Saturday, February 28, 2009
The US Govenment is now under the control of THUGS
February 13, 2009
An Indiana county municipal official in the vicinity of Chicago reveals the contents of his meetings with FEMA and the Department of Homeland Security. The initial requests seem reasonable enough when FEMA asks the county officials to prepare a Hazard Mitigation Plan to deal with flooding, fires, high winds and tornadoes.
But as the required meetings and calls with FEMA and DHS continue over a two year period their request become more unusual, raising suspicions of county officials
Listen to the audio:
“We want to know every important thing in this county. We want to know where police departments are. Where weapons are stored. Hazardous material. Where can we land a helicopter. Where are the airports. How big a plane can you land at the airport. Where are all the bridges. Where are all the power stations. Where are all the generating stations.Where are all the substations. They literally wanted to know where everything was. I’m sitting there thinking man if there was ever martial law. This kind of information is exactly the kind of stuff they are going to want. We’re just laying it all out for them right there.”
fema is preparing for mass graves and martial law
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Obama is the antichrist
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Obama Recites The Islamic Call To Prayer In Perfect Arabic
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Martial LAW IS COMING The example is new orleans and what the government did. Took away guns of Lawful US citizens!
Friday, February 27, 2009
Why letting judges modify mortgages is bad for all
Obama is destroying the US economy
The fix is simple yet painful. The assets must be allowed to re-price through the system that is in place. If you change the rules halfway through the game it will cause economic disaster in the near future! There will be pain for individuals and for organizations – but there will be pain under any scenario and the only “fair” one is the set of rules that we all started the game with.
This will lead to disaster. Obama is trying to DESTROY the US economy on purpose!
It will drive up the cost of borrowing. In the long run, it will keep people in homes they couldn't afford and it will prop up unsustainable prices by artificially curtailing supply.
It will lead to inflation as personal incomes rise to meet artificially inflated, but real housing prices. Consumer goods will rise to meet the increased consumer income. There will be a short term boom in spending from it, but eventually it will lead to inflation and leave more American with less spending power.
Ultimatly, future first time home buyers will be foresaken by higher costs of ownership across the board in order to save the irresponsible home home owners who will be the benificiary of this action.
This is a mistaken, which is being conducted by rank amateurs who have no business meddling in economic affairs.
Mortgage Modifications in Bankruptcy Would Undermine Homeownership, Prevent Few Foreclosures
Mortgage Modifications Are Another Example Of Obama Socialism
Federal housing policy, we now know, has caused catastrophic economic failures. Programs designed to expand homeownership did so at the expense of sound lending and borrowing, to the ultimate detriment of economic stability and many families' finances.
But one federal housing policy worked to reduce the price of housing credit and to extend its availability without contributing to the mortgage mess: denying bankruptcy judges the power to modify home mortgages, a practice known as "strip-down" or "cram-down." This added certainty allowed lenders to accept smaller down payments and offer lower interest rates to millions of American homeowners without providing any incentive to make irresponsible loans.
Now Congress is considering snuffing out this one bright spot by giving judges the power to discharge mortgage debt in bankruptcy and rewrite repayment terms. If enacted, these proposals would increase the cost of homeownership and put it out of reach for many Americans, especially those of lesser means. They would also deal a blow to banks and other lenders at a time when many are faltering, thereby undermining government efforts to increase stability in that sector. Worst of all, allowing bankruptcy judges to rewrite mortgages would prevent few foreclosures while causing harm to those it is intended to protect.
Fundamentally, strip-down is a poor "fit" for the problem of rising foreclosure rates. Its benefits would fall disproportionately to those who can afford their mortgage payments and do not need relief, while those whose homes are at risk would typically obtain only temporary relief at a great personal cost. The result would be to impose enormous expenses on mortgage and consumer lenders—at a time when doing so would be destabilizing and counterproductive—in exchange for extremely limited benefits for vulnerable homeowners.
Congress should look beyond the following myths about mortgage strip-down and recognize that its costs, in the form of unintended consequences, would far outweigh its limited benefits.
Myth: Current law provides no relief from foreclosure for primary residences.
Reality: Under Chapter 13 of the Bankruptcy Code, individuals can stop foreclosure proceedings and spread delinquent payments over a period of time, and most mortgage servicers are willing and able to renegotiate loans when mutually beneficial.
The current Bankruptcy Code carefully balances the need for predictability and stability in mortgage lending with the needs of borrowers who have temporarily fallen behind on their payments. Unlike a Chapter 7 liquidation, in which most of an individual's assets are sold to pay his or her debts, a Chapter 13 bankruptcy puts an immediate halt (known as the "automatic stay") to foreclosure proceedings from the moment of filing and then gives the individual an opportunity to catch up on late payments.
Specifically, instead of being forced to bring a mortgage up to date all at once, a borrower suffering a temporary financial setback can spread the burden over a period of up to three to five years, depending on his or her income and expenses. During this period, the borrower must also continue to make regular scheduled mortgage payments. Once the deficiency has been made up, the payment schedule continues pursuant to the terms of the mortgage until the house is paid off or sold.
Moreover, homeowners can obtain relief by renegotiating the terms of their mortgages with those who hold or service them. When the alternative is a foreclosure valued at far less than the principle remaining in the loan, both homeowners and mortgage investors benefit by modifying the loan to reduce the principle and ease the terms of repayment. This standard is the same that bankruptcy courts would apply under mortgage strip-down proposals but is applied in a way that avoids the blunt, one-size-fits-all approach of strip-downs. Though some mortgages have been privately securitized in ways that present barriers to renegotiation, the vast majority are not subject to such limitations.
The current Chapter 13 process, as well as voluntary and mutually beneficial relief provided by mortgage servicers, serves to separate borrowers whose income is likely to be sufficient to make payments that exceed the foreclosure values of their home from those who have borrowed beyond their means and lack the earning capacity to afford the home that they nominally own but in which (usually) they have little equity. Granting judges new power to modify mortgage terms would blur this line, encouraging both those who have taken on excessive debt and those who have borrowed reasonably and need no relief to reject voluntary renegotiation and seek better terms in bankruptcy.
Myth: Allowing strip-down will not increase the cost or reduce the availability of mortgage loans.
Reality: If forced to shoulder greater risk and expense, mortgage lenders will demand higher interest rates and bigger down payments, putting homeownership out of reach for many low- and middle-income Americans.
Congress cannot repeal the laws of economics. Thus, it is unreasonable to expect that lenders would not adjust their up-front terms in response to changes in the law that weakened loan enforcement. Experience and research show that any proposal that has the effect of undermining the certainty of mortgage agreements or imposing losses on mortgage lenders will serve to reduce the availability and increase the cost of mortgage loans.
