Commercial mortgages will cause banks much more trouble.

November 9, 2008

It is by now general wisdom that the commercial mortgage market is headed for massive defaults and shrinkage during next year and beyond, but if anyone needs confirmation, here’s the latest situation. What is most important is that 700 billion in Paulson’s TARP will almost certainly be about one-seventh to one tenth of what will eventually be needed to bail the financial system out, on the conservative assumption that the sorting out of this crisis will last a whole decade, and the greatest amount will be spent in the first two years, from now. This scenario is based on the comparatively less severe prognosis of the S&L crisis of the eighties. In any case, 700 billion is almost laughably small for this purpose. The Treasury has not even completed satisfying the increasing demands of institutions such as Morgan Stanley, Bank of America, AIG, etc  through its TARP, which are not even the most troubled firms that they have be to sorted out, by far (with the exception of AIG). The insurance industry is already clamoring for more public money.
Commercial real estate borrowers are running out of options as asset-backed markets dry up and alternative financing comes to an “abrupt halt,” RBS Greenwich Capital Markets Inc. analysts said.
Regional banks and insurance companies, which had become the primary source of financing since credit markets seized up, have stopped lending, the RBS analysts wrote in a report. Sales of CMBS slumped to $12.2 billion in 2008, compared with a record $237 billion last year, according to JPMorgan Chase & Co.

The government’s attempts to unlock credit markets is easing some borrowing costs in some markets, though won’t relieve the seizure in the commercial mortgage debt market, Pendergast said.

“The de-thawing of the shorter-term lending markets is a baby step and will have little effect on commercial real estate lending near term.”

Both regional banks and insurers are reigning in lending. The insurance industry is under review by ratings companies and may be downgraded, while not yet receiving permission to participate in the Treasury’s capital injection programs, she said. Regional banks remain “under significant pressure,” Pendergast said.

“Like life insurance companies, indications are that many of these banks have closed their books for the year and 2009 remains a big question mark,” Pendergast said.

Loans Coming Due

The dearth of financing options will make it challenging for borrowers with loans coming due in 2009. About $88 billion in commercial real estate loans will mature next year, RBS estimates. Between 2009 and 2011, $123 billion in loans that have been packaged into bonds will mature, which doesn’t include direct loans originated by banks or insurance companies, the analysts said.

Top-rated CMBS are trading at a record 633 basis points more than the benchmark swap rate, according to Bank of America Corp. data, compared with 318.8 basis points on Sept. 15, the day Lehman Brother Holdings Inc. filed for bankruptcy. The bonds were trading at about 70 basis points more than the benchmark a year ago, the data show.

Spreads on commercial mortgage-backed securities won’t narrow until late 2009 at the earliest, and more likely not until 2010, the analysts said.

Delinquencies on commercial real estate debt rose to 0.78 in October compared with 0.66 percent in September, RBS Greenwich data show.

Genworth the insurer, which is a recent spinoff of GM, will probably not survive this crisis without public money (I’m tempted to say “Paulson’s magic touch”, but he’s leaving soon.)

Genworth fell $2.03 to $2.67 at 4 p.m. in New York Stock Exchange composite trading, the lowest since the company first sold shares in 2004. It has lost $258 million in the third-quarter, equal to 60 cents a share, from a profit of $339 million a year earlier. The insurer is considering asset sales and may raise funds by selling private or public equity or debt.

Chief Executive Officer Michael Fraizer said during a conference call with analysts that Genworth is preparing for prolonged, deeper market disruptions and a “significant recession.” Fraizer also said that the company is participating in the Federal Reserve’s commercial paper program designed to unlock short-term credit markets. Genworth is eligible for about $223 million, he said.

The company was downgraded by Standard & Poor’s on concerns about “the company’s increased need for funding in mid-2009,” the ratings firm said in a statement today. The company has “limited access” to the capital markets.

The mortgage-insurance business of Genworth posted a $121 million deficit because of rising delinquencies and higher reserves.

CDS spreads on Genworth widened. Traders demanded 17.25 percentage points up front in addition to five percentage points a year, according to CMA Datavision. That means it would cost $1.73 million initially and $500,000 a year to protect $10 million of bonds from default for five years. Yesterday the up-front payment was 11 percent.

And finally, some good news from China. The government is going to spend about 600 billion dollars on infractructure investment as it tries to cushion the economy from the impact of the global crash. This will be good for the rest of the world, because China’s massive reserves, hopefully, will find some use in the process, although it is obvious that the financing will be through borrowing, not through the liquidation of the currency reserves. It would be much better if the Chinese had decided to tap their reserves. China is still a risky third world country, and throwing money around in such a heavy-handed manner, borrowing so much so early in this crisis  doesn’t appear to be the most prudent attitude in today’s circumstances. China’s immunity to speculative attacks and the resilience of its economy today is almost entirely dependent on its positive trade balance. However, given the attitude of the government, and its desire to increase domestic spending, while exports are curbed rapidly by falling global demand, means that the surplus is probably illusory, and much weaker fiscal and trade positions lie ahead. We’ll see if CCP’s gamble will pay off in the future.  

China pledged a 4 trillion yuan ($586 billion) stimulus plan to prop up growth in the fourth-largest economy as the world heads toward a recession. The funds, equivalent to almost a fifth of China’s gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said yesterday. Following a weekend meeting in Sao Paulo, finance ministers from the Group of 20 nations, of which China is a member, issued a joint statement saying they are ready to act “urgently” to tackle the economic slump.

“Over the past two months, the global financial crisis has been intensifying daily,” the State Council said in yesterday’s statement. “In expanding investment, we must be fast and heavy- handed,” it said, adding that the central bank will pursue a “moderately loose” monetary policy. The central bank has already cut interest rates three times in two months, reducing the one-year lending rate to 6.66 percent.

The stimulus package, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, it said. The government will allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies’ costs by an estimated 120 billion yuan. In addition, grain purchase prices and subsidies for farmers will be raised, as will allowances for low-income urban households. The government also scrapped loan quotas to help boost lending to small businesses.

China accounted for 27 percent of global economic growth last year, more than any other nation, according to IMF estimates. Central bank Governor Zhou Xiaochuan said Nov. 8 that boosting spending at home is the best way China can help avert a prolonged world recession. UBS AG and Credit Suisse AG, before yesterday’s announcement, forecast GDP would rise no more than 7.5 percent next year, which would be the smallest increase in nearly two decades. Manufacturing contracted by the most since at least 2004 in October and export orders dropped to their lowest, according to CLSA Asia Pacific Markets. Home sales have plunged in major cities including Beijing and the stockpile of unsold new vehicles was at a four-year high in September.

“The golden years have shuddered to a dramatic halt,” said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.

Meanwhile, Taiwan, which counts China as its largest trading partner, late yesterday cut interest rates for the fourth time in two months after exports dropped in October by the most in three years.

All the news clips from Bloomberg.





One Response to “Commercial mortgages will cause banks much more trouble.”

  1. I am glad I had a chance to read your post, if you have more information on cheap airfare elsewhere let me know or post it here.

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