Comings and Goings

Peter Cooper/Stuy Town is finally defaulting on their mortgage after much anticipation. Five different CMBS deals have exposure, and are gearing up for their shortfalls.

One, unnamed*, journalist got it right. She didn't get a byline, maybe I should know who she is, but I'm going to dub her "Samantha's Mom". As we've said all along - the CRE problems are much worse on bank's balance sheets than in CMBS.

CMBS is going to rally in 2010, and it's going to be huge!

I'm just embarrassed for the Fed and how they've done pretty much everything. They screwed up TALF, again. Did you know the fed was a private enterprise that can be hired/fired by Congress? Should you be asking your Congressman to let go this wayward contractor?

*It's Agnes Crane - I just think it's weird she doesn't have a byline.

Fed Concerned About CRE & particularly IOs?

The WSJ has an article out regarding a presentation from the Fed, that I can't find - someone send me a copy.

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%

You do not really see substantial benefits until several years down the road. IOs are a minor concern in CRE in my opinion, and come behind Partial IOs, general economic decline, poor underwriting, poor sponsorship, lack of recourse, current uncertainty around bankruptcy-remote structures, forced selling due to risk-based capital reserve requirements and CDO liquidiations, etc., etc., etc. Full IOs are nowhere near the top of the list.

At Year 3