Strip-down proposals would impose massive and unjustifiable costs on lenders. Despite the current state of the economy, less than 5 percent of homeowners are more than 60 days behind on their mortgages—the usual measure of delinquency. Yet strip-down would be available as well to the more than 50 million homeowners who are current on their mortgages if they filed bankruptcy. If even a small percentage of these homeowners chose to take advantage of bankruptcy to discharge some of their mortgage debt, their numbers, as well as the total value of the debt they would discharge, would far exceed the number of those in dire straits obtaining strip-downs. Thus, hundreds of billions in debts that likely would have been paid would be relieved.
These costs, in turn, would be reflected in the availability and price of mortgages. To protect themselves from future strip-downs, lenders would have to demand increased down payments from mortgage borrowers. Requiring that borrowers put down enough money to cover any foreseeable decline in the value of their homes is the only way to avoid the risk of a future strip-down.
Home price volatility provides some indication of the magnitude of the down payments that would be required. Over the past year, U.S. home prices have declined by about 12 percent, with some regions seeing drops as high as 30 percent, and prices are still falling. Under current law, down payments are typically 10 percent to 20 percent of the price of a home, but this amount would be insufficient to protect lenders in a volatile market. If the risk of strip-downs led to down payments of 20 percent to 30 percent, a down payment on the median house, valued at just over $200,000, would be $40,000 to $60,000—far more than many families could scrape together. Hardest hit would be first-time home buyers, who cannot draw upon existing home equity, and lower- and middle-class families.
Additionally, lenders would demand higher interest rates and fees as compensation for taking on the added risk of losing money if the loan is stripped down. Because strip-down is such a blunt and indiscriminate tool, all borrowers, no matter their creditworthiness, would face higher rates on mortgages. The biggest increases, though, would fall on first-time home buyers and lower-income families, as lenders demand larger risk premiums.
Recent research confirms this effect. In one study, Karen Pence, a senior economist at the Federal Reserve Board who studies household and real estate finance, determined that state laws that impose costs on lenders (as much as 10 percent of the value of the loan balance) prior to foreclosure reduce the availability of credit for residents of those states. As a result of these laws, families "may pay more for their mortgages, purchase smaller houses, or have difficulty becoming homeowners." If strip-downs impose larger costs on lenders, they would likely have an even greater effect on interest rates and mortgage availability.[1]
Similarly, economists Emily Lin and Michelle White found that unlimited homestead exemptions, which allow individuals to shelter home equity from creditors in bankruptcy, significantly reduce the availability of mortgages and home-improvement loans.[2]
The result, then, of allowing the discharge of home mortgage debt in bankruptcy would be to put home lending out of reach of many Americans and to raise the cost of borrowing for those who are able to secure mortgages, further weakening the housing market. This is a perverse result, considering that the long-standing aim of U.S. housing policy has been to encourage homeownership by promoting affordability in the mortgage market.
That some proposals are temporary in nature would not prevent this outcome, because mortgage lenders (as well as borrowers) would reasonably expect Congress to reinstate strip-downs in the next economic crisis. Indeed, a repeat of this policy would be even more likely once the precedent is set and lenders' and borrowers' expectations are altered.
Myth: The Bankruptcy Code allows mortgages on vacation homes, boats, and expensive cars to be stripped down.
Reality: Instead of changing loan terms, courts regularly require the liquidation of luxury and "lifestyle" assets to increase distributions to other creditors.
Proponents of strip-down proposals make much of the fact that Chapter 13 allows for the modification of most debts other than those secured by a primary residence. Current law, notes Representative John Conyers (D-MI), who has sponsored legislation that would permit strip-downs, permits judicial modification of "loans secured by second homes, investment properties, luxury yachts, and jets" but not primary residences.[3]
In reality, luxury and "lifestyle" assets are rarely afforded this treatment because they are not considered to be necessary to the support of the filer or his family. Though a filer may propose a plan that modifies claims secured by luxury items, bankruptcy judges have extremely broad discretion to reject such modifications when they impair the rights of other creditors.
Further, unlike mortgage strip-down proposals, current law requires the filer to pay off in full any secured claim that is modified, including any arrearages, during the duration of the plan within just three to five years. For example, a debtor who manages to strip down a $300,000 mortgage on a vacation home to $200,000 would have to make equal monthly installments over the course of just a few years to retire that debt.
Thus, in most cases, luxury and "lifestyle" items— things like vacation homes and yachts—that are encumbered by debt are surrendered to the creditor and liquidated to pay off the debt and, in many instances, obtain funds that can be used to pay other creditors. The debts encumbering them are not stripped down. And in the rare cases where this does not occur and the debt is stripped down, the filer is required to pay off the remaining secured portion of the debt, including arrearages at the time of filing and any penalties and fees, over the course of the Chapter 13 plan and may also have to pay off a portion of the remainder of the loan—that is, the part that was crammed down—which remains as an unsecured debt.
Myth: Allowing strip-downs will help consumers.
Reality: Encouraging more families to file for bankruptcy will undermine more promising means of refinancing mortgage debt, hurt consumer credit, and ultimately prevent few foreclosures.
Filing for Chapter 13 bankruptcy is an expensive and disruptive process. While the total fees for filing are only about $300, guideline attorney's fees range from about $2,500 to $5,000 in simple cases, depending on the district; in complex cases, the fee can be much higher. Indeed, the difficulty of stripping down a home mortgage could be expected to increase fees by several thousand dollars.
In addition, filings are included on credit reports immediately upon filing and remain there for seven years. Thus, Chapter 13 bankruptcy damages credit scores and impairs access to credit for a significant period of time.
Many Chapter 13 bankruptcies fail; that is, the filer never obtains a discharge of his debts. Nearly 20 percent of Chapter 13 cases fail before the court has confirmed the filer's plan. Another 55 percent fail between confirmation and discharge because the filer has been unable to carry out his plan. This means that only one-third of all Chapter 13 filers complete the process successfully and get the fresh start that bankruptcy promises. The rest—two-thirds of all filers—pay court fees, pay attorney's fees, pay fees to the bankruptcy trustee, invest time and money to restructure their financial affairs, and then wind up with nothing more than temporary relief. It is therefore not surprising that a substantial number of Chapter 13 filers—nearly one-third—go on to file for bankruptcy again.[4]
These statistics suggest that holding out the promise of significant relief from mortgage debt to encourage more individuals to file for Chapter 13 bankruptcy is bad policy. At best, Chapter 13 would serve only to delay foreclosures in most case where the home is at risk while imposing enormous costs on those who are already financially vulnerable and losing their access to credit.
Worse, allowing discharge of home mortgage debt in bankruptcy would undermine more promising approaches to preventing foreclosures. While there have been difficulties in renegotiating certain types of securitized mortgages, the bulk of outstanding mortgages are controlled or owned by Fannie Mae and Freddie Mac, private banks, and portfolio lenders, all of which have the power to renegotiate mortgages and face strong incentives to do so to preserve the value of homes.
Strip-downs, however, would undermine their efforts by eliminating homeowners' incentives to accept modification offers, even ones that are targeted to their situation and less disruptive than bankruptcy is likely to be. In this way, strip-down proposals would only delay foreclosures while blocking more promising alternatives that protect consumers' financial security.
