Monday, November 30, 2009

Further declines in commercial real estate forcast by Moody's

Moody's said in a press release last week that commercial real estate will continue to decline in value before a long term stabilization occurs and the market begins to recover.  The income stream produced by commercial real estate which has been sold to investors as CMBS will not recover soon causing further declines in CMBS values.  Maturing CRE loans in these pools will not be able to be refinanced as maturities of bubble value loans approach.

The rating agency says that they will be downgrading CMBS tranches that were issued as late as 2008 - well into the bubble deflation.  They went on to say that the cash flows for properties with short-term lease structures, such as hotels and multifamily, will likely hit bottom in 2010 or early 2011. The bottom for office, retail and industrial properties will take longer to form.

Moody's says that property values have deflated 42.9% from their peak and thinks that the bottom will hit in up to two years from now at a 45-55% decline from the peak.

Source: http://v3.moodys.com/viewresearchdoc.aspx?docid=PR_190851

Tuesday, November 17, 2009

Recent Commercial Mortgage Modification Consulting Requests

A strip mall owner in Las Vegas paid $7 million with $2.5 down payment in 2005.  Today the property is only worth $3 million and the loan amount is still over $4 million.  The property is not producing enough cash flow to cover the debt service and the loan, which is in a CMBS pool has been assigned to a special servicer.

The property has a 45% occupancy and the existing tenants are clamoring for lease modifications.  Cash flow is declining as the vacancy rate is expected to increase over the next 12 months as businesses in the area are closing and unemployment remains over 13%.

Considering the fact that the property can not sustain the debt service for this loan amount, the note holder, or in this case the bond holders are going to take a hit.  How much of a hit is what is up for negotiation.

The loan may have already been removed from the CMBS pool because of its non performing status and sold to an investor for as little as 20 cents on the dollar or even less.  In that case the owner of the note, who may have paid only $1 million would be willing to accept an offer that provided a handsome return on investment.

If the property owner could arrange for a new investor to come in and buy out the note, then refinance based on the current value the new loan amount would be $1.8 million and even with 50% occupancy the property would cash flow.

While this example makes some big assumptions, the principles are sound.  The people taking the biggest hit are the CMBS bond holders.  The fact is they took the hit already in 2008 when the CMBS bond market seized up.

If the loan is still part of the CMBS pool, it can be removed from the pool and sold or the servicer can agree to a modification that would reduce the principal balance, extend the term or lower the interest rate.

In October the Treasury Department changed the IRS rules to allow CMBS servicers to change the terms of the loans without the IRS calling into question the tax exempt status of the REMIC.  Prior to this rule change servicers could only foreclose or offer short term changes to CMBS loans.

Thursday, November 12, 2009

Real Estate Attorney Stephen Meister Video On Fox Business

Watch this fascinating discussion about the next bailout and real estate crash with attorney Steven Meister on Fox Business.

 http://www.foxbusiness.com/search-results/m/27371346/fed-s-housing-fix-broken.htm

As readers of this blog know I had predicted this crash a year ago and the next "Mother of all bailouts", now finally it has hit the main stream media.

Wednesday, November 11, 2009

Fed Survey Shows Banks In Line With Pretend & Extend

The Federal Reserve released its Senior Loan Officer Opinion Survey on Bank Lending Practices. The results showed an increase in residential lending over the past three months but showed a continual decline in commercial lending activity.

The survey asked bankers why CRE lending has declined in 2009 and also addressed commercial real estate loans on their books that were scheduled to mature by Sept 09.

The table below shows their responses:


The survey showed that 75% of respondents said they had extended at least 25% of the loans that were maturing. This indicates that commercial real estate loans are frequently being extended.

This statistic will no doubt go up next year as the brunt of the maturing commercial loans come due. These maturing loans were often the most toxic loans made at the height of the bubble at a time when underwriting guidelines were at their lowest historical levels.

The chart below shows the demand for commercial real estate  is at extremely low levels even with a spike in maturing loans looming.





Tightening credit standards for commercial loans indicate that the months ahead present significant challenges for commercial real estate financing in the foreseeable future.  The chart below shows the increasingly tight credit standards are being applied to new loans.




Monday, November 9, 2009

Commercial Real Estate Bottom Expected in 2011

In spite of recent rosy reports of a recovery in commercial real estate (see MIT commercial property price index posts first increase in over a year) the bottom is a long way off as unemployment continues to climb into the double digits.

There is no recovery for commercial real estate when jobless numbers are increasing. In order for rents to stabilize and prices to recover, people have to get back to work.

A report published by the Urban Land Institute and accounting firm PricewaterhouseCoopers LLP predicts that nationwide commercial real estate vacancies will continue to increase and rents will decrease across all property sectors before the market hits bottom in 2010.

The report was based on interviews and surveys involving some 700 industry professionals around the country. Participants projected national value declines of 40 percent to 50 percent off 2007 market peaks. Survey participants also believe that 2010 and 2011 will present buying opportunities at or near cyclical low prices.

This creates an opportunity for professionals who have experience in this area to offer commercial loan modification services to property owners. Leadsnet Inc., has set up a website (http://www.commercialmodification.com) for commercial property owners to get connected with industry professionals who can offer loan modification services.

Friday, November 6, 2009

Senate Votes To Extends First Time Home Buyers Tax Credit

The Senate approved an extension of the first time home buyers tax credit of $8000 and also added a provision to allow existing homeowners to get $6500 from the rest of the taxpayers if they buy a home. The credit can be claimed by anyone that buys a home for under $800,000.

With the FHA underwriting loans with only 3% down this means you can buy a $250,000 home with no money down. This will have the affect of prolonging the housing decline over a longer period of time. A large percentage of these homes will go in to foreclosure because the buyers will have no equity.

Many homeowners who are already in negative equity situations are increasingly turning to shorts sales. In a short sale transaction the debtor is relieved of the mortgage and the bank accepts a reduced principal balance. This avoids the cost of foreclosure and allows the seller to walk away without the severe hit to his credit that a foreclosure would.

Recently the Obama administration stepped up its efforts to get lenders to speed up the process of allowing short sales. In the past, transactions would typically take six to nine months to complete.

Monday, November 2, 2009

Government Gives The Green Light To Pretend and Extend

Last week government bank regulators officially put their blessing on the practice of "pretending and extending" by issuing guidance to banks that allow them to modify commercial loans without being viewed unfavorably by their regulators. It has become clear to Washington that the next banking crisis and government bailout is right around the corner. They have taken this step to ease the pain that is sure to come.

Analyst estimate that there is about $270 billion in negative equity that has to be resolved in the next few years. This comes from about 1.5 trillion in debt that is maturing on CRE loans. This property can not be refinanced because of the negative equity. If the banks were to foreclose and not modify the loans, they would be forced to show the real value of the property on their books, wiping out the profits they reported earlier this year and causing a liquidity crisis in an already overstressed banking system.

By allowing the banks to modify these loans, the bankers and property owners are allowed to "kick-the-can" down the road some more years.

Prior to this change in guidance, if a bank were to modify a loan, and the loan amount was greater than the market value, the loan would have been considered "adversely credit classified". Such a loan modification wold not have been considered prudent based on sound banking principles. This new guidance allows them to modify the loans even if the loan amount exceeds the market value.

Property owners ought to contact their bank or a professional that specializes in commercial loan modification.