On Construction Loan Delinquences
Submitted by
CalculatedRisk on Wed, 07/23/2008 - 7:30am (113 comments)
in
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Recent Recommendations
The next shoe ...
First in line for soma tablets?
I need to check out of here asap.
Third in line for Kool-aid?
Maybe shopping centers will come under pressure from lower consumer spending and retailers re-thinking their business models.
Sign of the times:
"Mervyns LLC has stopped giving financial updates and may file for bankruptcy.
Bob Carbonell, chief credit officer at Bernard Sands LLC, said that the company stopped providing financial updates a week ago.
An anonymous source inside the company told the Associated Press that GMAC Commercial Finance stopped approving merchandise orders last week."
Mervyns teeters close to bankruptcy - San Francisco Business Times:
I was reading this morning that average cap rates for all property types are a little above 6%. In 2001 they were north of 9%.
Doesn't leave much room for error.
Simon reports second quarter on the 28th. should be interesting.
Obviously the market doesn't care today. Is this short-sightedness?
I have asked, and continue to ask: where are the developer bankruptcies? Banks have been going out of business faster than the developers they lend to.
The only conclusion I can draw is that the banks have been keeping the developers on life support in order to avoid recognizing losses on existing loans. That game can be played only so long.
CR how high did you say construction-loan delinquencies were going to get?
Mervyns LLC has stopped giving financial updates
Its a computer glitch no more =)
This is the move that puts the regional banks on the path to zero.
If there are any thrifts that are publicly listed, look at calls when they're circling the drain; they'll likely be among the few banks that will get picked up by Chase, BofA, Wells or US Bank as it doesn't count against the 10% limit.
They're was a commercial lot that was vacant here in Tempe off of Broadway & Priest, was like that well into last fall. Some bank was dumb enough to lend to someone to develop it even this late in the game.
Construction is done, but the buildings ain't. Pads, 4 walls and a roof and that's it. Every unit is for sale as is.
Between this, high rise condo implosions, declining strip malls in cruddy demographics getting facelifts and flipped and the new retail servicing the zomburbs, Phoenix, Vegas and San Diego make S. FlA & Rivertucky look like a walk in the park.
The regionals are riding the coattails of the 4 banks I mentioned above because of indexes, but when they break down, it'll be fuglier than Paul McCartney's divorce case.
I have also been wondering about the impact of exchange rates on squeezing retail margins.
MiTurn- "Obviously the market doesn't care today. Is this short-sightedness?"
Mr. Market is re-arranging the deck chairs. Again.
"The next shoe ..."
That's for sure. No prospects for bailouts in CRE, bond yields ratchet higher and ratings agencies (for what they're worth) downgrade issues.
For the past few years cap rates have been below the interest rates on the loans. Many owners started off underwater when the bought the property.
Talk about banking on appreciation and continual liquidity in the debt markets....
No thanks!
........................
and right on cue (C) announces more debt.....oh I'm sorry the "intention" of more debt.
$35 billion worth of "maybe"..
What's their CRE exposure??? LOL
Ciao
MS
For the past few years cap rates have been below the interest rates on the loans. Many owners started off underwater when the bought the property.
From what I've read Macklowe did his big deal at a price that would mean the properties would be cash flow negative for the first 5 years. That didn't work out so well for him. I found it odd that Boston Properties also paid a price that meant they were cash flow negative when they picked up his mess.
I wonder if Goldman is going to feel anything from this.
As I remember they were heavy on CRE loans and light on Resi debt...
Will the golden child survive this one too?
................
12th Percentile,
And bxp is up today just the same, they must have been involved with the deck chair moving mp referenced...
There is one property in NYC that was the poster child for this. Its white and tall and went for $1000 / sf...
Let me see if I can find it, I want to say it was the old Citi building...
..................
A not-so-surprising consequence of CMBX and ABX cliff diving. Wheee!