Myth: Allowing strip-downs will help the economy.
Reality: Undermining the certainty of loan agreements threatens the availability of credit, and thereby market stability, and will only delay recovery, especially in the housing sector.
Some claim that allowing strip-downs in bankruptcy would ease turmoil in the housing markets and slow or reverse declines in home prices. This is a pipe dream.
Merely allowing strip-downs in bankruptcy could be enough to trigger bank instability and failures. U.S. banks and thrifts hold about $315 billion worth of highly rated mortgage-backed securities that would suffer immediate and permanent downgrades. This, in turn, would force banks to write down these assets to reflect their lower value and set aside additional capital to satisfy regulatory requirements. Some banks' already overburdened balance sheets could not absorb those hits.
And as described above, allowing strip-downs could push millions of Americans, who are current on their mortgages and whose homes are not at risk of foreclosure, into bankruptcy. Any reductions in loan principle that they achieved would come at the expense of lenders, increasing the likelihood of their insolvency and further tightening credit markets. Resulting declines in the valuations of mortgage-backed securities and other "troubled assets" could also affect banks' capital statements, leading to more failures and the need for additional capital on top of that already being provided by the federal government. Some of these losses would fall to taxpayers through Fannie Mae and Freddie Mac (which guarantee over $5 trillion in mortgage debt), other government entities, and recent government investments in the financial sector. The drawn-out bankruptcy process would also put a brake on efforts to value mortgage-backed securities and begin to clean up banks' balance sheets, thereby prolonging current financial instability.
Further, increases in bankruptcy filings would harm the financial health of many additional industries. In Chapter 13, unsecured creditors (those whose loans are not backed by property that can be repossessed or foreclosed) typically receive less than 20 percent of what they are owed. Facing this risk, lenders would further tighten the availability of credit, dealing a new blow to the demand side of the economy. This result would be perfectly opposed to Congress's current efforts to stimulate consumer demand.
Conclusion
It should not be surprising that there is no free lunch. Congress cannot enact a policy that imposes major, unexpected losses on home lenders without raising the cost of and reducing access to home loans. Claims to the contrary are unsupported either by experience or by the available data.
What is a surprise, though, is the minuscule benefit that such a policy would achieve. Allowing the strip-down of home mortgage debt in bankruptcy would prevent very few foreclosures even as it undermined better alternatives for homeowners.
That this policy would have any positive effect at all is premised on wishful thinking: that Chapter 13's deliberately weak protections for debtor assets, which are ultimately unavailing in the majority of cases, will do anything more than delay some foreclosures at an enormous cost to the economy. At the same time, this policy would open the door to achieving mortgage reductions for tens of millions of homeowners who can afford their mortgage payments and whose homes are not at risk.
The growing but still relatively small foreclosure rate may warrant a policy response, but Congress must take care not to rush into ill-conceived fixes that threaten to cause more harm than they would alleviate. To avoid that risk, proposals must be carefully targeted and proportionate to the problems they are intended to address.
Opening the door to modification of all home mortgages is both overbroad and extreme and, for that reason, risky. Rather than risk adding to the turmoil in the housing and financial markets, Congress should consider approaches that do not undermine investors' expectations and, ultimately, homeownership.
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Letting Judges Rewrite Loans Is Toxic Itself
REP. ED ROYCE
"At first blush it seems somewhat strange that the Bankruptcy Code should provide less protection to an individual's interest in retaining possession of his or her home than of other assets ... (but) favorable treatment of residential mortgages was intended to encourage the flow of capital into the home lending market."
That was Supreme Court Justice John Paul Stevens in 1993. Yet today that sound reasoning is turned on its head with President Obama's proposal to allow bankruptcy judges to rewrite existing mortgage contracts.
Despite a vocal opposition to this "cram-down provision," it is being pushed through Congress by the administration and Democratic leadership and will likely be voted on in the House on Thursday.
Beyond the long-term damage this provision will have on our private mortgage market, the precedent this legislation will set risks permanently undermining the sanctity of private contracts upon which our country's economic model is based.
The consequences of the cram-down will likely be felt by homeowners for years to come in the form of tighter credit markets and higher interest rates. Because of the uncertainty that will result from bankruptcy judges abrogating private contracts, institutions will avoid investing in the private mortgage market.
As our capital markets struggle to recover, we should be looking for ways to encourage, not discourage, capital back into the system. The less capital in the system, the more expensive it will be to obtain a mortgage. Some economists predict that a 2% risk premium will be added to every mortgage should this proposal be implemented.
Credit cards and auto loans have typically seen higher interest rates because the ability of the lender to recover collateral, if any exists, is more difficult than with less-risky mortgage loans. With the implementation of the cram-down, however, mortgage debt will likely be treated more like credit card and auto loans because lenders' ability to recover collateral will be further restricted.
Advocates for the cram-down got a boost earlier this year when Citigroup had a change of heart and endorsed this proposal. After years of opposing cram-down, Citi's reversal is likely a reflection of influx of public sector dollars into the firm and the growing influence of regulators over day-to-day operations rather than any logical policy shift.
Citigroup believes this provision is "a temporary solution" that will be implemented for outstanding mortgages and then allowed to expire following this difficult period in our economy. Unfortunately, in Washington nothing is more permanent than a temporary solution.
Much of the past success of our country's capitalist system is based on a solid foundation of free and flexible markets and respect for the sanctity of contracts and the rule of law. As a member of the Foreign Affairs Committee in the House, I have seen the stark contrasts between societies that respect private contracts and those that opt to change the rules as they go. The bankruptcy cram-down has the potential to lead us down a path toward the latter.
Private mortgage foreclosure-mitigation efforts currently under way by the Hope Now Alliance and various financial institutions throughout the country are at risk of hitting a significant obstacle should the cram-down go into effect.
Almost 2.3 million foreclosure prevention workouts were completed in 2008 -- all on a case-by-case basis. An effort to allow a third party to wipe out the interest rate and principal of the loan provides a perverse incentive for those borrowers that would otherwise work together with their lender to restructure the loan.
As Congress and the administration work to stabilize the housing market, we must avoid at all costs policies that will hinder the private sector's ability to recover. Enacting the bankruptcy cram-down legislation will restrict the flow of capital into the housing sector, make it more expensive for individuals to obtain a mortgage, hinder the broader housing sector's ability to fully recover and set a disturbing precedent of the government's treatment of private contracts.
It is critical that the administration and Democratic leaders in Congress understand the long-term consequences of this misguided policy before it is too late.
Royce, a Republican, represents California's 40th congressional district in northern Orange County.
The fix is simple yet painful. The assets must be allowed to re-price through the system that is in place. If you change the rules halfway through the game it will cause economic disaster in the near future! There will be pain for individuals and for organizations – but there will be pain under any scenario and the only “fair” one is the set of rules that we all started the game with.
This will lead to disaster. Obama is trying to DESTROY the US economy on purpose!
