They claim the presentation calls for 45% losses in 2010 in the CRE space, "worse than the 1990s real estate recession" -- yeah, that is nearly 6 times worse than the 8.1% 10-year loss during the 1990s, and 30-40 times worse than any one year from the early 90s! Something must have been misunderstood here.
Also, people keep talking about IO loans being the problem. Partial IOs are one thing, due to payment resets, but just straight IOs make a for a hard argument that they are going to lead to significantly greater losses. Let's look at an example.
Let's compare an IO loan from 2006 to an Amortizing Loan in 2006. 2006 is more or less the start of the bad underwriting, and we'll imagine we have a loan at 6% per year with a 30-year amortization schedule and a 10-year balloon payment due.
- At Year 3, 2009, the principal paid down through amortization is just 3.92% of the loan balance.
- Year 5, principal returned amounts to 6.95%
- Year 10, but before the balloon, is 16%
At Year 3