Posted on 10/31/2009 8:21:58 AM PDT by FromLori
In what could have been the biggest piece of news today, yet making little headway into the media, the Fed announced that it is adopting a policy statement supporting "prudent commercial real estate loan workouts." And even though in traditional Fed fashion, the statement says a lot but is even more vague, some of the implications from a more nuanced read have very serious adverse implications for commercial real estate. The section:
Financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers' financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications. In addition, performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral declined. seems to imply that the Fed is now encouraging active loan workouts as a matter of policy. The other implication is that firms with CRE exposure can no longer rely on the Fed as a perpetual guarantor of risky exposure. Not only that, but in adopting a new policy strategy, the Fed is acknowledging the major problem that CRE writedowns will represent for banks, yet is telling banks to resolve problems on their own, while subsequently they will "not be subject to criticism for engaging in these efforts."
The implications of this Fed action for the economy could be staggering as the $3.5 b,quadr,trillion CRE market will likely not receive the same largesse that residential real estate has been the recipient of ever since the conservatorship of the GSEs. And the biggest loser in all of this will be banks that still have not used the massive risk rally to offload whole loan and CMBS CRE holdings, and moreover, still have these marked at par or close thereby.
As Wilbur Ross and George Soros pointed out earlier, the trouble for CRE is just starting. If the Fed is unwilling to recreate QE for CRE, in the same way that it continues to bail out residential exposure, then look for a major double dip in the economy. The only wild card is why the Fed is letting this happen, although if the political backlash against just QE 1 is any indication, then it likely would not have been able to pass additional liquidity measures regardless.
Full Fed policy statement can be found here.
Related
http://www.economicpolicyjournal.com/2009/10/fed-to-banks-with-major-commercial-real.html
http://www.zerohedge.com/article/wilbur-ross-beginning-huge-crash-commercial-real-estate
Our best-and-brightest in Washington are turning our finance system into the zombieland that’s stifled Japan for more than a decade.
Ping for later...
Ultimately, this collapse needs to be seen as a gross failure of our business schools. The best and the brightest trained at communist dominated universities! Who can expect a different result?
Property is either owned by the government or it is privately owned. Just because one chooses to exercise his property rights on ones property, one should not loose ones rights.
It is like saying one has the right to publish as long as one does not have a printing press.
The government under Obama and the people backing him will act only upon what they can steal and convert to power for themselves.
Must be hard keeping all the lies straight.
Back in Sept 2008, they said that everything would come crashing down unless we had a massive bailout. Well, I wish we had sat on our hands. If it needs to come crashing down, it ought to.
If the government is now going to let the players in the commercial real estate market take their lumps for past bad business decisions, then I say it's about time.
Government intervention in private business is fascism. I oppose fascism. Allowing business to benefit from good decisions, and suffer from bad decisions is free market economics. I support the free market.
Oh I agree I don’t think we should have had any bailouts. I just posted it because I thought it was interesting.
Roger that.
Thus inflating their balance sheets, eh?
Having been an investment partner in a retail mall, what you say is very, very true.
There are differing levels of absent tenants, tho. Lose a specialty shop (eg, something small, like a t-shirt shop) and it really doesn’t cause a ripple. Lose several of these smaller shops, and it starts to make an effect.
Lose a couple of medium-sized tenants (eg, a national bookstore chain) and shoppers really start to notice.
Lose an “anchor tenant” (eg, something the size of a Sears of JCP) and if the mall operators cannot get a new tenant into that space FAST, the mall starts going into a death spiral.
The experience of having been an investor in retail property operation taught us one very important thing about retail: a LOT of retail leases are not paid on time - even in good economic years. The margins in some retail operations are razor-thin, and their success is absolutely contingent upon the public pissing away money on a large number of utterly superfluous nonsense.
That’s not in the card any more, which is why I’ve been something of a wet blanket on the economic prospects going forward. Again, we learned these lessons the hard way in a good macroeconomic environment - the mall in which we invested we thought was a relatively good prospect because it was in a location with little to no competition - and still, it went under as the local economy got into a rough patch.
In California, Nevada, Florida, etc - where there has been huge over-building of retail space - there is a surplus of retail space that is unlike any time in the last two generations. This was an unstable situation even if consumer spending stayed constant at 2007 peak levels, which it won’t.
I still laugh at your 'skankware' comments from long ago.
Let me see if I have this right.
The Fed bailed out the Banks so they did not have to renegotiate down the bankster fraudulently inflated values of private homes.. Then the Banksters flush with case forclosed on millions and continue to do so..
Those they have not forclosed on are in many cases upside down and will be forever.
Now, the Fed will not bail out the Banks on Commercial Real Estate which will force the banks to renegotiate down the loan values which will allow persons owning Commercial Real Estate to maintain possession of their properties and they will not be upside down on the value and cost of their properties.
Seems to me like some animals are more equal than others on this Farm.. mmm mmmm mmmm
W
Very descriptive. In my very amateur opinion, most of our "service" economy is based around trading utterly superflous nonsense back and forth.
One Freeper coined the term "frippery slope", and we're on it.
For now, the Fed seems to be counting on a revival in the economy and a rebound in commercial real estate so that a large segment of now impaired commercial loans can be gradually worked out. Meanwhile, as long as the FDIC does not aggressively force write downs and charge offs, liquid but insolvent banks will tread water in hope of better days. Quite likely, as in Japan, these “zombie banks” will crowd out new lending and forestall recovery.
The bad news continues. There is no easy way out of this. The only question is, is there any way out of this at all?
The only thing the fed could do now would be pure printing press monopoly money, and that would likely be the last straw to break the dollar's back. CRE holders are on their own. Look to more banks going belly up every Friday afternoon data dump to join the hundred plus that already have succumbed to Obamanomics.
True!!!!
And he's the bugger that's supposed to be in charge. Pray for us.
Excellent analysis!
http://www.vanityfair.com/business/features/2009/11/too-big-to-fail-excerpt-200911
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.