It will drive up the cost of borrowing. In the long run, it will keep people in homes they couldn't afford and it will prop up unsustainable prices by artificially curtailing supply.
It will lead to inflation as personal incomes rise to meet artificially inflated, but real housing prices. Consumer goods will rise to meet the increased consumer income. There will be a short term boom in spending from it, but eventually it will lead to inflation and leave more American with less spending power.
Ultimatly, future first time home buyers will be foresaken by higher costs of ownership across the board in order to save the irresponsible home home owners who will be the benificiary of this action.
This is a mistaken, which is being conducted by rank amateurs who have no business meddling in economic affairs.
Mortgage Modifications in Bankruptcy Would Undermine Homeownership, Prevent Few Foreclosures
Mortgage Modifications Are Another Example Of Obama Socialism
Federal housing policy, we now know, has caused catastrophic economic failures. Programs designed to expand homeownership did so at the expense of sound lending and borrowing, to the ultimate detriment of economic stability and many families' finances.
But one federal housing policy worked to reduce the price of housing credit and to extend its availability without contributing to the mortgage mess: denying bankruptcy judges the power to modify home mortgages, a practice known as "strip-down" or "cram-down." This added certainty allowed lenders to accept smaller down payments and offer lower interest rates to millions of American homeowners without providing any incentive to make irresponsible loans.
Now Congress is considering snuffing out this one bright spot by giving judges the power to discharge mortgage debt in bankruptcy and rewrite repayment terms. If enacted, these proposals would increase the cost of homeownership and put it out of reach for many Americans, especially those of lesser means. They would also deal a blow to banks and other lenders at a time when many are faltering, thereby undermining government efforts to increase stability in that sector. Worst of all, allowing bankruptcy judges to rewrite mortgages would prevent few foreclosures while causing harm to those it is intended to protect.
Fundamentally, strip-down is a poor "fit" for the problem of rising foreclosure rates. Its benefits would fall disproportionately to those who can afford their mortgage payments and do not need relief, while those whose homes are at risk would typically obtain only temporary relief at a great personal cost. The result would be to impose enormous expenses on mortgage and consumer lenders—at a time when doing so would be destabilizing and counterproductive—in exchange for extremely limited benefits for vulnerable homeowners.
Congress should look beyond the following myths about mortgage strip-down and recognize that its costs, in the form of unintended consequences, would far outweigh its limited benefits.
Myth: Current law provides no relief from foreclosure for primary residences.
Reality: Under Chapter 13 of the Bankruptcy Code, individuals can stop foreclosure proceedings and spread delinquent payments over a period of time, and most mortgage servicers are willing and able to renegotiate loans when mutually beneficial.
The current Bankruptcy Code carefully balances the need for predictability and stability in mortgage lending with the needs of borrowers who have temporarily fallen behind on their payments. Unlike a Chapter 7 liquidation, in which most of an individual's assets are sold to pay his or her debts, a Chapter 13 bankruptcy puts an immediate halt (known as the "automatic stay") to foreclosure proceedings from the moment of filing and then gives the individual an opportunity to catch up on late payments.
Specifically, instead of being forced to bring a mortgage up to date all at once, a borrower suffering a temporary financial setback can spread the burden over a period of up to three to five years, depending on his or her income and expenses. During this period, the borrower must also continue to make regular scheduled mortgage payments. Once the deficiency has been made up, the payment schedule continues pursuant to the terms of the mortgage until the house is paid off or sold.
Moreover, homeowners can obtain relief by renegotiating the terms of their mortgages with those who hold or service them. When the alternative is a foreclosure valued at far less than the principle remaining in the loan, both homeowners and mortgage investors benefit by modifying the loan to reduce the principle and ease the terms of repayment. This standard is the same that bankruptcy courts would apply under mortgage strip-down proposals but is applied in a way that avoids the blunt, one-size-fits-all approach of strip-downs. Though some mortgages have been privately securitized in ways that present barriers to renegotiation, the vast majority are not subject to such limitations.
The current Chapter 13 process, as well as voluntary and mutually beneficial relief provided by mortgage servicers, serves to separate borrowers whose income is likely to be sufficient to make payments that exceed the foreclosure values of their home from those who have borrowed beyond their means and lack the earning capacity to afford the home that they nominally own but in which (usually) they have little equity. Granting judges new power to modify mortgage terms would blur this line, encouraging both those who have taken on excessive debt and those who have borrowed reasonably and need no relief to reject voluntary renegotiation and seek better terms in bankruptcy.
Myth: Allowing strip-down will not increase the cost or reduce the availability of mortgage loans.
Reality: If forced to shoulder greater risk and expense, mortgage lenders will demand higher interest rates and bigger down payments, putting homeownership out of reach for many low- and middle-income Americans.
Congress cannot repeal the laws of economics. Thus, it is unreasonable to expect that lenders would not adjust their up-front terms in response to changes in the law that weakened loan enforcement. Experience and research show that any proposal that has the effect of undermining the certainty of mortgage agreements or imposing losses on mortgage lenders will serve to reduce the availability and increase the cost of mortgage loans.
Strip-down proposals would impose massive and unjustifiable costs on lenders. Despite the current state of the economy, less than 5 percent of homeowners are more than 60 days behind on their mortgages—the usual measure of delinquency. Yet strip-down would be available as well to the more than 50 million homeowners who are current on their mortgages if they filed bankruptcy. If even a small percentage of these homeowners chose to take advantage of bankruptcy to discharge some of their mortgage debt, their numbers, as well as the total value of the debt they would discharge, would far exceed the number of those in dire straits obtaining strip-downs. Thus, hundreds of billions in debts that likely would have been paid would be relieved.
These costs, in turn, would be reflected in the availability and price of mortgages. To protect themselves from future strip-downs, lenders would have to demand increased down payments from mortgage borrowers. Requiring that borrowers put down enough money to cover any foreseeable decline in the value of their homes is the only way to avoid the risk of a future strip-down.
Home price volatility provides some indication of the magnitude of the down payments that would be required. Over the past year, U.S. home prices have declined by about 12 percent, with some regions seeing drops as high as 30 percent, and prices are still falling. Under current law, down payments are typically 10 percent to 20 percent of the price of a home, but this amount would be insufficient to protect lenders in a volatile market. If the risk of strip-downs led to down payments of 20 percent to 30 percent, a down payment on the median house, valued at just over $200,000, would be $40,000 to $60,000—far more than many families could scrape together. Hardest hit would be first-time home buyers, who cannot draw upon existing home equity, and lower- and middle-class families.
Additionally, lenders would demand higher interest rates and fees as compensation for taking on the added risk of losing money if the loan is stripped down. Because strip-down is such a blunt and indiscriminate tool, all borrowers, no matter their creditworthiness, would face higher rates on mortgages. The biggest increases, though, would fall on first-time home buyers and lower-income families, as lenders demand larger risk premiums.