Bewteen all this and oil inventories rising faster than refiners can ramp down production means that Q3 GDP will be negative.
Anon,
What's with C? What debt?
Citigroup Expects To Raise Up To $35B In Debt This Year >C
Last update: 7/23/2008 9:42:09 AM
By Matthias Rieker
Of DOW JONES NEWSWIRES
Citigroup Inc. (C) Treasurer Zion Shohet told the $2.1 trillion-asset company's debt holders during a conference call Wednesday that Citi plans to raise up to $35 billion in debt this year.
"For Citigroup's termed issuance program, we have an annual borrowing target of $38 billion to $46 billion," he said. "Given our year-to-date borrowing our expected funding for remainder of the year is $18 billion to $26 billion."
Another $3 billion to $9 billion is expected to come through its Citigroup Funding Inc. subsidiary, Shohet said.
The treasurer also said that Citi will continue to diversify the currency denomination of its funding. "We will continue to target roughly 50% non-dollar component to the program and an eight-year weighted average maturity," the treasurer said.
Currency diversification plays into what Citi executives have long said is not only Citi's major difference to its U.S. rivals JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC), but also its most significant strength: geographic diversification of revenue, income, and funding.
For example, 30% of the up to $9 billion Citi wants to raise in senior or subordinated debt through Citigroup Funding will be non-dollar denominated, Shohet said.
"We've had a commitment to globally diversify our funding program," he said. "Our non-U.S. dollar borrowings account for 47.6% of total issuance across six currencies. In 2007, we issued a similar percentage, 47.8% in non-U.S. dollars in a dozen currencies."
Shohet did not disclose how much capacity Citi has left to issue hybrid securities.
Citigroup shares recently fell 20 cents, or 1%, to $20.70.
Ciao
MS
Do they all cheer on the floor and on bubblevision when SKF goes GREEN ?
More dilution IMO.....of course it's all planned though
Ciao
MS
Wow. So fast?
Developers usually borrow the interest to construction to pay while the house or project is under construction.
This is a very bad sign.
We will continue to target roughly 50% non-dollar component to the program and an eight-year weighted average maturity," the treasurer said.
Currency diversification plays into what Citi executives have long said is not only Citi's major difference to its U.S. rivals JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC), but also its most significant strength:
Nothing like buying near the top.
OT: don't know why people are so worried about Citi. According to CFO their off-book risks are "well in hand"
Citi Off-Books Risks `Well in Hand,' Crittenden Says (Update2) - Bloomberg.com
1 WEDB Wedbush Morgan Securities Inc.
2 MSCO Morgan Stanley & Co. Inc.
3 CDRG Citadel Derivatives Group, LLC
4 UBSS UBS Securities, LLC
5 LEHM Lehman Brothers Inc.
6 GSCO Goldman, Sachs & Co.
7 JPMS J.P. Morgan Securities Inc.
8 MLCO Merrill Lynch, Pierce, Fenner & Smith Inc.
9 FOMA TD Ameritrade, Inc.
10 NITE Knight Capital Group
this should be easy to figure out
Bunning-my hero but he can't get anyone to join him
FNM] Bunning: GSE bill will cost govt. 'way more' than $25 bln
m.[FNM] Sen Jim Bunning: Could only muster 15 votes against GSE bill
gillianx-
That term is ok when hunting or fishing but not as the rot continues to fester from below....what else would they say?
Ciao
MS
The only conclusion I can draw is that the banks have been keeping the developers on life support in order to avoid recognizing losses on existing loans. That game can be played only so long." - Peripheral Visionary
Add to that CRE loans are renegotiated, rolled, changed in name, etc. all the time. I cannot even begin to estimate how many of these loans were relabeled rather than marked delinquent. Eventually the game of hot potato will end but when is anyone's guess. As you so perceptively observe both sides have incentive to cover up tthe true situation.
"Developers of malls, hotels, and offices are all going to get hurt."
