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Monday, July 02, 2007

Smaller Commercial Lending Going Splat

Dear friends, we have a major anti-liquidity event going on. Commercial lending development loans are going the way of subprime. It is not just RE development either. It's developed in less than a week, and it appears to be moving with frightening speed. Probably Bear Stearn's problems triggered it, but the underlying problems have been there for a while.

This is the third horseman of the liquidity apocalypse: The first was the residential mortgage tightening. The second was the linkage of stocks prices to commodity prices, etc; I have been watching that very carefully. Once the small commercial loan market goes belly-up, which it is in the process of doing, the dollar value of the delinquencies and foreclosures escalate and the banks must scramble for cover. It is not the leveraged buyout market that matters, but now the ground level, the screaming and shouting of high finance abruptly gets transmitted to the ground-level economy.

If you have money at risk now's the time to move. The exit doors are closing fast. There's been good discussion on Calculated Risk on more than just housing. You can read any financial news outlet and see article after article about the problems with "complex structured financial vehicles", i.e., there's tons of paper out there carried on the books at far more than it is actually worth. The real on-the-ground action is just starting now, as suddenly the money spigot starts emitting a cautious trickle of water instead of a healthy flow.

Btw, in the early stages of the ground-level yank it can look like conditions are improving. There are fire-sales on land, lots, developed houses, etc. This gives a bit of a boost to reported numbers. Desperate deals are made, and for a period of about six to nine weeks pundits may be able to look at the national figures and pretend good things are happening.


Comments:
Silly question, but 'money at risk'... would that include money in the bank? CD's? Love your blog by the way, thanks!
 
Not as long as it's under FDIC insured limits.
 
ed in texas

I moved to cash assets in January. In Winter's Wall St Examiner column, I hit link for a Hudson Inst study on the credit rating bodies (S&P, Moody, Fitch). Seems the reason they give for rating error is that they're (are you ready for this) journalists, not underwriters, and have first amendment coverage. I shit you not:
http://hudson.org/files/publications/Hudson_Mortgage_Paper5_3_07.pdf
About pg 12 or so. Friggin mind boggling.
 
ed in texas

Let's try that again to get the url:

http://hudson.org/files/publications/Hudson_
Mortgage_Paper5_3_07.pdf
 
I read somewhere recently that one of the rating co's said the rating was just their opinion, and no one should use their opinion to make investment decisions.

Greetings from South Beach. I've seen more building cranes than sets of fake boobs....
 
Ed & CF: They do indeed maintain that. Which, of course, begs the question of why those very same ratings determine which investments are considered "investment grade" by regulators.

Just like getting a rotten fish slammed across your face, isn't it?

And CF - the building must continue until all the builders have worked through their land or have gone bankrupt.
 
MoM,

Can you give us some more color on what you're seeing/hearing in CRE-land? Perhaps a new post?

I'm wondering why there are no impairments on land loans where the homebuilder has walked away from the option to buy. I assume the term of the loan fits with the expiration of the option, so that having to extend the term would be grounds for taking a look at impairing. Yet we saw virtually no impairments in the public community banks in 1q.

I think the leverage supporting land is something that will ultimately contribute to a fall in home prices.

David Pearson
 
David - if you look at broker's forums I believe you'll see the loans popping up yourself.

It doesn't look right at all. Land and retail space. This was the funniest.

As for impairments, if the banks have to foreclose they'll go REO. The next writedown would be when they actually cleared REO.

The required appraisals don't have to be done except for extensions of credit, so you can theoretically not recognize impaired collateral for a long, long time. If you had to mod or the loan stopped performing and you had to make a decision, you'd expect an appraisal. But I am not sure how often that will be done in the current situation.
 
Which, of course, begs the question of why those very same ratings determine which investments are considered "investment grade" by regulators.

Like that abandoned Over the Hedge movie set along I-5 in the wastelands south of Stockton last summer? All the billboards around it were pimping it as "INVESTMENT Real Estate!"
 
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