US Commercial Real Estate a Multi-Trillion Dollar Bloodbath in Progress

Residential Real Estate in the US is in serious trouble, and a drag on the real economy. And yet it is holding up a bit because the Fed is buying over $1 Trillion in mortgage debt, presumably at artficially high prices to support it, and of course the too big to fail Wall Street Banks who were wallowing in the residential real estate bubble.

Commercial Real Estate is much worse, a bloodbath in progress. Down 42% and dropping with store, office and apartment vacancies soaring. And much of that paper is held by regional banks and REITs like Boston Properties (BXP), Vornado Realty Trust (VNO), Brookfield Properties (BPO), and a host of private firms and trusts.

Like the residential market, the pain in commercial real estate is not distributed evenly across geographic regions. So far the public equities have recovered reasonably after a breathtaking plunge, as compared to the SP 500's decline from the top. I am watching them for an indication or at least a confirmation of a double dip, a potential next leg down in the real economy and the financial markets.

I hope Ben is wearing a truss if he tries to put a floor under this one.

At least the rental market will be more economical for the foreclosed homeowners, but its hard to see who will be opening new retail stores and commercial businesses in the near future.

My Budget 360
Commercial Real Estate Is $3.5 Trillion Time Bomb Hitting the Economy

Some of you are probably not aware that the commercial real estate market has crossed a dreaded line in the sand. Commercial real estate (CRE) that includes apartments, industrial, office, and retail space is now performing worse than residential real estate. Not just by a little but by a good amount. While the CRE bust took about a year longer than the residential housing bust, once problems started hitting in this market prices have been steadily collapsing. At the peak, it was estimated that CRE values hit $6.5 trillion in the country. With $3.5 trillion in CRE debt outstanding, this seemed to provide a nice equity buffer. That buffer is now erased.

First we, need to examine the actual decline in CRE values by looking at data gathered by MIT:



Putting together all CRE values we find that the market has fallen by a significant 42 percent. Now assuming this figure, that $6.5 trillion is now “worth” approximately $3.7 trillion giving us an equity cushion of $200 billion for all CRE properties in the U.S. I doubt this figure is even that high. It is safe to say that commercial real estate is now in a negative equity position. The U.S. Treasury has discussed plans on bailing out this industry but not much has been done on this front since all the bailout funds have been concentrated on residential real estate and protecting the too big to fail banks. Many CRE loans are held in the smaller regional banks that are actually small enough to fail. The FDIC will be busy in 2010 given the above data.

Now looking at the residential market, prices fell earlier but have recently stabilized because trillions of dollars have been used to prop up the system:



Read the rest of the story here.

Weekend Highlight: The Bankers Testify to the Financial Crisis Inquiry Commission

High drama.

Wes Craven's remake of It's a Wonderful Life



concept h/t Barry Ritholz

A Brief Bio of the Star of the Proceedings.



"The details of my life are quite inconsequential. My father was a relentlessly self-improving boulangerie owner from Belgium with low-grade narcolepsy and a penchant for buggery. My mother was a 15-year-old French prostitute named Chloe with webbed feet. My childhood was typical, summers in Rangoon, luge lessons. In the spring, we'd make meat helmets. When I was insolent, I was placed in a burlap bag and beaten with reeds. Pretty standard, really."

Up Next: A Pop on the Long End of the Yield Curve



Weapons of Mass Distraction
Fox Business News

Guest Post: An Analysis of JPM's Credit Card Business

2009 Credit Card Segment Results: JPMorgan Chase
By Keith Hazelton, The Anecdotal Economist

Credit Card Fee and Interest Income Soar as Nation's Largest Credit Card Company Hammers the Customers Who Bailed It Out in 2008

While we are waiting for the December Federal Reserve G.19 Consumer Credit report due February 5th, which will confirm 2009's complete collapse of Revolving Consumer Credit resulting from millions of the insolvent and near-insolvent 60 percent or so of Americans who carry credit card balances month-to-month but who desperately are trying to reduce the hideous debt-shadow which has remained long after the afterglow has faded from years of restaurant meals, trips to Disney World, flat-screen televisions, college tuitions and entrepreneurial forays, inquiring minds may care to put JPM Morgan Chase's full-year card services results under the microscope.

In JPM's January 15, 2010 earnings release, on pages 18-20 of its Earnings Release Financial Supplement, the nation's largest credit card company by cards and balances details the sorry state of what in better years was its most profitable segment.

JPM's 2009 Card Services segment results are summarized in the table above, which highlights some of the lowlights:

• End of year balances, both held and securitized (so-called Managed Card Assets), fell 14.1 percent in 2009 to $163.4 billion. The number of cards issued (not detailed above) also fell 14.0 percent to 145.3 million from 168.7 million at the end of 2008.


• Notwithstanding a $26.9 billion decline from 2008, JPM's credit card fee income (late fees, overlimit fees, telephone payment fees, balance transfer fees, annual card fees) soared 30.5 percent to $3.6 billion, and net card interest income jumped 26.4 percent to $17.4 billion as the bank clearly scrambled to raise interest rates on as many cardholders as possible ahead of 2010 rule changes.


• Reflecting those abominable fee income and interest income grabs from the very taxpayers who enabled their own misery by allowing JPMorgan Chase to be bailed out in 2008 along with the rest of the "too big to fails," the bank's credit card net revenue as a percentage of average balances grew 15.7 percent in 2009.