Corn, Soybeans Plunge as Dollar's Rise Cuts Commodity Demand
Corn, Soybeans Plunge as Dollar's Rise Cuts Commodity Demand - Bloomberg.com
These guy's are Cornholiod, they will be assimilated
Ross writes: "This is a very bad sign."
Why? Educate me.
Banks won't let the builders fail, and the Government won't let the banks fail. Uncle Same will keep shoveling money. How long can this go on?
I guess it can go on forever. There isn't really any political will for it not too. I guess another generation just needs to be fooled into paying over the odds for assets and everything will be ok.
Has enough dumb money been sucked in and enough shorts covered to permit a 400pt plunge ?
And they still keep building and building and building....
Cheers,
barely-
we will soon find out
Ciao
MS
Costco the largest U.S. warehouse-club chain, said earnings will be ``well below'' analysts' estimates after surging energy prices increased the retailer's costs and made selling gasoline less profitable.
Costco Sees Profit Below Estimates; Plans Buyback (Update3) - Bloomberg.com
One of them is "well below" and the other is "well in hand". Maybe they can get a reach around.
It will continue until foreign CBs stop buying US Treasury notes...ie capital flight occurs.
OT from Fitch:
Unstructuring Structured Finance: A Closer Look at Loan-Level and Pool-Level Credit Quality Indicators
http://fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=394106§or_flag=3&marketsector=2&detail=
I just heard from an old acquaintance today, who is a project manager for shopping center developments, that after her current project is completed at the end of October, she will be pounding the pavement, looking for a new job.
From the same WSJ article CR linked to:
A Moody's Investors Service index showed that prices of apartment, office and retail buildings fell 5.7% in May from a year earlier and have logged three months of consecutive declines. But Standard & Poor's latest commercial-real-estate indexes, released Tuesday, showed that prices rose 3.1% from a year ago.
The price differences may be caused by different methodologies. Maureen Maitland, a vice president at S&P, says her firm's less-dire results include one-off building sales, while Moody's looks at repeat sales of the same building, leading to a smaller sample size. She also says S&P includes sales of more than $1 million, while Moody's measures sales over $5 million, which may make it a higher-end sample.
S&P's methodology is is flawed on its face. They are using what is in essence a random sample by cutting off the low end. One month 5% of buildings might sell below $1m, the same month the next year it might be 10%.
This helps explain why their ratings have held up so well...
Misean writes:
And they still keep building and building and building....
This is what never stops amazing me. All over the OC, hammers are still swinging on projects that make no sense whatsoever today. I wonder how much is still in the pipe.
OT: the last bit of life in the Republic on housing policy
United States Senator - Jim DeMint
CSC,
"I wonder how much is still in the pipe."
Coming from you that is quite funny.
Company I work for has an office near Angel's Stadium. I cannot believe all the construction going on their. Commercial on the bottom and Condo's on top. Huge buildings...almost entire blocks and 5-10 stories tall.
Insane. See the same here in SFV. Hell on my street they knocked down a apt. building and are building something with more units.
Cheers,
CSC-
"I wonder how much is still in the pipe"
Please do tell us and don't bogart that pipe...
I think once house passes bill today. Skf will take a further hit..and I'm driving down to S.Calif to share CSC's pipe....
CSC-
CRE is different....if that was your example. Once the money is secure they either use it (with really no regards to the viability of it) or it goes away. The developer is only really on the "hook" if they have any ownership stake in it. Which in the current environment would be slightly suicidal IMO.
Same here in SD....large project with a brand new Starbucks as the anchor....love to see how that works out
Ciao
MS
I'm familiar with the developments near the stadium. Hardly any of them are occupied. We've got a whole new city of homes going in at the "future" OC Great Park at the old Marine base, the skyscrapers of luxury condos off the 55 half-built, and dozens of these little McMansion projects tucked into the most run-down neighborhoods (Anaheim, Santa Ana).