Recent research confirms this effect. In one study, Karen Pence, a senior economist at the Federal Reserve Board who studies household and real estate finance, determined that state laws that impose costs on lenders (as much as 10 percent of the value of the loan balance) prior to foreclosure reduce the availability of credit for residents of those states. As a result of these laws, families "may pay more for their mortgages, purchase smaller houses, or have difficulty becoming homeowners." If strip-downs impose larger costs on lenders, they would likely have an even greater effect on interest rates and mortgage availability.[1]
Similarly, economists Emily Lin and Michelle White found that unlimited homestead exemptions, which allow individuals to shelter home equity from creditors in bankruptcy, significantly reduce the availability of mortgages and home-improvement loans.[2]
The result, then, of allowing the discharge of home mortgage debt in bankruptcy would be to put home lending out of reach of many Americans and to raise the cost of borrowing for those who are able to secure mortgages, further weakening the housing market. This is a perverse result, considering that the long-standing aim of U.S. housing policy has been to encourage homeownership by promoting affordability in the mortgage market.
That some proposals are temporary in nature would not prevent this outcome, because mortgage lenders (as well as borrowers) would reasonably expect Congress to reinstate strip-downs in the next economic crisis. Indeed, a repeat of this policy would be even more likely once the precedent is set and lenders' and borrowers' expectations are altered.
Myth: The Bankruptcy Code allows mortgages on vacation homes, boats, and expensive cars to be stripped down.
Reality: Instead of changing loan terms, courts regularly require the liquidation of luxury and "lifestyle" assets to increase distributions to other creditors.
Proponents of strip-down proposals make much of the fact that Chapter 13 allows for the modification of most debts other than those secured by a primary residence. Current law, notes Representative John Conyers (D-MI), who has sponsored legislation that would permit strip-downs, permits judicial modification of "loans secured by second homes, investment properties, luxury yachts, and jets" but not primary residences.[3]
In reality, luxury and "lifestyle" assets are rarely afforded this treatment because they are not considered to be necessary to the support of the filer or his family. Though a filer may propose a plan that modifies claims secured by luxury items, bankruptcy judges have extremely broad discretion to reject such modifications when they impair the rights of other creditors.
Further, unlike mortgage strip-down proposals, current law requires the filer to pay off in full any secured claim that is modified, including any arrearages, during the duration of the plan within just three to five years. For example, a debtor who manages to strip down a $300,000 mortgage on a vacation home to $200,000 would have to make equal monthly installments over the course of just a few years to retire that debt.
Thus, in most cases, luxury and "lifestyle" items— things like vacation homes and yachts—that are encumbered by debt are surrendered to the creditor and liquidated to pay off the debt and, in many instances, obtain funds that can be used to pay other creditors. The debts encumbering them are not stripped down. And in the rare cases where this does not occur and the debt is stripped down, the filer is required to pay off the remaining secured portion of the debt, including arrearages at the time of filing and any penalties and fees, over the course of the Chapter 13 plan and may also have to pay off a portion of the remainder of the loan—that is, the part that was crammed down—which remains as an unsecured debt.
Myth: Allowing strip-downs will help consumers.
Reality: Encouraging more families to file for bankruptcy will undermine more promising means of refinancing mortgage debt, hurt consumer credit, and ultimately prevent few foreclosures.
Filing for Chapter 13 bankruptcy is an expensive and disruptive process. While the total fees for filing are only about $300, guideline attorney's fees range from about $2,500 to $5,000 in simple cases, depending on the district; in complex cases, the fee can be much higher. Indeed, the difficulty of stripping down a home mortgage could be expected to increase fees by several thousand dollars.
In addition, filings are included on credit reports immediately upon filing and remain there for seven years. Thus, Chapter 13 bankruptcy damages credit scores and impairs access to credit for a significant period of time.
Many Chapter 13 bankruptcies fail; that is, the filer never obtains a discharge of his debts. Nearly 20 percent of Chapter 13 cases fail before the court has confirmed the filer's plan. Another 55 percent fail between confirmation and discharge because the filer has been unable to carry out his plan. This means that only one-third of all Chapter 13 filers complete the process successfully and get the fresh start that bankruptcy promises. The rest—two-thirds of all filers—pay court fees, pay attorney's fees, pay fees to the bankruptcy trustee, invest time and money to restructure their financial affairs, and then wind up with nothing more than temporary relief. It is therefore not surprising that a substantial number of Chapter 13 filers—nearly one-third—go on to file for bankruptcy again.[4]
These statistics suggest that holding out the promise of significant relief from mortgage debt to encourage more individuals to file for Chapter 13 bankruptcy is bad policy. At best, Chapter 13 would serve only to delay foreclosures in most case where the home is at risk while imposing enormous costs on those who are already financially vulnerable and losing their access to credit.
Worse, allowing discharge of home mortgage debt in bankruptcy would undermine more promising approaches to preventing foreclosures. While there have been difficulties in renegotiating certain types of securitized mortgages, the bulk of outstanding mortgages are controlled or owned by Fannie Mae and Freddie Mac, private banks, and portfolio lenders, all of which have the power to renegotiate mortgages and face strong incentives to do so to preserve the value of homes.
Strip-downs, however, would undermine their efforts by eliminating homeowners' incentives to accept modification offers, even ones that are targeted to their situation and less disruptive than bankruptcy is likely to be. In this way, strip-down proposals would only delay foreclosures while blocking more promising alternatives that protect consumers' financial security.
Myth: Allowing strip-downs will help the economy.
Reality: Undermining the certainty of loan agreements threatens the availability of credit, and thereby market stability, and will only delay recovery, especially in the housing sector.
Some claim that allowing strip-downs in bankruptcy would ease turmoil in the housing markets and slow or reverse declines in home prices. This is a pipe dream.
Merely allowing strip-downs in bankruptcy could be enough to trigger bank instability and failures. U.S. banks and thrifts hold about $315 billion worth of highly rated mortgage-backed securities that would suffer immediate and permanent downgrades. This, in turn, would force banks to write down these assets to reflect their lower value and set aside additional capital to satisfy regulatory requirements. Some banks' already overburdened balance sheets could not absorb those hits.
And as described above, allowing strip-downs could push millions of Americans, who are current on their mortgages and whose homes are not at risk of foreclosure, into bankruptcy. Any reductions in loan principle that they achieved would come at the expense of lenders, increasing the likelihood of their insolvency and further tightening credit markets. Resulting declines in the valuations of mortgage-backed securities and other "troubled assets" could also affect banks' capital statements, leading to more failures and the need for additional capital on top of that already being provided by the federal government. Some of these losses would fall to taxpayers through Fannie Mae and Freddie Mac (which guarantee over $5 trillion in mortgage debt), other government entities, and recent government investments in the financial sector. The drawn-out bankruptcy process would also put a brake on efforts to value mortgage-backed securities and begin to clean up banks' balance sheets, thereby prolonging current financial instability.
