A Tax on Transactions????

Wrong, wrong wrong. I cannot understand how it could be considered smart to set up a "fund" (from a transaction tax or any other tax), to bail out bad business operators (the argument that tax payers should not bear the burden is founded on a corruption of the basic business model: that a company needs operate to make profits, not lose capital, or it goes out of business). This tax would only encourage financial risk takers to act irresponsibly (with respect to shareholders), knowing there was an external safety net. We should be striving for true accountability, not devising ways to avoid it and then spread the pain that results.

Unemployment Down, Unemployment Up: Looking Past the News Blurbs

The Labor Department's Bureau of Labor Statistcs (BLS) announced that October unemployment was down to 10% from 10.2% in September. The unemployment benefits extension that Congress agreed to in November was not appoved by the Senate until December and thus those individuals that were eligible for the unemployment benefits under the extension did not get counted in the BLS November numbers as they were neither "here" nor "there".

We will not be surprised to see December's BLS info give us 10.2%+ as these people are again counted as unemployed. Of course, one might ask why we don't count the rest of the unemployed who taken together push the real unemployment rate to 17-18%. Wait until January when the holiday hiring effect is gone.

Talf will end and then?

The Fed said its TALF expiration remains set at June 30, 2010 for loans backed by new-issue CMBS and March 31 for loans backed by all other types of collateral.

This means that we can expect some deflation of the bubble in certain securities, but certainly in CMBS. I'm not suggesting trying to set up a short and time it just right. Rather, I am suggesting that with a fall in cheap,tax-payer financed, low risk (yours not mine) buying power, we will see spreads widen, providing some good buying opportunities. Well researched CMBS buys will provide better yields than almost any other fixed income play. The window for this will be relatively small-9 months max, as the world is chasing yield and won't miss this moment.

Poor U.S.: Unemployment, Net Worth & Buying Power

Under-employment is of paramount concern. The recent proposal to use some TARP funds to create a financing source for small-medium sized businesses (SME’s) is a good idea as there is very little capital currently mobilized to do this. However, there is a question as to where the demand for new/more product/services is to come from. In this crisis, in addition to low employment, we have seen something equally problematic: a dramatic reduction in consumers’ buying power that is not just the result of low employment. Specifically, the consumer, having first borrowed to buy a house/2nd/3rd vacation home, now finds the value of these houses to be worth less than what is owed or, at the very least, 25-75% less than what they paid and thus the consumer in every income bracket has experienced a substantial capital loss. Compounding this loss, the consumer finds that his ability to obtain buying power by borrowing through HELOC and first mortgage refinance is non-existant. Compounding this buying power reduction, the consumer finds that his credit cards now cost more to use while at the same time, the credit card issuer has reduced the amount of available credit. Compounding this, the consumer finds that his store credit cards credit have been reduced. The only possible solution for restoring wealth and buying power to the consumer (and thereby demand for products and services) is through actual growth (and the current loose money is not doing that, it is artificially inflating asset prices and those prices will come back to earth when money is tightened). The problem that we have is that the amount of growth we must achieve to restore wealth to the consumer (and buying power) is enormous when viewed relative to the increase in national debt burden that is developing as a result of the structure of our military committments and entitlements obligations to our indigent, elderly, retirees, veterans, handicapped and economically dis-enfranchized members of our populace. From a global perspective, China and India are experiencing actual growth as they move from the 18th century to the present. Unfortunately, the U.S. (and Europe) has already enjoyed the radical growth in wealth resulting from moving from the pre-industrial to the post industrial, and, we then over-shot with debt-enabled inflated buying power, which we now must carry as a drag weight. China and India enjoy the benefit of the growth opportunity and no drag from debt. As their populaces grow in wealth and buying power, they will develop ever increasing internal consumer demand, and this growth will be geometric. While this is happening, the U.S. populace will be paying back the money it owes for assets that no longer have the value that they paid for them, and our growth will continue to lag that of China and India as we grow incrementally on a linear trajectory. The result is that we will continue to borrow from those that have the wealth, becoming evermore indebted and burdened as they continue to grow in wealth. This scenario is not one that any business person would accept as a viable model for their business, and it is not viable for our nation. Our currency is headed down, and with it our buying power, and that means that we are on a track to experience less and less wealth. So, while we need to finance SME’s, we also need to address the fundamental imbalance in our nation’s operating budget, or these SME’s will choke on taxes to fund our debt.

