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Commercial real estate loans grow more distressed


Realpoint, the ratings firm that specializes in bonds backed by commercial real estate properties, is out with its July delinquency report on loans in CMBS deals and it has lots of great data tidbits on the building pressure on distressed loans.

The amount of loans delinquent for three months or more – an indication of extreme distress – now stands at $11.23 billion, up from $9.57 billion in the previous month. What’s interesting about the 90-day plus delinquencies is that they’ve been rising at a much faster clip than say foreclosures and REO (when the property is turned over to the bank). Check out chart on page 9 of the full report here.

It could indicate that a wave of defaults is about to crash.

Part of the reason is special servicers, those charged with helping  borrowers work out a loan when they can no longer stay current on their payments, are still trying to figure out whether these loans are worth saving. Some, presumably will not.

Separately, Frank Innaurato of RealPoint notes that some loans, which are still current on their regular payments, have moved into special servicing anyway in anticipation of refinancing problems on the horizon. Typically, borrowers avoid special servicing unless they’re desperate since it signals a higher likelihood of default.

Commercial real estate and small banks


A couple more data points for the commercial real estate and the banks that plowed into the sector during the go-go years earlier this decade. It’s a mess and one that smaller banks and the FDIC will be left to clean up.

Fitch Ratings says banks with less than $20 billion in assets on average have a commercial real estate loan exposure that represents more than 200% of total equity. For comparison, the exposure of the 20 largest banks rated by the firm, is more than 125%. and this doesn’t even include the toxic construction and development loans that are sinking fast.

Fun commercial real estate figures and charts


I just came across this research from the Cleveland Fed that has some scary numbers and charts on commercial real estate. They underscore why the Fed and the FDIC are so worried, particularly about construction and development loans, which are seeing the most stress.

Although commercial mortgage-backed securities (securitized CRE loans), have garnered their own significant amount of attention, they account for only 20 percent of outstanding commercial mortgage debt. Loans held by banks, meanwhile, account for 60 percent of the CRE debt market—much more than any other institutional holder. Also, unlike the residential mortgage market (where a majority of lending has been done by a few large banks), the array of banks holding large concentrations of commercial mortgage debt is broad and diverse.

Less can be more


It’s good news when a bank reports a decline in the percentage of problem assets on its balance sheet. 

At Goldman Sachs it could even be better news down the line.

The bank’s tough-to-value Level 3 assets at the end of the second quarter totaled $54.5 billion, down from $66.2 billion in November 2008 — the end of the firm’s most recent fiscal year. 

Commercial real estate death watch


It’s no wonder that the Federal Reserve has a watchful eye on commercial real estate. Lending hasn’t come back, prices are plummeting and those that poured funds into the sector during real estate boom are getting killed by high vacancy rates and falling rents.

Maguire Properties is one such company. The Wall Street Journal reports the debt-laden REIT is handing over seven buildings to its creditors along with the $1.06 billion of debt that comes along with them. But rather than restructure the debt, the creditors may try to offload them into an extremely soft market, suggesting they’d rather take their lumps now rather than wait for a snapback in the market that may well be years away.

Credit Suisse toxic bonus pool not that hot


The 17% return on the Credit Suisse toxic bonus pool so far this year, as reported by the Wall Street Journal, surely soothed hard feelings among bankers who were outraged in December when the bank told 2,000 of them that  bonuses would be linked to the performance of risky leveraged loans and commercial mortgage-backed  securities dumped into a pool called the partner asset facility.

But compared with gains in the U.S. commercial mortgage-backed securities market, it’s not looking too hot. AAA CMBS have moved from around 60 cents at the beginning of the year to about 80 to 85 cents on the dollar while the riskier BBB- tranche of the CMBX is showing gains of around 50% over the last two months, according Richard Parkus at Barclays Capital Deutsche Bank, who gives the government and its TALF and PPIP programs full credit for the gains.

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.

from Margaret Doyle:

Lloyds calls bottom of loss cycle – early?