And we're lucky we don't live in the IE.
last night FFDIC alerted us to this:
Welcome to the future home of the officious Geroge W. Bush Presidential Library. This patriotic website will serve as an authoritative digital archive, dedicated to preserving and celebrating the godly legacy of the most honest, peaceful, and intelligent leader in the 6,000 year history of the planet Earth.
most peaceful honest and intelligent in 6000 years
more than Moses, Jesus, Ghandi,Buddha?
clearly our maximum and perfect leader and his followers are an awesome sight to behold.
mock:
it was a spoof. if you click on the links you'll see.
they are actually very humorous in a "the Onion" sort of way.
MS: I get that. But when it's all finished, then what? Pockets of ghost-towns? I suspect some of these seemed like a good idea at one time, but now that they're getting going it looks like satirical performance art.
mock, YTL
Linkage?
TIA.
Cheers,
cd,
I think once house passes bill today. Skf will take a further hit..
Already priced in? Anyway, the loser rally is perplexing. The buying in FED, for instance, is bizarre.
the oc-
The beach areas are turning colorful according to realtytrac, take a look every 2 wks and watch the colors fill in..it's different here though....
http://www.realtytrac.com/MapSearch/MapSearch/MapSearch.aspx?zipcode=92646&zipOnly=true&#eyJCYXNpY1JlcXVlc3QiOnsiWmlwIjoiOTI2NDYiLCJDb3VudHlDb2RlIjpudWxsLCJDaXR5IjpudWxsLCJBZGRyZXNzIjpudWxsLCJQYXJjZWxOdW1iZXIiOm51bGwsIlByb3BlcnR5SUQiOm51bGwsIkV4YWN0WmlwIj
Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders
Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders - Bloomberg.com
Citi Off-Books Risks `Well in Hand,' Crittenden Says
Citi Off-Books Risks `Well in Hand,' Crittenden Says (Update2) - Bloomberg.com
Citigroup has the most off-balance-sheet assets among U.S. banks, totaling about $1.1 trillion at the end of March, based on first-quarter regulatory filings.
Most of Citigroup's $500 billion-plus of off-books assets linked to residential mortgages probably won't have to be consolidated under the new rules, Crittenden said.
Obama is going to sort all this out. DOn't you worry.
To a developer, money is mothers milk. They will use it and use it until they are weaned.
CRE is longer lead time. I suspect the pig is getting real close to being excreated.
Prediction. A lot of developers underestimated the inflation impact on their projects and do not have enough money to finish. This could account for the late debt service. They may be using interest to construction to pay their subs.
Just a thought.
cd
Great link its funny when you scroll out it says "too many to list" "try seaching for less than 300"!!!!
barely writes:
Has enough dumb money been sucked in and enough shorts covered to permit a 400pt plunge ?
All it would take is one black swan.
csc-
that's exactly what will happen.
As long as the developer's keep getting money to spend....they will.
I second Ross' prediction
Ciao
MS
adding that the subs will be unpaid when that portion dries up. It's getting very close IMO.
Ciao
MS
A lot of developers underestimated the inflation impact on their projects and do not have enough money to finish.
Agree either developers are really dragging their feet or they have abandoned many projects in the Central valley. Who wants to go copper stripping?
"Boehner: DemocratsÂ’ Housing Bill Bails Out Scam Artists, Speculators at Taxpayer Expense"
Boehner: Democrats’ Housing Bill Bails Out Scam Artists, Speculators at Taxpayer Expense | Republican Leader John Boehner
Of course, Bush doesn't have to sign it.
Tim,
if you hold left button on mouse or laptop you can scroll anywhere in S.California or nation if you want with mouse. Scroll to ladera ranch and it's even more colorful. I stopped scrolling to I.E. as it brought back experimental days of my college years. Too much color...
cd,
I lived on 10th street when I was in high school. That's pretty brutal.