Further, increases in bankruptcy filings would harm the financial health of many additional industries. In Chapter 13, unsecured creditors (those whose loans are not backed by property that can be repossessed or foreclosed) typically receive less than 20 percent of what they are owed. Facing this risk, lenders would further tighten the availability of credit, dealing a new blow to the demand side of the economy. This result would be perfectly opposed to Congress's current efforts to stimulate consumer demand.
Conclusion
It should not be surprising that there is no free lunch. Congress cannot enact a policy that imposes major, unexpected losses on home lenders without raising the cost of and reducing access to home loans. Claims to the contrary are unsupported either by experience or by the available data.
What is a surprise, though, is the minuscule benefit that such a policy would achieve. Allowing the strip-down of home mortgage debt in bankruptcy would prevent very few foreclosures even as it undermined better alternatives for homeowners.
That this policy would have any positive effect at all is premised on wishful thinking: that Chapter 13's deliberately weak protections for debtor assets, which are ultimately unavailing in the majority of cases, will do anything more than delay some foreclosures at an enormous cost to the economy. At the same time, this policy would open the door to achieving mortgage reductions for tens of millions of homeowners who can afford their mortgage payments and whose homes are not at risk.
The growing but still relatively small foreclosure rate may warrant a policy response, but Congress must take care not to rush into ill-conceived fixes that threaten to cause more harm than they would alleviate. To avoid that risk, proposals must be carefully targeted and proportionate to the problems they are intended to address.
Opening the door to modification of all home mortgages is both overbroad and extreme and, for that reason, risky. Rather than risk adding to the turmoil in the housing and financial markets, Congress should consider approaches that do not undermine investors' expectations and, ultimately, homeownership.
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Letting Judges Rewrite Loans Is Toxic Itself
REP. ED ROYCE
"At first blush it seems somewhat strange that the Bankruptcy Code should provide less protection to an individual's interest in retaining possession of his or her home than of other assets ... (but) favorable treatment of residential mortgages was intended to encourage the flow of capital into the home lending market."
That was Supreme Court Justice John Paul Stevens in 1993. Yet today that sound reasoning is turned on its head with President Obama's proposal to allow bankruptcy judges to rewrite existing mortgage contracts.
Despite a vocal opposition to this "cram-down provision," it is being pushed through Congress by the administration and Democratic leadership and will likely be voted on in the House on Thursday.
Beyond the long-term damage this provision will have on our private mortgage market, the precedent this legislation will set risks permanently undermining the sanctity of private contracts upon which our country's economic model is based.
The consequences of the cram-down will likely be felt by homeowners for years to come in the form of tighter credit markets and higher interest rates. Because of the uncertainty that will result from bankruptcy judges abrogating private contracts, institutions will avoid investing in the private mortgage market.
As our capital markets struggle to recover, we should be looking for ways to encourage, not discourage, capital back into the system. The less capital in the system, the more expensive it will be to obtain a mortgage. Some economists predict that a 2% risk premium will be added to every mortgage should this proposal be implemented.
Credit cards and auto loans have typically seen higher interest rates because the ability of the lender to recover collateral, if any exists, is more difficult than with less-risky mortgage loans. With the implementation of the cram-down, however, mortgage debt will likely be treated more like credit card and auto loans because lenders' ability to recover collateral will be further restricted.
Advocates for the cram-down got a boost earlier this year when Citigroup had a change of heart and endorsed this proposal. After years of opposing cram-down, Citi's reversal is likely a reflection of influx of public sector dollars into the firm and the growing influence of regulators over day-to-day operations rather than any logical policy shift.
Citigroup believes this provision is "a temporary solution" that will be implemented for outstanding mortgages and then allowed to expire following this difficult period in our economy. Unfortunately, in Washington nothing is more permanent than a temporary solution.
Much of the past success of our country's capitalist system is based on a solid foundation of free and flexible markets and respect for the sanctity of contracts and the rule of law. As a member of the Foreign Affairs Committee in the House, I have seen the stark contrasts between societies that respect private contracts and those that opt to change the rules as they go. The bankruptcy cram-down has the potential to lead us down a path toward the latter.
Private mortgage foreclosure-mitigation efforts currently under way by the Hope Now Alliance and various financial institutions throughout the country are at risk of hitting a significant obstacle should the cram-down go into effect.
Almost 2.3 million foreclosure prevention workouts were completed in 2008 -- all on a case-by-case basis. An effort to allow a third party to wipe out the interest rate and principal of the loan provides a perverse incentive for those borrowers that would otherwise work together with their lender to restructure the loan.
As Congress and the administration work to stabilize the housing market, we must avoid at all costs policies that will hinder the private sector's ability to recover. Enacting the bankruptcy cram-down legislation will restrict the flow of capital into the housing sector, make it more expensive for individuals to obtain a mortgage, hinder the broader housing sector's ability to fully recover and set a disturbing precedent of the government's treatment of private contracts.
It is critical that the administration and Democratic leaders in Congress understand the long-term consequences of this misguided policy before it is too late.
Royce, a Republican, represents California's 40th congressional district in northern Orange County.
Wednesday, February 25, 2009
Commercial Real Estate Bubble Is Set to Burst
What we have done is guaranteed hyperinflation in the United States. We have guaranteed the destruction of the United States. We will have riots starting in the first quarter of next year; we will default by the summer of 2009.
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America will see a major economic collapse followed by riots, martial law (??) , food shortage… etc will follow. Why is US Army redeploying troops to America? Why is the Pentagon openly discussing possible collapse of American society? Martial Law?? These are all very dire predictions for the future of America.
Here’s what we’ve got: the Fed has committed to $8.5 trillion of taxpayers’ money to bail out the worst run companies and banks. It hasn’t worked. Now, they’re at a 0% to .25% on the Fed Funds rate for funds for banks, which means if you go down and you pay $100,000 for a T-bill for 90 days, your return is zero, which is to imply that there is zero risk to investing with the government. Anybody who actually believes that is going to be in for a real shock in the first quarter of next year.
http://www.thedeal.com/newsweekly/features/the-coming-commercial-crash.php
Global systemic crisis – New tipping-point in March 2009: 'When the world becomes aware that this crisis is worse than the 1930s crisis'
LEAP/E2020 anticipates than the unfolding global systemic crisis will experience in March 2009 a new tipping point of similar magnitude to the September 2008 one. According to our team, at that period of the year, the general public will become aware of three major destabilizing processes at work in the global economy, i.e.:
• the length of the crisis
• the explosion of unemployment worldwide
• the risk of sudden collapse of all capital-based pension systems
A whole range of psychological factors will contribute to this tipping point: general awareness in Europe, America and Asia that the crisis has escaped from the control of every public authority, whether national or international; that it is severely affecting all regions of the world, even if some are more affected than others (see GEAB N°28); that it is directly hitting hundreds of millions of people in the “developed” world; and that it is only worsening as its consequences reveal throughout the real economy. National governments and international institutions only have three months left to prepare themselves to the next blow, one that could go along severe risks of social chaos. The countries which are not properly equipped to cope with a surge in unemployment and major risks on pensions will be seriously destabilized by this new public awareness.
