Thursday, June 18, 2009

More Bad CRE News.

The next shoe to drop in the credit crisis is going to be Commercial Real Estate. You cant stop it nor can you contain it. The only thing to do is resecuritize the debt and sell it to a different class of morons who didn't lose their shirt the first time.

Yes folks...CRE is going to be the next Bruno Magli to reek havoc on the credit system.

The following is from a REALPOINT RESEARCH


In April 2009, the delinquent unpaid balance for CMBS increased by an unprecedented $3.26 billion, up
to a trailing 12-month high of $17.15 billion. Overall, the delinquent unpaid balance grew for the eighth
straight month, up over 329% from one-year ago (when only $3.99 billion of delinquent balance was
reported for April 2008), and is now over seven times the low point of $2.21 billion in March 2007. An
increase in four of the five delinquent loan categories was noted in April, including over $1.96 billion in 30-day delinquency. The distressed 90+-day, Foreclosure and REO categories grew in aggregate for the
17Th straight month – up 15% from the previous month and over 260% in the past year. This increase far
overshadows the $65.9 million in loan workouts and liquidations reported for April 2009 across 18 loans. Nine of these loans at $40.99 million, however, experienced a loss severity near or below 1%, most likely related to work out fees, while the other nine loans at $24.9 million experienced an average loss severity near 61%. Were main cautious regarding the increased delinquencies,loan workout activity, and reported loss severity's when considering our expectations for the remainder of 2009. As
additional pressures are placed on special servicers to maximize returns in today’s market, true loss severity's are expected to be high while liquidation activity is expected to slow as fewer transactions occur. This would be the result of reduced or distressed asset pricing, lower
availability of take-out financing, and increased extensions of balloon defaults through the end of 2009
into 2010.The total unpaid balance for all CMBS pools under review by Realpoint was $830.1 billion in April 2009,down from $834.5 billion in March. Both the delinquent unpaid balance and delinquency percentage over

Bloomberg also has this nugget this morning:

The Federal Reserve received no requests from investors for loans to buy new commercial mortgage-backed securities under an emergency program aimed at reducing borrowing costs and reviving U.S. economic growth.

The New York Fed announced the absence of loan requests yesterday, the first monthly deadline for investors to apply for loans to buy new CMBS through the Term Asset-Backed Securities Loan Facility, or TALF. No issuers have publicly announced debt that’s eligible for the program.

New York Fed President William Dudley set expectations low, saying in a June 4 speech that he didn’t foresee any activity because the securitization process “takes quite a while to ramp up.” He asked his audience not to “take that as a mark of the success of the CMBS effort, please.”

The stakes of TALF aid for CMBS extend beyond the markets for office and retail space. Worsening problems in the commercial mortgage market may accelerate the drop in property values, increase defaults and weaken banks’ finances, Dudley said in the speech.

The Fed has made $25.2 billion in TALF loans for other securities, including those backed by auto and credit-card debt.

“This is not an embarrassment for the Fed, but it does show there is a slow discovery process on the part of investors and originators,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

‘Toughest to Crack’

Among asset classes targeted by the Fed through the TALF, “commercial real estate is going to be the toughest to crack as its financing is very long-term in nature,” Rupkey said.

Yesterday’s deadline applied to securities issued this year. In late July, the Fed will start accepting investor requests for loans to purchase older CMBS.

The Fed, acceding to an industry request in May, authorized TALF loans of as long as five years, up from three years for other parts of the TALF. Real estate groups including the Mortgage Bankers Association had lobbied the Fed for the extended loan terms.

Fed officials hope the TALF -- an emergency program that may make as much as $1 trillion in loans -- will help revive the $760 billion market for CMBS. That in turn may lower interest rates and expand the availability of loans for the commercial real estate market.

“The revival of the CMBS market is essential to stabilizing the commercial real estate market,” Dudley said in the speech.

Slow Start

A slow start for the TALF’s CMBS support would mirror the first phase for other asset-backed debt, which began in March with $4.7 billion in requests followed by $1.7 billion in April. Loan requests exceeded $10 billion in both May and this month.

Demand in March and April was hampered in part by investor opposition to government restrictions on hiring foreign workers for firms that accepted the subsidized loans, and concern that Congress would try to tax earnings retroactively.

“This will take a while,” said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm. “It may very well be that when we see sharp increases in TALF participation, that that’s going to be a signal that the markets are in fact healed.”

Sales of CMBS plummeted to $12.2 billion last year, compared with a record $237 billion in 2007, according to estimates by JPMorgan Chase & Co. There have been no sales of the debt since June 2008.

Fed Chairman Ben S. Bernanke said in congressional testimony on May 5 that lending conditions in the commercial real estate sector are “still severely strained.”

Deals have been few partly because it can take as long as six months from the time a loan is originated to when it’s securitized.

In addition, the Fed posted the legal forms for CMBS in the TALF on June 9, leaving little time for participants, said Chip MacDonald, a partner at law firm Jones Day in Atlanta.

But It looks like Bank America and Investors are totally ignoring the warning signs.

Another Bloomberg Nugget.

Bank of America Corp. and Morgan Stanley are marketing securities backed by commercial mortgage bonds.

Bank of America is selling $368 million in debt backed by nine commercial mortgage bonds, according to a person familiar with the offering. Morgan Stanley plans to sell $210 million in similar securities backed by a single commercial mortgage bond, according to a person familiar with the sale. The people declined to be identified because the terms aren’t public.

Banks are turning to so-called re-REMICs for commercial properties to create securities that offer protection from rating cuts and losses. Standard & Poor’s said it may lower the rankings on as much as 90 percent of the highest-graded commercial mortgage-backed bonds sold in 2007. A record $237 billion of the debt was sold that year, according to JPMorgan Chase & Co. data.

“This could be the start of something you see more of,” Eric Johnson, president of Carmel, Indiana-based 40/86 Advisors Inc., said in a telephone interview. “It will get more interesting when these deals use bonds that are rated below AAA.”

The Morgan Stanley and Bank of America offerings consist of portions of debt already rated AAA, according to documents connected with the sales.

The top-ranked portion of the Bank of America debt may price to yield 550 basis points more than the benchmark, the person said. The most senior part of the Morgan Stanley offering may price to yield 500 basis points more than the benchmark swap rate. A basis point is 0.01 percentage point.

Loan Vehicles

REMICs, or real estate mortgage investment conduits, are vehicles used to turn loans into bonds by passing payments from the debt to different investors in varying orders of priority or at different times. Re-REMICs repackage some of those securities, or a single class, into new bonds.

The yield gap, or spread, relative to the benchmark on top- rated bonds backed by commercial mortgages fell 73 basis points to 7.5 percentage points today, according to Bank of America data.

About $27 billion of Re-REMIC repackagings of home-loan bonds have been issued this year, up from $17 billion for all of 2008, according to a June 12 report by Bank of America Merrill Lynch.

Sales of commercial mortgage bonds plummeted amid concern about rising defaults. There have been no sales of the debt this year, according to data compiled by Bloomberg.

Obama is front and center with Financial Reforms, but this kind of stuff is borderline criminal.

When does it become readily apparent that this is the type of behavior that got us in this mess in the first place. How many more hedge funds, mutual funds, state pension funds, and banks need to blow up before any action takes place?

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