Cheers,
i came back to post a gafaw apology
and reading down thread see that YTL and others got it...
i didnt until i went back for a third look
boy am i the dummy
"most peaceful honest and intelligent in 6000 years"
FFDIC got me (and my own willingness to believe the unending pomposity of the maximum leader)
egg on my face
Tim, scrap that-they embedded a new feature with arrows to do it...
my bad...
georgebush.org
it had conjure in stiches! ! !
"...preserving and celebrating the godly legacy of the most honest, peaceful, and intelligent leader in the 6,000 year history of the planet Earth."
Satire, yes, but I work with people who actually think this way about GWB. Can't get my mind around that.
Misean
heres the link courtesy FFDIC
i saw this last night at 2 am and bought it hook line and sinker.
George W. Bush Presidential Library
Damn. This is all a serious bummer.
Obama is going to sort all this out. DOn't you worry.
Is he going to come run my business for me?
Make it better?
Misean,
That was you taking off in front me at northside...I used to like it when you could park for free on the cliffs..
The old Oil wells might be better investment now..
"it brought back experimental days of my college years"
Careful. That terminology may get lost on GenYers. They may think you tried a little switch hitting.
barely writes:
Has enough dumb money been sucked in and enough shorts covered to permit a 400pt plunge ?
All it would take is one black swan.
I prefer no black swan. I'd love to see another clean rollover just like last time.
I'm constantly amazed at how much of the "dumb money" around these days is professionally managed. Over the past 5-6 years, a cult has developed in which 99.9% of money managers say they are "fundamentally oriented" which means they focus on picking outstanding stocks, not watching the economy or market ups and downs. They are "picking great stocks for the long term" and are convinced they are smart enough to ride through any downturns. Bill Miller (Legg Mason Value) and Bill Nygren (Harris Oakmark) are the gurus of this school, and both of their reputations are getting clobbered. Miller is becoming an embarrassment.
The one prominent manager who is the opposite, really "macro" and tuned into big-picture trends, is Ken Heebner of CMG Fund, and look at what his performance has done. He's the only active manager who has beaten the commodities sector funds this year, because he's been heavily into commodities.
Never have so many people been paid so much money to be so stupid and lose so much money.
"Is he going to come run my business for me"
DO you need someone to man the cash register and "make change"
They may think you tried a little switch hitting
No no no I get it. He has a kid so I figured.
Funny though
New York Times to raise newsstand price to $1.50
or you can read it free... Online
ps...
inflation is well contained
barely,
that was good..Heck back then I thought switch hitting was confined to George Brett
I'm constantly amazed at how much of the "dumb money" around these days is professionally managed.
Remember, the mutual fund industry manages a lot more money than hedge funds and they don't really have the option of making bearish bets.
nades writes:
I wonder if Goldman is going to feel anything from this.
Weren't they part of a group buying a big building in Midtown just in the past6-9 months? I couldn't figure that out. I think it was sold by some Gulf State SWF. Kind of ironic.
cd,
Yeah...good times. Unfortunately when I was 16/17 I drove like a Banshee...so by summer '83 I was no longer allowed to drive. Parking not an issue. Lived close enough to the beach to walk down with the board.
Ah the memories.
Cheers,
Yeah, but with all the comments here violently in favor of naked shorting - that and the intense interest in High Fashion (not Finance!) caps, shoes (dropping) and interior design (rearranging chairs, certainly...), well, one could wonder.
How Goldman Sachs took over the world -
Business Analysis & Features, Business - The Independent
GS&co
GS bought into the GM building, with BP and a Dubai fund. Either I was thinking of another building, or just addled.
Such purchases would seem to be the latest wave of cash- flush foreigners buying America's architectural jewels. An earlier wave in the 1980s had Japanese grabbing Rockefeller Center, Universal Studios and Pebble Beach golf course -- and generated considerable ire among Americans.
The Japanese bought at the top of the market, didn't they?
FWIW-
On Monday, the cashier at Costco said:
"It has been really slow."
That's a Philly suburb Costco.
