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Next Mortgage Default Wave: Commercial Real Estate

storm brewing real estate
Federal Reserve and Treasury officials were scrambling to prevent the commercial real estate to deliver a roundhouse punch to the U.S. economy as it struggles to recover from the carpet.

Gerald Celente, a famed economic forecaster, warned us that their efforts could be undermined by a sharp increase in seizures of commercial properties carrying mortgages that were packaged and sold by Wall Street as bonds. Similar Mortgage backed securities created from loans have played an important role to rid the industry and the outbreak of the global economic downturn. Now the $ 700 billion of securities backed by commercial mortgages outstanding are being tested for the first time by a massive decline. Bill Bonner explains in a recent article as well that the commercial real estate sector is awash in trouble.

New Default Wave Hits Mortgage Industry

Bill Bonner, The Daily Reckoning

Meanwhile, from Phoenix comes news that a new wave of defaults is about to slam into the mortgage industry. Commercial properties, retail space, office complexes, apartment buildings are hard to rent. You can see why. In 2007, America was already outfitted with far more retail space than it actually needed. Americans had gone on a shopping spree for the previous ten years…prompting builders to add more and more space. By 2006, the United States had 10 times as much retail space per person as France. This was the bubble phase of a boom in consumer credit that began in 1945.

When you get to the bubble phase, few people stop to ask questions. Instead, everyone assumes that the trends in place will remain…and even intensify. So even into 2008, in Phoenix as well as other growing areas – principally in the sand states – the building continued. And now it is 2009. Where are the shoppers? Where are the renters? Alas, they are thinner on the ground than anticipated…and the developers are having trouble paying their mortgages. Commercial mortgage backed securities are carrying 5 times the unpaid balances they had in June ’08, says Bloomberg.

Imagine how disappointed lenders will be when these loans default. And then, imagine how American investors will feel when a new wave of mortgage defaults and foreclosures is hits the commercial property market.

A new wave of foreclosures and falling house prices may be approaching the housing market too. Alan Abelson, in this week’s Barron’s, reports on the outlook as described by Amherst Securities. The research group estimates an overhang of ‘hidden inventory’ of some 7 million units. These are properties owners would like to sell – if and when the market strengthens. Trouble is, the market may not strengthen soon enough. Then, many of these hidden properties could come right out in the open, as mortgages are reset, marriages break up, and people move on. Amherst says these people are in the “delinquency pipeline” which eventually flushes out the market. And it calculates that another 300,000 properties enter the pipe every month.

Falling prices have reduced ‘owners’ equity’ – the part of the house the homeowner owns free and clear of a mortgage – to only about 43%. This number includes people who have no mortgage at all – more than 50 million of them. Abelson speculates that the actual equity in the hands of the ‘owners’ of mortgaged houses must be substantially less. Pushed by joblessness…not to many life’s other, normal hazards…many of these people are surely going to default. Of those in the “delinquent pipeline,” nearly 10% haven’t made a payment in more than two years. Sooner or later, the banks and mortgage holders will be forced to take action…and more houses will come onto the distressed property market.

Full article is at The Daily Reckoning


  1. Jack Jack November 23, 2009

    Very interesting post ..

  2. Max Laurence Max Laurence January 2, 2010

    Very insightful post. I am going to link to it in my new blog.

  3. Vita Cornejo Vita Cornejo January 14, 2010

    I just wanted to stop in and tell you that I really liked this post. It was full of great information and creativity, both of which we always can use more of.

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