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11/30/2009
11/27/2009
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.
11/25/2009
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
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.
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
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
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
11/24/2009
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
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
11/17/2009
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
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
Charles Cecil
Opin Partners, LLC
CMBS BONDHOLDERS, GET NERVOUS:
CMBS BONDHOLDERS, GET NERVOUS:
November 13, 2009
On Thursday November 12th, 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
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