Commercial Mortgage Mess

June/13/2009 15:45PM
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The commercial real estate mortgage business is estimated to be $6.5 trillion. The current delinquency rate has tripled in the past six months to 2.7%. This is the highest is the past 10 years. Default rates could be a high as 30% with net losses after recovery close to 13%. This translates into $210 billion in CMBS or commercial-mortgage-backed securities at risk. Between now and 2012 it’s $45 billion.

In Obama’s world, these numbers seem paltry. A few billion here, a few billion there. Just fire up the printing press and ship some more money to the same financial institutions who held the residential mortgage backed securities that went bad. But, there is one difference. Only borrowers who are delinquent can talk to servicers of these bonds. There can’t be a discussion to restructure to avoid a default. The Treasury is looking at changing this rule to avoid the same meltdown as we saw in the residential sector.

Basically, nothing happens here until it has already hit the wall. By then, it’s over. This time bomb is ticking and hasn’t blown. But, if the recovery isn’t quick, it will blow soon. These toxic assets, as they will soon be called, are like the home mortgages, spread out all over the world. Until this clears, many of us are concerned about the impact of this on the fragile economy.

Evidently, the Russians are nervous too. About 30% or the Russian international reserves are held in Treasuries. They plan to buy $10 billion in International Monetary Fund bonds using sales of US Treasuries to do that. China plans to buy $50 billion of the bonds. The IMF has never issued bonds before and is seeking more cash to finance loans and aid to foreign countries. A new financial instrument is being looked at by at least two of our large creditors as superior to our credit. This is really scary.

You may think the worst is over here, but beware of being spun by the very people who are making it worse. The commercial mortgage bubble will break. The fallout will be big. If foreign countries keep shunning our lending efforts, we will be forced to print more and more money to cover the $2 trillion and growing Obama debt. This year and “as far as the eye can see.”

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