New Geography

Tag: MBS

  • Commercial Real Estate Bust of 2010

    Coming soon to a market near you: a bust in commercial real estate that will make the subprime mortgage crisis look like a picnic. The other shoe drops in 2010.

    Federal Deposit Insurance Corporation Chairman Sheila Bair told a Senate committee on October 14 that commercial real estate loan losses between now and the end of 2010 pose the most significant risk to U.S. financial institutions. Although you can’t read it online, on October 7, 2009 Wall Street Journal reporters Lingling Wei and Maurice Tamman (Eastern edition, pg. C.1, Fed Frets About Commercial Real Estate) reported on a presentation prepared by an Atlanta Fed real-estate expert who is worried “about the banking industry’s commercial real-estate exposure.”

    Since July, the Federal Reserve has been pumping billions of dollars into commercial-mortgage-backed securities (CMBS, same things as the residential-MBS I’ve written about before in this space, only for shopping malls instead of houses). To accomplish this, the Fed uses the Term Asset-Backed Securities Loan Facility or TALF program. It is one of several alphabet-soup programs the Fed is using to pass a couple of trillion dollars to the stock market through private corporations (not just regulated banking institutions). For example, between March and July 2009, Harley-Davidson Inc. and other non-banks raised $65 billion in sales of bonds backed by everything from motorcycle loans to credit card debt. The Fed made $35 billion in TALF loans to investors buying those securities, which sparked a market rally. That market rally, however, is not in the commercial real estate market – it’s in the securities market. Since its inception, TALF has put between $2 billion and $11 billion per month into the securities market.

    TALF lends money to anyone willing to buy CMBS (or student loans, car loans, etc.). The Fed reasons that, as long as banks can move loans off their books by repackaging and selling them as bonds, they will make more loans. So they justify giving money to non-banks to buy the bonds because the money will go to the banks. Get it?

    Unfortunately, as vacancy rates rise, banks are increasingly reluctant to make new commercial real estate loans. This is obviously the case since Office of Thrift Supervision deputy director Timothy Ward told Congress this week that they will be issuing guidelines on doing loan workouts. A loan work out is what industry experts call “extend and pretend” – extend the terms and pretend like they are paying you. CRE loans, furthermore, are shorter in duration than home mortgages – typically 5 years instead of 30 years. That means a lot of loans will be coming due before the economy picks up enough to fill all those offices with rent-paying businesses. The value of commercial mortgages at least 60 days behind on payments jumped sevenfold in September – to $22.4 billion – or almost 4 percent of all commercial mortgages repackaged and sold as bonds. That’s about the same as the 90 day past-due rate seen for all residential mortgages (including those not sold off by the banks) in the first quarter of 2009.

    As of October 14, 2009, the TALF balance is $43.2 billion and growing. From what we are hearing now, it may not be enough.

  • One Homeowner, Two Mortgage Holders, No Lien!

    I’ve been following this for a while and writing about it on NewGeography.com since March – not all mortgage-backed securities (MBS) are actually backed by mortgages. So when the homeowner goes into bankruptcy, there’s no way for the MBS holder to prove a lien on the house and the judge awards the bondholder bupkus. In April, a bankruptcy judge in California wrote that as many as one-third of all MBS didn’t have mortgages. No “M” in the “BS,” as I like to put it!

    Well, this story just gets better and better. It turns out that even when the MBS has an actual mortgage underneath it, the same mortgage is backing more than one security. Last week I talked to Matt Taibbi, who wrote in Rolling Stone magazine (The Great American Bubble Machine) that 58 percent of an MBS issued by Goldman Sachs had nothing but a list of zip codes where the mortgages should have been. He told me about a lawyer in Florida who has a list of cases where two MBS holders showed up at the bankruptcy proceedings, both claiming that they owned the same mortgage. You can expect to read more on that here as the story develops.

    Then it gets worse! Gretchen Morgenson reported in the New York Times on Sunday that there are about 60 million mortgages registered with the Mortgage Electronic Registration System (MERS) to keep track of who owns which loans and which MBS. Problem was that MERS, created by Fannie Mae, Freddie Mac and the mortgage industry, thought they were too good to have to register liens against land at the county level – real estate 101 for any sober realtor. The Kansas Supreme Court has now ruled that changes in mortgage ownership registered with MERS – and not registered with the local land authority – have no legal standing.

    Don’t forget – MBS are the junk that Treasury Secretary Geithner wants purchase with tax-payer dollars; and Federal Reserve Chairman Ben Bernanke committed $1.25 trillion of freshly-printed dollars to buy up out of the marketplace this year. Here’s the math made easy – the median house costs $177,000, figure an 80% mortgage, times 60 million mortgages: it looks like $8.5 trillion worth of mortgages could have no real estate underneath them! If the repo man comes knocking on your door, remember these four words: Show Me The Paper!