bank run blog

The other shoe has dropped.

Bloomberg reports that mortgage delinquincies of commercial properties are beginning to been seen across the US. Bloomberg writes;

“Loans secured by properties that were writtenassuming rental growth have been unable to meet targets, leading to increased defaults. The delinquency rate for North American commercial real estate loans in mortgage backed securities may triple in 2009 as loans default.”

Some regions have been hit hard and hit early, Bloomberg reports;

“Office, retail, apartment and industrial properties with mortgage payments 60 days late or more rose to 3.93 percent as of March in Cleveland area and 3.75 percent in the Detroit area…The North American commercial property delinquency rate is 1.1 percent according to Standard and Poor’s.”

Cleveland had a commercial real estate vacancy rate of 14.8 in 2008 which is forcast to rise to more than 20 percent by 2010. Ohio has unemployment levels that outpace the national average. In December, the unemployment rate in Ohio was 8.8 percent and the state lost a further 214,000 jobs in January. Detroit’s unemployment rate is even greater, with 10.6 percent of its workers receiving unemployment insurance.

The service also said that that Phoenix area had the “second highest percentage of 30-day late commercial real estate loan payments” and that other regions, such as the Las Vegas area, could see commercial defaults increasing over the course of 2009.

“Cleveland and Detroit are just the first to see the stress. They’re the canaries in the coal mine”, Bloomberg qoutes chief economist for Grubb Ellis, “There is really no part of the country being spared.”

see story
Bloomberg : Cleveland Commercial Loan Delinquencies Signal More Declines

The bedrock asset of most Americans, their home, is declining in value at a record rate. CNN reports;

“The Federal Housing Finance Agency (FHFA) reported that home prices fell a record 1.8% for the month, compared with October, declining at an annualized rate of nearly 20%. That follows losses of 1.2% and 1.1% in the two previous months. For the 12 months ended November 30, prices fell 8.7%, which was the largest 12-month price drop ever for the 17-year-old index.”

Reductions in home value were even greater in certain regions, CNN wrtes;

“According to FHFA, the Great Plains and prairie states of North and South Dakota, Nebraska, Kansas, Iowa, Missouri and Minnesota were the worst-hit U.S. regions in November. Prices there dropped a whopping 2.7%.”

The FHFA index tracks the purchase price of homes bought with loans of $417,000 or less that are sold to or guaranteed by the federally controlled mortgage firms Fannie Mae and Freddie Mac.

see story-
CNN Money : Home prices see sharp dip

In an exaggerated instance of the type of severe deflation that can infect markets in this New Year, Yahoo reports on the phenomenon of “four-figure” real estate listings that are popping up in cities that have experienced high foreclosure rates. Yahoo writes;

“There are 18 listings in Flint, Mich., for under $3,000, according to Realtor.com. There are 22 in Indianapolis, 46 in Cleveland and a whopping 709 in Detroit.”

The properties, which are listed in the low thousands with some homes listed as low as $500, are bank owned properties that have not sold at auction and may require extensive repairs. Yahoo writes;

“buyers are legally required to rehab these homes to bring them up to code. In Detroit, buyers are required to sign Affidavits of Compliance Responsibility, which obligates them to make repairs outlined in an inspection report. Only after that can a certificate of occupancy will be issued, which makes the house legal to live in.”

Yahoo writes;

“Foreclosures have turned banks into property management companies,” said Heather Fernandez, a spokeswoman for Trulia.com, the real estate Web site. “And it’s often cheaper for them to give these homes away rather than try to get market value for them.”

Banks that own four-figure properties are basically paying to get rid of these homes. Banks often pay real estate agents to list such homes, and when a home is sold for $1000, the entire sale price goes to the real estate agent as a commission.

See story-
Yahoo News : Radical cheap: $1,000 homes

The Wall Street Journal is reporting Developers Ask U.S. for Bailout as Massive Debt Looms :

“With a record amount of commercial real-estate debt coming due, some of the country’s biggest property developers have become the latest to go hat-in-hand to the government for assistance.

They’re warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years — with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.”

full story

According to the Atlanta Business Chronicle, the imminent collapse of the commercial real estate market in the early part of 2009 has prompted developers to ask for this bailout now :

“In a letter to Paulson, commercial real estate leaders warn that thousands of properties are in danger of foreclosure because current financing is coming due and new financing is hard to come by.

The industry envisions a credit facility that would offer financing to investors interested in purchasing highly-rated securities backed by newly-underwritten and appraised commercial properties.

‘Banks do not want to originate loans unless they have some way to transfer those loans to new investors,’ said Jeffrey DeBoer, president and CEO of The Real Estate Roundtable. ‘There needs to be market support for investors who want to buy highly-rated securities. Once they have a market, other securities will be able to price off of that.’”

full story

In a piece that provides a short review of the now collapsed housing bubble, USA Today writes, “history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.”

The article recounts the inflation of the real estate bubble noting the pervasiveness of shady No Income/No Asset loan products. USA Today reports that property values rose 8 percent a year during the early 2000s peaking in 2005 when real estate values rose a startling and unsustainable average of more 12 percent. USA Today quotes Peter Schiff, president of the investment firm Euro Pacific Capital, who said, “We will never see these prices again in our lifetime, when you adjust for inflation. These were lifetime peaks.”

USA Today goes on to report on the fallout of the bubble blowout;

“So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.

The price plunge has wiped out trillions of dollars in home equity and caused the worst financial crisis since the Great Depression. Susan Wachter, professor of real estate at the University of Pennsylvania, fears that foreclosures and tight credit could send home prices falling to the point that millions of families and thousands of banks are thrust into insolvency.

“If we have another 20% decline in prices, we’ll need another bailout of banks similar to what we just did,” Wachter says.”

Where is the bottom of the housing market and how far will property values sink? What is in store for homeowners who owe more than their home is worth and need desperately to sell? USA Today paints a bleak picture;

“As prices drop, home buyers wait for better deals, says economist Dean Baker of the liberal Center for Economic Policy Research in Washington, D.C.

Lenders want bigger down payments to protect against the falling value of collateral. Homeowners lose equity, so they can’t buy other houses…

An out-of-control price collapse would have dire consequences…Even the most conservative banks would find themselves carrying portfolios of toxic mortgage loans.

If housing prices don’t stabilize at traditional levels, financial troubles could spread everywhere — to credit cards, car loans and commercial mortgages,

Baker says, “The waves of bad debt will just keep coming.”

see story-
USA Today : Why home values may take decades to recover