In early November, General Electric Co.'s General Electric Capital Corp. moved to foreclose on a downtown Phoenix office building in a hearing scheduled for February. The 18-story office building is just another one of those nondescript rectangles that seem to punctuate the skylines of city centers across the United States. The owner: a San Diego company with the innocuous sounding initials of BCL Inc. The foreclosure makes that Phoenix office building special, in a gloomy sort of way, and a harbinger. Throughout the U.S., massive numbers of foreclosures have swept through residential real estate. By contrast, commercial real estate foreclosures remain relatively few and far between, even in cities the economic downturn has hit hardest. Bankruptcies are even rarer.
"Lenders don't want to default. Borrowers don't want a default. So lenders have extended to the extent they can," says independent real estate investor Terri Gumula. "Everybody's holding out."
The fate of the building on 111 West Monroe Street then is a "precursor," says Christopher Toci, executive director for Cushman & Wakefield of Arizona Inc., of what he and others expect is a massive problem to come.
"It has the potential for being a God-awful mess," adds David Jones, a longtime real estate attorney with K&L Gates LLP of Charlotte, N.C.
Right now we are witnessing what in many respects may prove to be the proverbial calm before the storm. Commercial real estate owners will soon face gale-force winds on two fronts. The rapidly deteriorating real estate market has only recently hit commercial properties. More critically, loans issued in the boom years are only now coming due, with little or no prospect of refinancing. "The velocity [of distress] is going to increase tremendously," says Ed Casas, managing director for Navigant Capital Advisors LLC, which advises hedge funds and private equity on distressed real estate. "It's just begun."
Just how bad the destruction will get is difficult to say. No one predicts the kind of unprecedented devastation residential real estate has experienced, where subprime mortgages alone, which reached $600 billion in 2006 and formed the underpinnings of several trillion dollars in mortgage-backed securities, collateralized debt obligations and credit default swaps, created vast wastelands. But the commercial mortgage failure numbers could be staggering as well.
"What worries people the most is that even healthy assets can't get refinanced," says Dan Fasulo, managing director of New York research firm Real Capital Analytics. "There's so much dislocation in the debt market. It no longer has the capacity to refinance all the loans that are coming due."
Real Capital Analytics considers about $21 billion worth of commercial real estate in distress, while almost $81 billion worth of additional property faces potential troubles in 2009. In all, roughly 5,000 individual properties are on Real Capital Analytics' watch list. Fasulo believes his current forecast errs on the conservative side.
Others believe the numbers could get much higher and that distressed commercial property in potential default may actually exceed $400 billion. Everyone expects the crisis will worsen in 2010 and remain nasty through 2011. "There will be a significant increase in default rates of commercial mortgages," says Stephen Tomlinson, senior partner in the real estate practice at Kirkland & Ellis LLP. But "you may not see a spike begin until the fourth quarter."
Christopher Grey is managing director and co-founder of Third Wave Partners LLC, which both invests in distressed real estate and advises investors. He predicts it will take three years before the market begins to recover. "There's a tremendous amount of adjustment to be made, but very little adjustment has taken place," he says.
There are ominous signs. The CMBX Indexes, which track 25 tranches of commercial mortgage-backed securities, now show "an unbelievably wide spread," says Grey, with an implied default rate of 20%.
Unsecured REIT bond spreads "are at all-time highs," Fitch Ratings Inc. reported in an outlook last month, which tagged office, industrial and retail REITs with negative outlooks. The stock market has already hammered commercial REITs, many of whose market caps have declined by more than 90% in a year. One dramatic example of a REIT teetering on the edge is General Growth Properties Inc., America's second-largest mall operator. General Growth narrowly avoided bankruptcy last year, when it was able to extend $900 million in debt repayments until February. General Growth still faces huge uncertainties with billions of dollars of short-term debt maturing soon.
Understanding why commercial foreclosures have lagged so significantly behind residences helps explain a great deal about what transpired during real estate's boom years. What's likely to happen in 2009 and 2010 offers a sobering look at assets that were considered robust and fairly safe until the fourth quarter of 2008. Now they are poised to become yet another part of the economic devastation.
Working through all this distress will be extremely difficult and time-consuming. Wrapped within those numbers is an often complex jumble of securitizations, debt tiers, priorities and liquidation preferences. In the best of times, these make decisions and workouts difficult. Now it's even more daunting.
Most of these properties are in bankruptcy-remote vehicles, which make it easy for lenders to take back assets without bankruptcy filings. What's more, current laws discourage commercial real estate-related bankruptcy filings. So it's more likely that borrowers would be inclined to just give up the keys and walk away.
However, most lenders don't want the property back, since there are few potential buyers. Money for refinancing remains almost nonexistent. With securitized assets, lenders are often at odds with each other on what course of action to take, depending on what part of the debt structure they fall. "It's a recipe for short-term paralysis," Casas says.
Commercial real estate encompasses everything from the toniest retail shopping complexes to modest strip malls, from low-rise office buildings to luxury hotels and skyscrapers. All face huge problems.
What's more, the economic distress will be wide-ranging, not just in the boom towns of California, Florida or Nevada, but in cities that stretch north to south and coast to coast, lawyers and commercial real estate advisers around the country say. "It's the same phenomenon all over," says Andrew Schwartz, a Boston-based partner at law firm Foley Hoag LLP. "The trouble is nationwide."
Schwartz cites his city as a prime example. In the past few years, real estate consortia paid huge sums for trophy properties. At the same time, star-crossed developers unveiled ambitious new developments. Now several major projects are on hold, including the $2.5 billion Fan Pier development and the $700 million redevelopment of the storied Filene's department store site. Developers can't get construction loans. At the same time, landlords of existing properties face rising vacancies and an inability to service loans.
Or take Phoenix, which was "one of the poster children for subprime mortgages," Toci says. That led to overbuilding in retail shopping centers and suburban office complexes. "A lot of [commercial] projects that were planned have either been reduced or are in trouble. One project in Tempe, a boutique hotel, just stopped," says Jeffrey Pitcher, a Phoenix-based real estate partner at Ballard Spahr Andrews & Ingersoll LLP. "We're at the stage where developers delay as long as possible the construction."
But Toci believes it's the economic downturn that is really doing his city in. "We've lost 58,000 jobs through November, and now Phoenix faces an oversupply of offices," he says. Tenants are going bankrupt, vacating properties or not renewing leases. "Operationally, there are serious weaknesses. Commercial real estate is just starting to tank."
Nearby Las Vegas is the site of one of the worst examples of residential speculative frenzy. Long after the housing bubble burst and residences were foreclosed on a massive scale, the city thought its economy safe, given its dependence on gaming and tourism. So ever-more-opulent casinos, upscale shopping centers and multibillion-dollar multiuse development projects continued to launch. But the economy has wreaked havoc on Las Vegas. That in turn has put enormous pressure on the city's livelihood.
