Posted on 10/07/2009 10:27:47 AM PDT by Kartographer
Not all commercial real-estate loans are created equal.
In Wednesday’s Journal we reported that U.S. banks have been “slow” to take losses on battered commercial real-estate loans, according to a Federal Reserve presentation to banking regulators last month.
So which are the most toxic loans?
The answer will sound familiar to anyone who’s followed the subprime mortgage meltdown. The Fed presentation points to Interest-only loans, held by banks or repackaged into securities, as the most poisoned piece of the commercial real-estate pie.
Interest-only loans allow borrowers to pay only the interest on the loan for a set period of time but no principal. A lot of these loans were made at the market peak, get no benefit from amortization and have seen a decline of more than 45% in the values of the properties backing the loans, the Fed presentation notes.
(Excerpt) Read more at blogs.wsj.com ...
All this was to have been taken care of in October under Paulsen / Bush.
s/o
“Interest-only loans allow borrowers to pay only the interest on the loan for a set period of time but no principal. A lot of these loans were made at the market peak, get no benefit from amortization and have seen a decline of more than 45% in the values of the properties backing the loans, the Fed presentation notes.”
And a lot of those interest only borrowers got suckered into buying second or third houses or beach lots by real estate brokers. The sky was the limit. The Realtor said:
“Why, no need to worry about that balloon. Just pay the interest, you’ll flip it within three years!”
And of course, it takes two to tango. The greedy and or naive buyer as well as the Realtor. And the buyer took the bait.
I expect that the series, “Flip this House” just stoked the fever.
It seems like a race is on. Nearly free money from the FED to major banks, to buy “riskless” Treasuries and Agency Debt, thus earning them a decent 1.5-2.0%. FED is doing this, and buying mortgage backed securities it seems - to give banks big profits.
Perhaps the FED’s hope is these subsidies/profits, will cover the banks when the bad commercial loans also need to be written off.
in effect, the FED’s hope is that they subsidizing the banks faster than they lose money.
With what they are going to have to print, it will take a much bigger toilet.
parsy, who sadly doesn’t see a better alternative
look for a weak Christmas selling season to touch off a wave of Chapter 11 filings and store closings that will start the cascade
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