According to Bloomberg, Ben Bernanke admitted that: "a potential wave of defaults in commercial real estate may present a “difficult” challenge for the economy." Note to Ben, it's not a "potential" wave, it's a 100 foot monster cresting just off shore and ready to roll in on the banking and financial system with a vengeance. The first wave, sub-prime housing loan defaults, was only the initial storm surge before the hurricane of real estate distress out there. Yet it was able to knock down Bear Stearns and Merrill Lynch, run Morgan Stanley to high ground, flood out WaMu and Wachovia, all but topple AIG, and inundate Fannie Mae and Freddi Mac under twenty feet of malarial toxic waste water. If that wasn't bad enough, it so stressed the housing market that millions of "homeowners" saw their house values decline to a point where they were also "underwater," unable to sell without taking a loss. Here's what is just off shore for us:
We've seen chart after chart showing the next big wave building in the residential markets. Look at how all the exotic trick mortgages are scheduled to reset to higher payment levels and then tell me things are anywhere near a bottom in residential real estate--they aren't. The waves of pain are spread out well into 2012. But now we are seeing an upswelling in the commercial paper market, and the outlying towers of the remaining banking industry are sounding the alarm sirens.
Financial Times reported today: "Two of America’s biggest banks, Morgan Stanley and Wells Fargo, on Wednesday threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loans...Wells Fargo saw non-performing loans in commercial real estate jump 69 per cent, from $4.5bn to $7.6bn in the second quarter as the economic downturn caused developers and office owners to fall behind in their mortgage payments." Bernanke noted that the market for commercial mortgage backed securities had “completely shut down,” meaning banks have no way to pass the risk of default off to some other dupe in the system. This means that as all the commercial loans mature and need refinancing, the bankers won't be so friendly. It also means that we will see more and more commercial defaults, more empty office towers, strip malls, and vacant apartment complexes. It's the worse possibe time to be a commercial real estate developer/investor.
All of this, the sub-prime, ALT-A, Option ARM and interest only loans, the no-doc, low-doc, liar loans that were written and approved, all of it was the creation and cash cow of the banking system. The crisis we have now with all these loan resets triggering defaults and bank foreclosures is entirely "Made in America" by the US banks. The notion of modifying the loans never seems to occur to the banks. They can't imagine any solution that doesn't fatten their bottom line.
When Hurricane Katrina devastated New Orleans in 2005 I saw the event as a grand metaphor for America as a whole in my article "Bye, Bye, Big Easy." That was at the very height of the housing boom, and the good times were rolling all across the country, yet back then, as gasoline pushed past the $4 mark in places, I wrote: "The Big Easy is gone in other ways for America as a whole. The shock this disaster gives to our energy system should be enough to awaken in us a realization that we simply cannot go on with our Mardi Gras lifestyle in this country. Something has to change. We have built our levees to protect us all these years: our powerful military to secure the oil we need, a vast outpouring of home equity and consumer credit to keep our economy running. In many ways we, as a nation, are much like New Orleans—a city below sea level that may soon be well over it’s head in the flood tide that is coming. The challenge now is not to rebuild in the same old ways, the same old place—but to create something new in this country that will address the really impending crisis ahead."
Impending crisis ahead? No one I talked to back then could hear or imagine that the life they were leading could ever be threatened. Now they squint at the ever rising tide of mortgage defaults and wonder if the good times will ever be back in this country.
We've seen chart after chart showing the next big wave building in the residential markets. Look at how all the exotic trick mortgages are scheduled to reset to higher payment levels and then tell me things are anywhere near a bottom in residential real estate--they aren't. The waves of pain are spread out well into 2012. But now we are seeing an upswelling in the commercial paper market, and the outlying towers of the remaining banking industry are sounding the alarm sirens.
Financial Times reported today: "Two of America’s biggest banks, Morgan Stanley and Wells Fargo, on Wednesday threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loans...Wells Fargo saw non-performing loans in commercial real estate jump 69 per cent, from $4.5bn to $7.6bn in the second quarter as the economic downturn caused developers and office owners to fall behind in their mortgage payments." Bernanke noted that the market for commercial mortgage backed securities had “completely shut down,” meaning banks have no way to pass the risk of default off to some other dupe in the system. This means that as all the commercial loans mature and need refinancing, the bankers won't be so friendly. It also means that we will see more and more commercial defaults, more empty office towers, strip malls, and vacant apartment complexes. It's the worse possibe time to be a commercial real estate developer/investor.
All of this, the sub-prime, ALT-A, Option ARM and interest only loans, the no-doc, low-doc, liar loans that were written and approved, all of it was the creation and cash cow of the banking system. The crisis we have now with all these loan resets triggering defaults and bank foreclosures is entirely "Made in America" by the US banks. The notion of modifying the loans never seems to occur to the banks. They can't imagine any solution that doesn't fatten their bottom line.
When Hurricane Katrina devastated New Orleans in 2005 I saw the event as a grand metaphor for America as a whole in my article "Bye, Bye, Big Easy." That was at the very height of the housing boom, and the good times were rolling all across the country, yet back then, as gasoline pushed past the $4 mark in places, I wrote: "The Big Easy is gone in other ways for America as a whole. The shock this disaster gives to our energy system should be enough to awaken in us a realization that we simply cannot go on with our Mardi Gras lifestyle in this country. Something has to change. We have built our levees to protect us all these years: our powerful military to secure the oil we need, a vast outpouring of home equity and consumer credit to keep our economy running. In many ways we, as a nation, are much like New Orleans—a city below sea level that may soon be well over it’s head in the flood tide that is coming. The challenge now is not to rebuild in the same old ways, the same old place—but to create something new in this country that will address the really impending crisis ahead."
Impending crisis ahead? No one I talked to back then could hear or imagine that the life they were leading could ever be threatened. Now they squint at the ever rising tide of mortgage defaults and wonder if the good times will ever be back in this country.