• JPM's 2009 total charge volume fell 11.0 percent to $328.3 billion, reflecting the nation's newfound preference for debit cards and cash.


• 2009 charge offs nearly doubled to $16.1 billion (Managed Card basis), representing 9.33 percent of average card balances.

So, JPM Chase in 2009 oversaw the charge-off of $16.1 billion of its own and securitized credit card balances, and its still-solvent card debt-slave customers paid down (or transferred, however unlikely) another $10.8 billion, which equals the $26.9 billion decline in EOY balances.

So far, according to the Fed, 2009 revolving consumer credit balances have plunged more than $100 billion through November, and it looks like JPM Chase, which held a 22 percent card market share in 2008, is accounting for slightly more of the decline than its market share would warrant.

Bank of America, the nation's number two credit card company, which reports 4Q and 2009 results January 20th, has been writing off its managed card balances at an annual rate of more than 13 percent, and we will look forward to seeing its grim full-year results, as well as those of the other dozen or so financial institutions which now control nearly 90 percent of the racket industry.

The nation's big banks in the 1990s and early 2000s wanted to consolidate the then-immensely profitable credit card industry in the worst way, and, as 2009 results will prove, they got it - in the worst way.

And to remind readers where we think revolving consumer credit balances are headed (to $300 billion - $500 billion from the nearly $900 billion last month) over the coming decade, here's a repost of a chart we first published in December.

Big Banks Demand Cash Payments "Off the Books" from Homeowners to Avoid Foreclosure

"The Hobbs Act defines extortion as the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right. 18 U.S.C. S 1951."

Interesting story in which Citi and J.P. Morgan among second lien holders are demanding cash payments "off the books" from homeowners in order to allow a short sale to proceed in lieu of a foreclosure, a total loss and a black mark on their credit record.

Was my characterization of the big Wall Street banks as 'sociopathic' a bit harsh as a reader asked?

No, more likely understated. Remember, this is not some small local lender facing a loss and trying to get something out of it for their trouble. These are the TARP-sucking, discount window-feeding, bonus paying, fraudulent flim-flam 29.9% interest-charging pigmen who are demanding a pound of flesh from the down and out and the dispossessed as a consequence of their own reckless lending practices.

Change you can believe in.

The banks must be restrained, and the financial system reformed, and the economy brought back into balance, before there can be a sustained recovery.

CNBC
Big Banks Accused of Short Sales Fraud
January 15, 2010, 12:55 pm EST

Just as regulators, lawmakers and all forms of financial oversight boards are talking about new regulations to guard against mortgage fraud and another mortgage meltdown, there appears to be yet a new mortgage fraud out there today, allegedly perpetuated by agents of, yes, the big banks.

I was first alerted to this by Jeremy Brandt, the CEO of several companies that bring short sale agents, investors and sellers together.

His companies include 1800CashOffer, HomeFlux.com and FastHomeOffer.com. Brandt has a huge network of short sale real estate agents, and over the past several months he's been receiving all kinds of questions and complaints about trouble with second lien holders.

As we all know, during the housing boom, millions of Americans pulled cash out of their homes in the form of home equity loans and lines of credit. They also used "piggy back" loans in order to get even lower interest rates on their primary mortgages. Now, many of the borrowers in trouble, and many who are so far underwater on their loans that they don't qualify for any refi or modification, are choosing short sales as a way out. (Short sales are when the lender allows the home to be sold for less than the value of the loan). About 12 percent of all home sales by the end of 2009 were short sales, according to the National Association of Realtors.

In order for a short sale with two loans to happen, the second lien holder has to drop the lien.

If they don't, and there's no short sale, the home goes to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.

In short, the second lien holder gets nothing. In order to get the second lien holder to drop the lien, the first lien holder generally negotiates some partial payment to the second lien holder. The second lien holder doesn't have to agree, but more and more are doing so.

That's all legal.

But here's what's not legal and what's apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say "on the side," I mean in cash, off the HUD settlement statements, so the first lien holder doesn't see it.

"They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale," says Brandt. "So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal."

(RESPA is the Real Estate Settlement Procedures Act, the 2008 law requiring that consumers receive disclosures at various times in the transaction. It outlaws kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD. Read more about it here.).

I told RESPA specialist Brian Sullivan over at HUD about all this and he replied, "That's a red flag!"

Clearly illegal.

Brandt told me he's heard from at least 200 agents that they've had these requests made by representatives of Citi Mortgage, JP Morgan Chase, Bank of America and other large banks.

Most agents wouldn't go on the record with me, for fear of retribution by the banks with whom they have to work every day. But one agent, Kayte Gentry, of Keller Williams Integrity First Realty, was brave enough to blow the whistle.

"I think it's wrong, and I think somebody needs to hold them accountable, and every time I lose a house in foreclosure because of this, it hurts my client," says Gentry matter-of-factly. "Aside from being illegal and a violation of RESPA, it's immoral and truly it's just sad for the client that it's hurting."

Gentry says she has had the requests made three times and claims she lost one sale because of it.

"The big banks that have recently made this request, specifically payments outside of the closing statement have been Citi Mortgage and JP Morgan Chase."

Read the rest here...