In a July 24 note, Pimco’s John Murray and François Trausch warned of a $1.5 trillion wall of maturities for commercial real-estate loans over the next two years.
“Lenders and borrowers will be forced to ‘face the music,’” they wrote. If they are right, it would mean the expected-loss model hasn’t been working as billed. Lenders still have wide discretion to delay officially expecting red ink if they would prefer not to expect it.
Noted short seller Carson Block, in a report last December, predicted large credit losses would soon swamp Blackstone Mortgage Trust BXMT -1.29%decrease; red down pointing triangle, a nonbank commercial real-estate lender. The company at the time called his report “self-interested and misleading” and said it was “well positioned to navigate this environment.” Then in July, it cut its dividend and posted its third consecutive quarterly net loss. Credit losses last quarter were so large that they exceeded the company’s net interest income.
Banking regulators have said they are aware there is a problem, while also assuring the public that this won’t be another 2008. An interview that Federal Reserve Chair Jerome Powell gave to CBS’s “60 Minutes” in February is worth revisiting. Asked about banks’ office loans, he said, “There will be expected losses. It feels like a problem we’ll be working on for years.
It’s a sizable problem.”
The irony of that statement: If Powell was right about the losses then, under the expected-loss model, banks probably should have booked them already.
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@EnergeticLobbyDemocrat2yrs2Y
What's needed are hard metrics:
What is the amount of debt for each property along with its current Interest Rate, and when does the note(s) come due ?
Also, what is the occupancy %, and when do those leases come due ?
One could expect that all of that data would shift the judgement to the market to decide just how impaired any given property is.
@FalconJasmineDemocrat2yrs2Y
Excellent point. Ratios of monthly or quarterly hard operating data can do the job. A very simple and auditable measure is Interest Expense as a % of Property Income, or more narrowly, Rents Received. For any situation in which a 6-month rolling average for that figure runs above 50%, the lenders should start writing down the value of their loans, even if they don't let the borrower off the hook.
Why does this surprise anybody? Loan default probabilities are ALWAYS based on forecasts, and in all but extreme cases, forecasts are easy to "fine tune" to produce the desired outputs (the Fed has been doing that for decades), so these institutions with big commercial RE exposures are busy "fine tuning" their forecasts so that they can plausibly claim that there's "noting to see here; move along".
@C0ngressMuesliVeteran2yrs2Y
Reminds me of the S&L crisis in a way. I was getting my MBA as the debacle was winding down. I can clearly remember one of the advanced accounting Prof's telling us how they kept non-performing loans off the radar. He called it swapping a dead horse for a dead cow. Dead means, obviously, non-performing.
The rule(s) back then stated that they only had to report non-performing loans after a certain number of payments had been missed. A and B would each have non-performing loan(s) equal in value. One would sell and the other would buy and vice-a-versa. Because of the transaction the missed payment(s) clock started all over again. Thereby allowing them to keep them out of sight.
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