Wednesday, May 12, 2010
The next shoe to drop
In my neighborhood there's three places in foreclosure and one upside down and about ready to walk away from it. Which got me to thinking about commercial properties so I did a little research.
I was looking around the area at all the business that has gone out. It's strange in a way. Some places had been around for years while some places were just built in the last two years and sit there empty never having been leased. There's a 76 story office building in Seattle that's about 40% leased and now in default. There was a time when the Seattle skyline was filled with construction cranes. Now building lots are empty and plentiful. In researching all this, which was no easy task. I find commercial real estate is like the onion similar to the residential mortgages. They did the same thing. Bundled good and bad commercial loans into packages that were sold everywhere. You may recall them touting REITs (real estate investment trusts) some years back as a great investment. I considered such an investment for about two seconds and since they're nearly impossible to understand without some kind of real estate background I thought otherwise. I knew the residential loans were a joke when they offered 125% loan to value and interest only loans. What's in store for commercial loans the coming years?
The financial side contains even greater risk. Fitch Ratings said it expects defaults to surpass 11 percent this year on commercial mortgage-backed securities. If that sounds like the kind of "innovation" that mushroomed the housing bust into a financial panic, it is. We just don't know the full exposure or interconnectedness of these derivatives. Or whether, as Fed Chairman Ben Bernanke once put it, the damage can be "contained."
(reported by Jon Talton Seattle Times)
Lastly there's 1.4 billion in commercial loans and about 1/2 are upside down which as everyone knows means that they own more than what the buildings are worth. And like it or not the taxpayer is going to get stuck with the bill. That's because of the bad paper that was sold to other banks bringing them to bankruptcy. The FDIC took possession of this paper when a bank folds effectively laying the burden on us the taxpayer. And I suspect that that is the reason congress won't separate the banks from from the investment firms because if they did they effectively kill the whole company in the process. Because as we all know they're still selling derivatives like junkies that need just one more fix.
Thanks for the links Oso but they didn't help there was only residential foreclosures on those sites.