Nationally, they had a bump up with WallMart, maybe the stimulus, we'll see when they do the numbers.
Clinto
OK, here's one where GS bought from a Dubai fund:
Goldman and Manhattan-based Monday Properties announced on March 28 that they had reached a deal to buy the Helmsley Building, adjacent to New York's Grand Central Station, from Istithmar World Real Estate, a property fund owned by Dubai's government. Istithmar said in an e-mail today that the deal had closed.
So it's a foregone conclusion then, Hanky Panky's going to get blank checks.
Re: ken heebner
I checked it out. Heebner took a big beating on countrywide. He was way too early. He manages three funds, two have done really bad. The focus
fund is a lucky score. I suspect it will underperform for a long time,
unless the commodity bubble keeps blowing.The focus fund at this point
is a commodities sector fund.
MS what do you think about the action on WaMu?
Tried to map my zip code in OC with realtytrack and got "Too many properties on map". 6 times too many, as a matter of fact.
Fair Economist
They used to list 600 at once but that caused serious cases of angina pectoris among customers.
"I thought switch hitting was confined to George Brett"
He was a left-handed hitter.
Gigantic bears searching for food killed and ate two men at mines in Russia's Pacific Kamchatka region and have kept hundreds of geologists and miners from reaching the mine news agencies reported Wednesday. Up to 30 bears are patrolling the area near the mines and killed two of the guards and ate them. Bear attacks are common in the area.
DH writes:
Re: ken heebner
I checked it out. Heebner took a big beating on countrywide. He was way too early. He manages three funds, two have done really bad. The focus
fund is a lucky score.
I think traditional mutual funds will be dead in a few years, done in by index funds and ETFs.
Tim-
I think someone unloaded what they bought in AH at the HOD today. I also think they will be next. The can't issue shares at that price. Unless it gets moving up quickly they are next. Sacrificially speaking of course. I'm sure this is all preplanned......Let one go and bailout a few more....lather, rinse, repeat.
Ciao
MS
On WaMu - [Friedman, Billings, Ramsey & Co analyst Paul Miller halved his price target for Washington Mutual to $4, saying capital levels could face "tremendous pressure"]
and, of course, no shares available to short at either of my broker's yesterday. They are also not on the "precious" list too. Neither in WB FWIW.
Ciao
MS
It may be en vogue to make jokes about our candidates and join the media narrative that the differences are small (they are not), but apathy and ignorance are not funny. It's too a large extent the reason we are in this mess. I would think the majority of CR regulars would make informed decisions and recognize the importance of leadership in a crisis.
Poor WaMu getting kicked out of the fraternity. Days, weeks, a month? Shela better get her check book out.
I think traditional mutual funds will be dead in a few years, done in by index funds and ETFs.
Bob_in_MA | 07.23.08 - 2:22 pm | #
I agree. Unless we have a miraculous
economic recovery where half of our debt is forgiven. I think this is likely.
Quick, someone call Schumer and get him to question WaMu's capital adequacy, in a press conference. He's VP material for Obama!
Chuckie has been VERY quiet as of late. Think he got that tap on the shoulder??
Like Michael Perry did when he shut off all of IMB's HELOC's earlier this year....only to "magically" turn them back on. I totally looted mine when they did.
Ciao
MS
Oh, great GoogaMooga, can't you hear me talking to you.
"One of them is "well below" and the other is "well in hand". Maybe they can get a reach around."
Ah, a happy ending.
life imitates-
you have that link..That's great..
mother nature fights back..Maybe they were pissed off about them eating all thier salmon...
Lionel-my bad..I should have said Pete Rose..But then I would have been gambling since I didn't know...
"Lionel-my bad..I should have said Pete Rose..But then I would have been gam'bling since I didn't know...
cd | 07.23.08 - 2:54 pm | #
No worries, cd, I had to look it up to make sure. (Plus, belatedly I thought you might have been referring to other rumors I had heard about over the years.)