition and that's with a lot of sweat equity. In some the drywall has significant mold; has to be completely replaced. It's getting so they would be better off with a bulldozer.
Only solution...
#1: Terminate all government supported loan programs. Get government (and federal reserve) completely out of the mortgage and finance businesses.
#2: Let banks with worthless loans fail.
#3: Let house prices fall as far as they will.
#4: Low house prices will attract buyers.
Every other actions screws up the entire economy to attempt to jigger this one market. That's insane and corrupt, period.
Financial Jeopardy - the topic is Utter and Complete Destruction and the $1,000 answer is:
Paid with Hyper-inflated dollars.
Tyler Durden?
"What is Later?"
This article gives a false reading. The number of foreclosure filings for residential properties is supposed to hit an all time high this year, going from approximately 2.9 million in year 2010 to 3.5 million this year. The shadow inventory of foreclosed properties is 30 times greater than foreclosed properties on the market. Inflation adjusted median prices are down 37% from the market peak with 25% of homes currently under water. According to Gary Shilling in an article from March 26th, 2011 in 'Business Insider', housing prices are expected to drop another 20%. Case Schiller has announced the beginning of the double dip in housing. The resulting marginal increase in underwater homes will greatly exceed the additional marginal drops in price (there is an uneven distribution of loans relative to LTV's...the majority of home loans are at LTV's of 50% or above...if prices drop by even an additional 13% the majority of homes will be underwater...any additional drops in prices only exacerbate the severity of the depth of being underwater). One solution to the problem is to stop the flow of foreclosed homes to the market thereby reducing the supply and letting the market find its bottom. This is done by modifying loans with major principal reductions and keeping people in their homes. Another solution, far worse in my opinion, (and what is happening right now and what the TBTF banks want) is to continue the hemorrhage and continuing to foreclose on homes resulting in an increased supply of foreclosed properties, a much smaller pool of qualified buyers and rapidly declining home prices...greater supply coupled with reduced demand equals housing disaster of unprecedented proportions. As a result we could see the economy tanks, greater unemployment and the economic system strained to the breaking point; all in an effort to save the TBTF banks. If Congress ever needed a reason to break up the big banks under Dodd Frank because of systemic threats, they should do so now, because to continue down the current path will lead to far more destruction (of wealth and people) than to pay the bill that is due today. The bill is going to eventually get paid...whether we pay a painful sum today or pay a destructive sum later is up to the people and their elected representatives. Fair warning has been given.
This article deals with CRE not residential. For residential, see this. The point of the article was credit and recovery, not houses.
Rotsa Ruck!
Dodd-Frank was written by a lobbyist. In Frank's Office! Yes!
Now the lobbyist has slithered back to his cesspool.
http://washingtonexaminer.com/blogs/beltway-confidential/2011/03/another-dodd-frank-author-cashes-out-k-street
The banks are taking the alternative to marking to market by foreclosing too quickly on a large numebr of homes during the same period of time. This would bring to light too quickly their reserve shortfalls in the real world of home prices. The alternative is that the banks use this same shortfall to demand subsidization of loans by the goverment via already bankrupt GSEs and other goverment backing agencies in the form of goverment backing of loans. They argue that goverment subsidization is necessary for the RE market to come back to "normal". Of course this is bullshit, if the prices were allowed to fall, as they will anyways eventually, investors would back mortgages without goverment subsidization. However this is how the banks uses a shortfall to gain subsidization from the goverment in a corrupt ironic twist.
This, as you point out, is the crux of the biscuit in the Ponzi.
One more addition to my observations...if we pay the tab now, housing prices have a chance to firm up sooner and perhaps even rise to the point where home are being sold AT replacement cost. When this happens residential builders will get back in the game...trades will be employed (construction has 24+ % unemployment in CA right now), contractors & subs, materials providers, appliance makers, civil engineers, durable goods manufacturers will start producing again...you getthe picutre: JOBS! The housing market has always been and will always be a major component of our GDP. So let's think real hard...pay a big bill right now and kick start the economy or waddle in tha morass as we kick the can down the road to economic self destruction...hmmm, which would you choose?
Uh, I got no problem with your observations, but the article is about COMMERCIAL property, not residential.
You are right, but he discusses the housing market as well.
No.
If it were politically possible to "pay the tab" we would have done so long ago.
It *is* politically possible if protecting one's own electoral chances at the expense of the citizenry is not one of your options.
oh, and +1
The residential Shadow Inventory better be killed in the crib before it grows up and devours the whole family.
HUD is on the dock to provide loan guarantees for loans used to purchase and renovate/repair units from its REO: but the question I have not seen the answer to is where will the appetite be in the secondary market for what will have to be robust sub-prime lending in order to move any appreciable number off the books and into the hands or owner occupants?
Home prices are not near the reset and will settle way below trend especially in the FL, CA, LV, AZ markets but also in the Rust-Dust belt.
Will the FED (Fanni Freddie extinct soon) step in and buy these MBS using a diverted revenue stream of FICO and Medicare taxes (privatized entitlements) under the con of Triple Grade A securities?
I see no easy decisions to live with on this.
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