The Gathering Geithner Storm

The Gathering Geithner Storm
Posted by ccecil

Regrettably for our country, this Administration, which was to be a model of transparency, has betrayed the American people's trust. Too much has been done in the name of expediency and all should have learned by now that the end does not justify the means. At this time it is especially true that it is simply unacceptable that a man with Geithner's conflicts should be allowed to be Treasury Secretary.

Charles Cecil, CEO, Opin Partners LLC

Geithner: Gotta Go

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Dubai Default Coming? Black Swan?

No Black Swan here-old news and relatively insignificant with respect to size. Look at the $17 trillion CRE, LBO/takeover and bank balance sheet debt that matures during the next few years and Dubai looks pretty small. Anyway, there have been Sovereign defaults in the past, and the markets all got upset so we can probably look for the same here, but I suspect a mild case. I'll bet that Abu Dhabi provides a solution, with a little pain. Especially since I see that investment in Dubai is continuing and the property market is moving towards stability.

Three Months Later, Nothing New Here: Excess Capacity in Labor

U.S. Dept of Labor August Report

Despite all the "good news", our labor utilization remains the same as it was in my post three months ago:

September 8, 2009

While the Labor Department’s monthly Employment Situation report is probably one of the most closely followed info points at this point in a recession, there are some aspects of it that receive less attention than they might merit.

In August, the unemployment rate and the change in payroll employment they gave us a mixed picture. The unemployment rate increased from 9.4% to 9.7%. On the other hand, "only" 216,000 net jobs were lost which was the least in any month in a year. One might hope that this indicates a brightening picture with job losses moderating.

However, in the report are several other data points including the average workweek for production and non-supervisory workers, which covers 80 percent of total employment on private non-farm payrolls. The average workweek in August was 33.1 hours, just a bit more than in June when it hit the all time low (since 1964) of 33.0 hours. The problem here is that employers' have considerable capacity to expand without hiring any new employees. Without new hiring, it is unlikely that there will be any increase in the office space needed by employers and will also mean that personal income will only grow minimally, suggesting that retail and vacation spending will remain stagnant, hurting the performance of retail centers, restaurants, hotels, casinos and resort properties.

Charles Cecil
Opin Partners, LLC
www.opinpartners.com




Data Source: U.S. Bureau of Labor Statistics

CONSUMERS’ NET WORTH, HOUSING, RECESSION & RECOVERY

September 18, 2009

It is widely accepted that there can be no strong and permanent recovery from the present recession until the housing market is "fixed". The numerous actions by the Federal Government to date to resuscitate the housing market have certainly been helpful, however, it would appear that they will not be sufficient to resuscitate the market to a point where it could be considered healthy.

The Government’s $8000 tax credit for first time home buyers is nice, but looking at the total cash required, the impediments provided by lenders and the magnitude of the decision to buy a home, (let alone a first home), it cannot be credited with too many sales.

The Fed announced yesterday that consumers’ net worth had increased by $2 trillion, a very good piece of news. However, looking a bit deeper, consumers’ net worth is still $11 trillion less than it was before the recession.

Prospective home buyers have lost as much as 40% of their net worth through the stock market and home equity loans are no longer available to home buyers. At the same time, first mortgage lenders have tightened criteria, requiring more income, better credit and more cash reserves by borrowers post-closing.

Why hasn't the Federal Government, through any number of possible mechanisms, provided first time buyers with home equity loans to reduce the cash they would need at closing (politics)? This would greatly increase the number of potential capable buyers for SFH and condos and would help stem the continuing fall in housing prices, currently in a vicious cycle, wiping out individuals’ and lenders’ net worths, reducing consumers' ability to spend and lenders' ability to lend, prolonging any move to a strong recovery.

That flushing sound: Not Just U.S. CMBS

As of this week, Fitch has now downgraded $70 billion of European CMBS, representing 69%of the CMBS it covers. In Japan, Fitch assumes that 100% of maturing CMBS loans will default when due. In the first half of 2009, 53% of maturing Japan CMBS defaulted.

Charles Cecil
Opin Parters, LLC

HOW MUCH FLUFF IS IN FINANCIAL INSTITUTIONS' COMMERCIAL REAL ESTATE BALANCE SHEET ASSETS?

HOW MUCH FLUFF IS IN FINANCIAL INSTITUTIONS' COMMERCIAL REAL ESTATE BALANCE SHEET ASSETS?

