Commentaries

Loans of concern

“Loans of concern” has the same ominous ring as the phrase “persons of interest” when uttered by law enforcement officials investigating a murder.

The corpse in this instance is the commercial real estate market, and Fitch Ratings has the latest indication of its morbid condition.

Fitch reports that it has added 432 commerical real estate loans totaling $5.2 billion to its designation of “Loans of Concern.” The 7 percent increase from June through August, means that $80.7 billion of U.S. commercial real estate loans have either deteriorated or defaulted — that is 17 percent of the total U.S. CMBS portfolio rated by Fitch.

Goldman’s commercial junk pile

Goldman Sachs, as I’ve pointed out before, has done a good job reducing its exposure to commerical mortgages by selling off potentially troublesome loans well ahead of the curve.

But it appears what’s left in Goldman’s commercial mortgage bin is all but untradeable, if not potenially toxic.

The Wall Street firm has pushed just about all of its remaining commercial real estate loans and securities backed by those kind of loans into its Level 3 trash pile. For Wall Street firms, Level 3 is a category of assets that difficult if not impossible to value because there is not ready market for them.

In its latest quarterly report, Goldman reports having $6.84 billion in commerical real estate related assets in Level 3. The remaining $1.17 billion in such loans and securities is listed as being Level 2–a category were outside market prices are more obtainable.

In many ways it shouldn’t come as a surprise that what’s left of Goldman’s commercial real estate loan book would be classified as impossible to value and trade. In the firm’s second-quarter earnings conference call, CFO David Viniar said the firm had marked down its commercial loan portfolio to about half of its par value. That’s an indication the firm expects many of those commercial loans to default.

Overall, Goldman reports having $54 billion in Level 3 assets, or 8.7% of its $614 billion in financial assets. Commercial mortgage and related securites account for about 13% of all Level 3 assets. Only two other kinds of assets–convertible bonds and bridge loans–constitute a bigger portion of Goldman’s trash.

So if the commercial real estate market totally falls into the toliet as many predict, keep a close eye on what’s left of Goldman’s commercial real estate book.

Goldman’s real estate gambit

Is history repeating itself at Goldman Sachs?

In late 2006, Goldman shrewdly began backing away from the residential mortgage market. With little fanfare, the firm began aggressively hedging its exposure to home loans, in particular mortgages to borrowers with shaky credit histories.

This savvy and somewhat stealthy strategy enabled Goldman to pawn off lots of its soon-to-be toxic mortgages and mortgage-backed securities on other institutions — forcing those foolhardy speculators to pay the price when the subprime market blew up.

And much to everyone else’s chagrin, Goldman even made money off the housing meltdown when some of its hedges — specifically a bet that a subprime mortgage index would plunge — paid off handsomely.

It appears Goldman is following a similar script with U.S. commercial real estate, the next big asset class that many believe is on the verge of disaster.

Goldman recently reported owning $6.4 billion in commercial mortgage loans. It also is holding some $1.6 billion in commercial mortgage-backed securities, or CMBS. That’s a big retreat from where it was just two years ago.

And in a sure sign that Goldman expects a good number of commercial real estate borrowers to default, the firm says it marked down the overall value of its commercial mortgages portfolio by nearly 50 percent.