The New York Times reports that since we've had such a catastrophic run with home mortgages, it's time to watch the collapse of commercial ones. The same names surface when it comes to the collapse of our financial system -- in the case of commercial mortgages Deutsche Bank (NYSE: DB) ($25.1 billion), Morgan Stanley (NYSE: MS) ($22.1 billion), Lehman Brothers (NYSE: LEH) ($40 billion in commercial mortgages and property), and Citigroup, Inc. (NYSE: C) ($19.1 billion) are among the biggest holders. They are also big names in Auction Rate Securities (ARS).
Why do people think that commercial real estate could be tanking? Here are four reasons:
- Declining property prices. The Times reports that the Moody's/REAL Commercial Property Price Index has dropped 12% since its peak last October.
- Commercial mortgage write-downs. According to the Times, Morgan Stanley reported commercial mortgage write-downs of $400 million and Wachovia (NYSE: WB) said it would take at least $1 billion worth of such write-downs.
- Potential Riverton default. The Times reports that Riverton, a 1,230 unit Harlem development, was premised on the idea that developers could convert "lower-priced rentals to apartments priced closer to the higher market average." But the Times reports that Monday Fitch "issued a negative watch on part of the Riverton Apartments trust" since the developers had not made much progress -- threatening commercial mortgages that Citi and Deutsche Bank hold.
- Increased losses in commercial mortgage trusts (CMT). The Times reports that losses are rising in CMTs -- such as the one that Citi and Deutsche Bank created for Riverton. Delinquencies rose at the end of July to 0.43% from 0.41% at the start of July. And since February, delinquencies on commercial mortgage-backed securities have increased 43% according to Fitch.
What is going on here? In times of trouble, the distinctions between different kinds of loans tend to fade away. Banks and borrowers over-extended themselves on the premise that prices would keep rising and bail out imprudent lending decisions. This means that the firewall that policymakers think separated one kind of credit default from another went up in smoke. (Remember how Hank Paulson and Ben Bernanke said that subprime was contained? Not so much).
Whether our financial system can survive depends on the ability of banks to raise more capital than the amount of bad loans they need to write off against their existing capital base. And that is looking like a pretty shaky financial foundation.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
8-22-2008 @ 11:20AM
william lindblad said...
The answer is YES - I have been saying this for over a year. The list of names on this list will knock your sox's off as it will be mostly the mid-range area of banking - you know - the ones that are still looking solid.
These notes are not in default yet because they can do a little "voodoo" on the notes to keep them looking solvent. It's a little case of steal from Peter (no pun) to pay Paul.
I would not waste my money on the Times either - took them too long to figure this out.
I am not really worried though, for the situation is in good hands. Bernanke just told everyone that he knew we had a problem at this time last year. I must have missed something. I thought the Fed was busy lowering rates and all the testimony before the 2 Congressional finance committees indicated everything was pretty good. Hmm! Therefore, I can deduce that the financial sector is advising both the Fed and government and I have to go with Alfred E. of "What! me worry"
8-22-2008 @ 4:24PM
Chuck said...
I can just see the White House being foreclosed on and the Prez having to live in a tent on the lawn.
8-26-2008 @ 5:59PM
loanguy said...
The distinction between pre-bubble loans and post bubble loans are very apparent. Read http://www.reitwrecks.com/2008/08/how-could-my-big-beautiful-loan-go-so_16.html for more detail on the ridiculously agressive loan on Riverton Apartments. It's no wonder the thing went south.