Some quick math on CRE loan collateral and prospective future loan losses:

The build-up of non-performing/underperforming CRE loans on the balance sheets under OCC, FDIC & Fed new non-performing loan policy announced last week got me thinking:

Nationally, we have seen an average 250 bpt increase in CAP rates (and some would argue 300 bpt), and a resultant loss in value of CRE as follows:

There are approximately $3.5 trillion of CRE loans outstanding at this time. Assuming an average LTV of .75, the CRE collateral was valued at loan inception at $4.2 trillion. So, assuming an average CAP Rate for CRE of 6, we can derive that the implied NOI at loan underwritings was $252 billion ($252 billion/.06=$4.2 trillion). Increasing the CAP Rate by 250bts to 8.5 results in a reduction of CRE loan collateral such that it is now worth $2.965 trillion, or, $1.235 trillion less than at loan inception underwritings. From this we see that at current values the $3.5 trillion of outstanding lender CRE loans are undercollateralized by about $535 billion. This of course ignores the declines in operating performance that have been experienced during the last 24 months and which continue to deteriorate with each passing month. Taking a stab at quantifying operating performance declines, we could say that broadley, NOI is down 10-30%, depending on asset class. Taking a conservative number of 15% and applying it to the $252 billion of NOI at loan inception underwriting, we find that current NOI may in fact be something like $215 billion. Using our current 8.5 CAP Rate, we get a current value of $2.529 trillion. This suggests that lender CRE loans are undercollaterallized by about $971 billion. Let's call it $1 trillion, and hope that NOI does not deteriorate any further - very wishful thinking.

Charles Cecil
Opin Partners, LLC

Fantasy Underwriting:

Fantasy Underwriting:
The Riverton Apartments now joins Peter Cooper Suyvesant Town in the ongoing Fantasy Underwriting Contest. Riverton, with 1,230 apartments in Harlem, NY, finally ran through its debt service reserves and its $225 million loan became the largest newly delinquent CMBS loan.

Charles Cecil
Opin Partners, LLC

Now This is Delay and Pray:

Now This is Delay & Pray:

The Fed, FDIC, OCC & OTS issued a joint policy clarification which has more than a few people in the mortgage investment industry concerned as it appears to say that lenders with non-performing loans need not treat them as such and that bank examiners will be flexible in this regard when reviewing banks portfolios. We don't understand what the "Plan" is, as non-performing loans are piling up at ever-increasing rates. This leaves us to wonder how and when it will be possible for the banks to clear these loans from their books, and under what circumstances. If the "Plan" is that the economy will grow its way out of this overhang of bad loans, then the Fed & Co had better get some stimulus(ae) going soon that will create organic demand and resultant growth.

Charles Cecil

Opin Partners, LLC

Now This is Delay and Pray:

Now THIS is Delay & Pray:

The Fed, FDIC, OCC & OTS issued a joint policy clarification which has more than a few people in the mortgage investment industry concerned as it appears to say that lenders with non-performing loans need not treat them as such and that bank examiners will be flexible in this regard when reviewing banks portfolios. We don't understand what the "Plan" is, as non-performing loans are piling up at ever-increasing rates. This leaves us to wonder how and when it will be possible for the banks to clear these loans from their books, and under what circumstances. If the "Plan" is that the economy will grow its way out of this overhang of bad loans, then the Fed & Co had better get some stimulus(ae) going soon that will create organic demand and resultant growth.

Charles Cecil

Opin Partners, LLC

CMBS BONDHOLDERS, GET NERVOUS:

CMBS BONDHOLDERS, GET NERVOUS:

November 13, 2009

On Thursday November 12^th, a bankruptcy court judgment in the Extended Stay Hotels case in NY signalled a possible change in how borrowers negotiate with first mortgage CMBS bondholders, and CMBS bondholders should worry.

The bankruptcy judge in the case gave the borrower, Extended Stay Hotels (ESH), the right to access a list of names of bondholders of a CMBS trust with $4.1 billion of mortgages on 680 ESH hotels in order to allow the borrower to negotiate a plan of reorganisation that meets the objectives of the various bondholders (read as in “give me my money now”, or, “don’t wipe me out yet”).

