Interest Rate Roundup

Monday, December 22, 2008

Commercial developers lining up at the bailout window

Good Monday morning - I don't know how many people are reading out there, given the fact we're now squarely in the holiday season. But I'm still toiling away and will do my best to keep you abreast of what's going on in the markets. One key news item I can't help but highlight: The story from the Wall Street Journal today entitled "Developers ask U.S. for Bailout as Massive Debt Looms." An excerpt:

"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.

"Unlike home loans, which borrowers repay after a set period of time, commercial mortgages usually are underwritten for five, seven or 10 years with big payments due at the end. At that point, they typically need to be refinanced. A borrower's inability to refinance could force it to give up the property to the lender.

"A recent letter sent to Treasury Secretary Henry Paulson, and signed by a dozen real-estate trade groups, painted a bleak scenario: "Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real-estate loans," said the letter. "For many borrowers, [credit] simply is not available," the letter noted.

"To head off some of the impending pain, the industry is asking to be included in a new $200 billion loan program initially created by the government to salvage the market for car loans, student loans and credit-card debt. This money is intended to go directly to help investors finance purchases of securities backed by these assets. If commercial real estate is included, banks might have an incentive to make more loans to developers since they'd be able to repackage and sell them more easily to investors with the assurance of government backing."

I've been saying for months on end that once you open the Pandora's Box of bailouts, you won't be able to shut it again. The government and the Fed are now on the verge of subsidizing everything from the home mortgage market to the credit card business to (potentially) the commercial real estate industry.

This is rapidly becoming a national disgrace. Whatever happened to free markets? The concept of failure for those who rolled the dice and lost? Sure it means the economy would sink into a deeper recession in the shorter-term if we ended up with more bankruptcies and foreclosures. But you know what? That's what happens to economies that binge on too much credit. You have to go through a period of pain to cleanse the bad loans, work off the excesses, and set the stage for a healthy economic rebound. Trying to get in the way of the economic cycle over and over again hasn't exactly worked out well. Witness the gigantic housing bubble we got in the wake of the dot-com bust, partially caused by the Fed's interest rate moves (which were designed to counter the tech-bust-driven recession).


  • Mike-

    Here is the bright side in this:

    As the mad rush to participate in the bailout grows, the realization that it is not possible will grow also.

    Had the bailout been limited to the financial sector, we may have thrown good money after bad until eternity.

    With the entire nation lining up for largesse, it SHOULD soon be clear that it is not possible.

    Sooner or later they will have to defend the dollar.

    My reasoning is this - regardless of how partisan the two parties are, they will stick together like brothers when it comes to protecting the ability of the government to spend.

    When is becomes clear that the rest of the world won't/can't finance a massive budget deficit, they will have to start paring the bailout list aggressively?

    Or have I been smoking too much TARP?


    By Anonymous Anonymous, at December 22, 2008 at 9:49 AM  

  • It is a breakdown on discipline. It has become increasingly accepted that the Federal Government is an insurance company. They are supposed to eliminate all misery. That includes financial, property and life losses. This process will continue as we have no one with the discipline to say no. I can only hope they hold up the 2nd 1/2 of the TARP based on the way the first half was handed out.

    By Anonymous Anonymous, at December 22, 2008 at 11:12 AM  

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