Fed's Lockhart: Commercial property a mounting risk

[MsDoodahs]

By Alister Bull

MIAMI (Reuters) - Recent U.S. economic data has been grim, and financing strains in the commercial real estate sector could heap pressure on the country's already battered banks, a top Federal Reserve official said on Wednesday.

"Problems in residential real estate are well known. But, with continued economic weakness, I'm increasingly paying attention to commercial real estate," Atlanta Federal Reserve Bank President Dennis Lockhart said in prepared remarks.

"Declining commercial real estate markets could put further pressure on already strained financial institutions and markets. And overcoming problems in the financial sector is central to achieving economic recovery," he told the Greater Miami Chamber of Commerce in a luncheon address.

Banks have around $2.5 trillion worth of commercial real estate loans on their books, and while this was less than a quarter of the size of the residential mortgage market, any more strain on the financial sector would be most unwelcome, Lockhart said.

"Commercial real estate finance challenges could further complicate efforts to stabilize the banking system and credit markets," he said.

Rest of article:

http://finance.yahoo.com/news/Feds-Lockhart-Commercial-rb-14542687.html

[angelatc]

I've heard this before. How can it not be a problem, with so many companies scaling back and closing down their locations?

[ArchPaul]

residential foreclosure = firecracker
commercial foreclosure = nuclear bomb

[Agent CSL]

The last graph I saw the commercial market bubble was just about as big as the residential. The shoe drops on this one in mid 2009, and peaks in 2011.

[HOLLYWOOD]

Whose the largest donors to politicians and who exchanges the most business amongst one another?

Banks/Wall Street and Real Estate/Builders

70% is Small and self business... save the HONEST small fries...

30% to Flunk/Fail/Slice/Dice the Corrupt/Colluding/Conniving/Scheming Political Corporate America.

Clean slate the graft and corruption that's bring the economy down, not the reward/bailout FRAUD... oh I forgot FEDERAL RESERVE/TREASURY/CONGRESS are their partners:rolleyes:

[danberkeley]

Is there a way of shorting any of this?

[Rock Sexton]

Is there a way of shorting any of this?


Seriously. I'm willing to venture a guess that commercial mortgages somehow found their way into CDO's and credit default swaps.

[danberkeley]

Seriously. I'm willing to venture a guess that commercial mortgages somehow found their way into CDO's and credit default swaps.

Some one should call Schiff's radio show and ask him about it.

[Rock Sexton]

Some one should call Schiff's radio show and ask him about it.

Well here's an article from November 2008


The U.S. commercial real estate CDO delinquency rate climbed to 3.13% in October from 2.39% in September, the rating agency found. Of the 14 newly delinquent loans, 90% were matured debts with balloon payments due. In fact, two thirds (67%) of all delinquent loans tracked by Fitch’s index fall under the same category of falling delinquent when the balloon payment was due.

While 74% of matured balloon loans continue to make monthly payments, approximately 26% — and 18% in Fitch’s CREL CDO Delinquency Index — are considered non-performing with inadequate cash flow to meet debt service obligations. In these cases, sponsors have refused or are unable to infuse additional equity into the projects.

http://nreionline.com/finance/news/cdo_delinquencies_dising_1111/

And here:


While everyone’s attention is concentrated on subprime and other residential mortgages, as first reported by this blogger this past July the next shoe to drop - in the mortgage and credit crunch saga - will be commercial real estate (CRE); indeed investors’ worries and panic are now shifting towards CRE and its related securitized products (CMBS and CMBX).

Many of the same excesses that were observed in subprime – poor underwriting standards, loose and excessive lending to marginal projects – are also observed in CRE. For example, as reported by Fitch, since 2005 there has been a very sharp increase in interest rate only mortgages and mortgages with high loan to value ratios. Loans increased to 118 per cent of the value of commercial properties in the last quarter, as reported by Moody’s, suggesting widespread use of reckless negative ammortization mortgages. And while real investment in commercial real estate has been strong in recent months (growing at a SAAR rate above 10% while residential was collapsing at a negative 20% rate) there is now evidence that commercial real estate is also at a tipping point. Actually the bubble in CRE construction – like the bubble in residential construction – will soon turn into a painful bust.....