Lloyds Banking Group's outgoing chairman, Victor Blank, foretold "exciting prospects [and] long-term success" as the bank wrote off 13.4 billion pounds in bad debts, contributing to an overall 4 billion pound loss. The group's assertion that its loan impairments have peaked -- well ahead of when historical precedent suggests -- may also prove a hostage to fortune.
Blank's remarks and chief executive Eric Daniels' thanks to him for his "significant contribution" had an air of surrealism about them. Blank, after all, cooked up the hasty takeover of HBOS that scuppered the formerly cautious Lloyds last autumn, forcing it into government arms. Daniels did nothing to stop him.
Blank is bowing out after losing the confidence of UK Financial Investments, the body that looks after the government's 43 percent stake in the bank. However, UKFI's boss, John Kingman. still defends Daniels, whose old-style banking skills are seen as key to digging Lloyds out of this mess.
The extent of the damage of the HBOS deal is evident from the numbers. No less than 80 percent of the impairments come from its book, which was laden with overvalued real estate, both commercial and residential. Indeed, the cost of bad HBOS loans in the first six months of the year exceeds the amount it spent buying the bank.
In Lloyds' defence, it is dealing aggressively with Blank's unfortunate legacy. It is working through the loan book and identifying the real dross that will go into the Government Asset Protection Scheme (GAPS). Three quarters of the assets affected by the impairment charge are ear-marked for the GAPS.
Moreover, all of the group's new lending (which is significant -- gross mortgage lending, for example, is 18 billion pounds, maintaining its market share at 27 percent), is now done under Lloyds stricter criteria. The group is winding down the "specialist", e.g. self certified, and buy-to-let mortgage categories that proved so tempting to amateur property barons.
Lloyds is also crunching through the integration at top speed. It has always been known for being tight on costs. Indeed, it is a bitter joke in the industry that it drip-feeds job losses -- rather than declaring its target for cuts -- in an effort to avoid political fall-out. Staff numbers fell by 2,619 in the first half, to 118,207. More are surely to come with the group targeting an annual improvement of a full 2 percentage points in its cost income ratio for the next few years.
On the funding side, Lloyds is increasing the maturity of its funding -- despite the higher costs -- though are still concerns the enlarged bank remains overly dependent on wholesale funding which is currently being supplied by central banks and
government guarantees.
So far, each of these initiatives has been dwarfed by the sheer scale of HBOS losses. Normally banking losses peak a year or so after the trough of the recession, which suggests any turning point is at least twelve months away.
Lloyds reckons that the property focus of the HBOS books means that losses have peaked much earlier than they would otherwise have done. The GAPS should also help shield Lloyds from mounting losses.
However, general corporate defaults are likely to rise, as are nemployment-related defaults on unsecured debt. If Lloyds' prediction proves correct, it will have taken a step towards rebuilding its battered credibility. Who knows? Daniels may be able to keep his job after all.

Another wrinkle in the TALF CMBS saga


The New Fed has released some modifications on its CMBS TALF program that could be telling as to why one of the CMBS legacy bonds put up as collateral was rejected during the inaugural round.

Clarification added to the FAQ:

The New York Fed will not fund a TALF loan if, in its judgment, a potential borrower is motivated to request a TALF loan due to such borrower’s or any of its affiliates’ direct or indirect economic interest in the underlying loans or leases, or products or services relating to such loans or leases, contained in the pool backing the ABS, and such economic interest would impact the incentive of such borrower to independently assess the risk of investment in such ABS. To the extent that any potential TALF borrower has any concerns that it could be rejected on this basis, such borrower is encouraged to contact the New York Fed well in advance of its loan request.

A commercial real estate horror story


The photos speak for themselves in this blog post about the economic devastation in south Florida. Vacant storefront after vacant storefront.

Green shoots? Yeah, if you count the weeds growing in the empty parking lots and between the cracks in the building foundations. Post courtesy of Clusterstock via Bob Norman’s blog at New Times of Broward/PalmBeach counties.