This ruling sets a precedent for possible direct involvement of individual bondholders in various tranches in the restructuring process in other situations where the borrower defaults on a mortgage that is part of a CMBS. This would clearly be in direct conflict with the rules stipulated in the CMBS securitisation documents which vest the Special Servicer with bondholder representation. The potential for chaos in a scenario where all the different tranches were individually represented is enormous and would seem to be contrary to the essential structure of the CMBS.

Charles Cecil

Opin Partners, LLC

The Real Deal

City sees more CMBS property value cuts

October 13, 2009

As rating agencies have slashed the value of bonds tied to securitized commercial real estate loans nationwide, some loan servicers are taking a harder look at the value of their assets and finding they are worth a lot less. Loan servicers reported more appraisal reductions for New York City properties last month than in the preceding eight months combined, data from mortgage tracking firm Trepp LLC showed. The firms that manage troubled loans in commercial mortgage-backed securities, known as special servicers, reported in September appraisal reductions for 11 properties, reflecting a total reduction of $150 million that month, the firm reported. In the previous eight months, there were only three properties that showed a total reduction in value of $15 million; and there were no appraisal reductions published in the first eight months of 2008, Trepp reported. The largest loan to see its value cut was the Riverton Houses, which was reappraised at $108 million, 68 percent below its original securitized value, The Real Deal reported last month. But that was just one of many, the data showed. The other properties that saw their values fall in September were the Rocket Lofts, at 98-106 South 4th Street in Brooklyn, which declined 35 percent to $25.7 million; and the Core Club retail condominium at 60 East 55th Street, which lost 56 percent, Trepp figures showed. Charles Cecil, partner at Opin Partners, an investment advisory firm, said special servicers are conducting more appraisals as a response to the downgrades of CMBS bonds by rating agencies, in an environment where real estate loan performance is deteriorating and loans will be difficult to refinance. In August, Fitch Ratings downgraded several classes of bonds tied to the Stuyvesant Town and Peter Cooper Village loan, which was packaged into a CMBS pool."The downgrades, they put the loan servicers in a peculiar position," Cecil said. The lower ratings force special servicers to ask themselves: "'We've got a bundle of loans in CMBS, and maybe we need to look at what is going on there. Maybe we are getting indicators that the value might not be what it used to be.'"So to protect themselves, the loan servicers have the appraisals done, he said. He expected more in the coming months.

Author: Adam Pincus

Copyright © 2009 – The Real Deal, Inc. , 158 West 29th Street New York, NY 10001 , 212-260-1332

The Real Deal

City sees more CMBS property value cuts

October 13, 2009

As rating agencies have slashed the value of bonds tied to securitized commercial real estate loans nationwide, some loan servicers are taking a harder look at the value of their assets and finding they are worth a lot less. Loan servicers reported more appraisal reductions for New York City properties last month than in the preceding eight months combined, data from mortgage tracking firm Trepp LLC showed. The firms that manage troubled loans in commercial mortgage-backed securities, known as special servicers, reported in September appraisal reductions for 11 properties, reflecting a total reduction of $150 million that month, the firm reported. In the previous eight months, there were only three properties that showed a total reduction in value of $15 million; and there were no appraisal reductions published in the first eight months of 2008, Trepp reported. The largest loan to see its value cut was the Riverton Houses, which was reappraised at $108 million, 68 percent below its original securitized value, The Real Deal reported last month. But that was just one of many, the data showed. The other properties that saw their values fall in September were the Rocket Lofts, at 98-106 South 4th Street in Brooklyn, which declined 35 percent to $25.7 million; and the Core Club retail condominium at 60 East 55th Street, which lost 56 percent, Trepp figures showed. Charles Cecil, partner at Opin Partners, an investment advisory firm, said special servicers are conducting more appraisals as a response to the downgrades of CMBS bonds by rating agencies, in an environment where real estate loan performance is deteriorating and loans will be difficult to refinance. In August, Fitch Ratings downgraded several classes of bonds tied to the Stuyvesant Town and Peter Cooper Village loan, which was packaged into a CMBS pool."The downgrades, they put the loan servicers in a peculiar position," Cecil said. The lower ratings force special servicers to ask themselves: "'We've got a bundle of loans in CMBS, and maybe we need to look at what is going on there. Maybe we are getting indicators that the value might not be what it used to be.'"So to protect themselves, the loan servicers have the appraisals done, he said. He expected more in the coming months.

Author: Adam Pincus

Copyright © 2009 – The Real Deal, Inc. , 158 West 29th Street New York, NY 10001 , 212-260-1332