Once this slowdown in CRE investment does occur of three components of fixed investment (residential, non-residential structures, and software and equipment) could experience negative growth.
And indeed the boom in CRE investment – with excessive construction of commercial real estate is leading – like in the case of housing – to a glut of unsold or empty properties that is leading to a fall in prices. As reported by the FT: “Moody’s index of commercial real estate prices is expected to show that prices flattened or fell in September, after rising nearly 14 per cent in the 12 months to August. RBS Greenwich Capital predicts that US commercial property prices will fall 10-15 per cent next year.”

The coming meltdown of commercial real estate is also evident by the sharp widening in credit spreads for CRE mortgages and commercial mortgage backed securities (CMBS). One of the most clear signals of this extreme stressed in the non residential MBS (CMBS) market is given by the CMBX index that is reported by Markit. The data are scary: for BB tranches the spread is now over 1500bps; for BBB- the spread is 1,100; for BBB is 965; even for A is 540; and 326 for AA tranches. All these spreads have sharply widened compared to their spring 2007 levels. At these spreads the ability to finance any new CRE investment – apart from those already committed and financed – is practically null. After the pipeline of already financed projects is finished the market for financing and securitizing CRE – apart from the highest rates projects – is practically frozen. Indeed, the issuance of CMBS fell to $6.3 billion in October, down 84% from a record $38.5 billion in March that finance about half of commercial property purchases. So the CRE market now behaves similarly to the sub-prime market; it is totally frozen.

Indeed delinquency rates on CRE projects – while still modest – are sharply rising. According to the WSJ the current default rate is 7.88% for CMBS issued in the last 10 years and is set to significantly rise. And now lending standards are being tightened as the risks of CRE are emerging and the credit crunch in this market is escalating: the typical loan to value ratio is now down to 70% from 80% and higher loan margins are imposed on investors.

And since the total value of the stock of securitised commercial property loans was $804bn (at the end of the first quarter of 2007) the coming bust of CRE will lead to another round of massive losses for the banks who made these loans and the investors who bought these toxic mortgages. So expect another saga of collapsing construction, falling prices, rising default and deliquencies and massive losses for the mortgages and mortgage backed securities related to CRE. If CRE prices will fall – as expected by some – by at least 15%, the losses from CRE investments could easily be above $100 billion, possibly as high as $150 billion. Add those CRE related losses to the losses in the $300 to $500 billion range now estimated by RBS and Deutsche Bank for subprime and other residential mortgages. The financial markets massacre is just starting and a generalized liquidity and credit crunch will become full blown in the next few months.

http://www.nakedcapitalism.com/2007/11/roubini-sounds-alarm-about-commercial.html

[Rock Sexton]

Commericial Real Estate traunches .......


Simmering beneath the surface and unbeknownst to most is a pronounced deterioration in commercial real estate. The evidence is can be seen in widening spreads in the tranches of Commercial Mortgage Backed Credit Default Swap Benchmark CMBX Indices.

Commercial real estate problems are in addition to massive problems in the guarantee business, as evidenced by the huge widening of spreads on the two largest bond guarantee companies, Ambac Financial Group (ABK) and MBIA Inc. (MBI).

Rising spreads represent a greater chance of default. In commercial real estate. Most spreads are now wider than they were in the peak of the mid-summer credit crunch. This indicates two things:

* Problems that previously affected only residential real estate have now spread in a big way to commercial real estate.
* In spite of the big stock market
rally off the summer lows, underlying credit conditions are deteriorating rapidly.


http://www.minyanville.com/articles/index.php?a=14739