"It all started feeding on itself," says David Barksdale, a Las Vegas-based partner at Ballard Spahr and the co-head of the firm's distressed real estate initiative. "Now it's spreading into the commercial side."
The city's most dramatic foreclosure to date came in September, when Deutsche Bank AG took over the $3.9 billion Cosmopolitan Resort and Casino project after developer Ian Bruce Eichner defaulted on $900 million in construction loans and the bank couldn't find willing buyers. But many more problems loom. Several new office complexes sprang up in the southwest part of the metropolitan area.
They broke ground two to three years ago, when "things looked great," says Barksdale. Now they're completed, but deserted. "Those buildings are empty," he says. "Those are see-through buildings."
Atlanta, on the other hand, thought itself relatively immune to commercial real estate pain. Not anymore. "I foresee a lot of commercial deals going sour," says Nicholas Sears, an Atlanta-based partner at Morris, Manning & Martin LLP. "Folks want to sell. They can't sell. Purchasers can't get new financing or assume existing debt, which can't be reduced."
Even a city like Milwaukee, which hardly went crazy during the property boom, is feeling the effects. "Banks have closed down their lending. Ninety percent of commercial lenders are just not lending right now," says Nancy Haggerty, a Milwaukee-based partner at Michael Best & Friedrich LLP. "Even some long-term lenders like life insurance we're just not seeing any more."
As the crisis unfolds, there will be inevitable comparisons to the savings & loan crisis of the late 1980s and 1990s. Easy money created a speculative boom and massive supply in commercial property, followed by a banking failure, a wholesale takeover of distressed properties by the federal government and a yearslong sorting out. Professionals, however, caution against a quick analogy.
"A lot of people are trying to draw parallels to the early '90s, but I think it's certainly a different animal," says Martin Caverly, a Los Angeles-based principal at private equity real estate fund O'Connor Capital Partners. Unlike two decades back, there isn't a huge oversupply of commercial property, except for retail, he explains. But the ownership structure of property is far more complicated and opaque, with crippling debt structures and a lack of affordable financing, which make workouts and disposition difficult.
"More and more my belief is that it will be a larger and deeper correction," Caverly says. "The deleveraging process will go on for quite a long time."
What's certain is that in terms of debt to value, many commercial properties of various shapes and sizes are well underwater.
"From a 90% loan-to-value, it's now a 130% loan-to-value," Tomlinson says.
Transactions are pretty much stalled right now. Grey estimates commercial deals in 2008 declined 90% more than in 2007. Even distressed players are in no hurry to buy. At a real estate conference late last year, a panel of private equity principals divided their world into two camps: Those with properties admit they're overbought and want to sell. Those with cash are sitting on their hands.
"It's very much a wait-and-see," says Pitcher. Potential buyers "want to see where everything settles out. They're looking, but they don't know where the floor is."
The shift has been dramatic. In early February 2007, Blackstone Group LP paid a staggering $39 billion for Equity Office Properties Trust. Most of the 100 million square feet of commercial real estate was financed by debt. During the next six months, Blackstone recouped $28 billion by selling off a little more than half of the properties. That included $7 billion New York property mogul Harry Macklowe forked out for some prime Manhattan real estate. Macklowe financed his purchase primarily through bridge loans from Deutsche Bank. At the time, Blackstone's maneuver was hailed as a brilliant model of leveraged dealmaking: Buy a property portfolio with short-term debt and quickly reduce debt levels by offloading a portion of the properties.
The music stopped in June 2007, when the credit crunch hit. Macklowe, for one, flamed out in spectacular fashion. He was stuck with loans he couldn't service and hugely overpriced real estate he couldn't hold. Deutsche Bank ended up taking back seven properties, selling five for huge losses. The sale of the other two fell through, and they are back on the market.
The Blackstone-EOP deal, it turns out, represented the last great hurrah. How Blackstone will dispose of its remaining properties is as yet unanswered. "They can't sell that stuff," says a rival PE investor. "There's not enough debt on the planet to float those trades."
In fact, the kind of flips Blackstone pulled off had been popular at least since 2005, when commercial real estate really began to heat up. The returns were equally dramatic as the Blackstone-EOP shuffle, although not necessarily on the same mega-scale. Biltmore Holdings LLC, for example, bought the 111 West Monroe Street building in Phoenix along with a vacant downtown redevelopment site in April 2005 for $20 million. After investing a further $6 million in upgrades on the office building, Biltmore Holdings sold the two properties for $52 million in February 2007. BCL paid $40 million for the building alone.
Why commercial real estate, which mirrored residential real estate, boomed is easy enough to understand. Financing was plentiful. Securitization was commonplace.
In some ways, the more expensive the asset, the easier it was to finance the purchase.
Why the collapse of the commercial real estate market didn't occur sooner is equally obvious: cash flow. Tenants filled buildings and paid rent. Because the terms of most loans were anything but onerous, as long as borrowers made interest payments, they were safe. "Rents haven't backed up far enough. Vacancies haven't ballooned high enough" to reach crisis point, says Richard Hollowell, a managing director with Alvarez & Marsal Real Estate Advisory Services. That won't happen for another three to six months, Hollowell believes.
"Until the fourth quarter of 2008, you didn't see a significant deterioration of property fundamentals. Even deals done at the top of the market were covering debt service with cash flow or reserves," says Tomlinson.
"Defaults won't materialize until reserves are depleted, and they can't [cover debt service]."
Even through the summer of 2008, with credit markets frozen, there wasn't the kind of wholesale panic that was sweeping through residential real estate, and a false sense of hope prevailed. The Macklowe debacle wasn't repeated, and more optimistic observers viewed it as an outlier. "Overall, businesses were treading water. Underlying fundamentals were holding up," says Gumula. Commercial real estate owners "could make their debt service, so defaults were rare."
All that changed after the mid-September financial meltdown. "Up until Lehman, we were pleasantly surprised by tenant activity," she says. "Yeah, deals took longer to get signed, but up until September, plenty of leases were getting done."
Since then, it's been a dramatically different story. The economic downturn began take its toll on commercial occupancy rates. Typically made for three, five or seven years, commercial real estate loans are coming due, with few financial institutions willing to offer refinancing even at onerous terms. The combination can be deadly.
In boom days, borrowers could regularly obtain 90% financing. Those days are long gone. According to a Cushman & Wakefield Sonnenblick-Goldman LLC survey last month, the few financing deals quoted or completed were typically 60% loan-to-value.
Retail complexes were the first to exhibit signs of distress. That makes sense, since many shopping centers got whacked by both the residential real estate meltdown and the more general economic malaise. With the residential real estate boom came exurban sprawl. "One of the first amenities is a neighborhood retail center," Jones explains.
After the subprime crisis, however, residential developments were stillborn. The population that retail developers had expected never materialized.
Local retailers find it increasingly difficult to pay the rent, and they close stores. The retail developer defaults on an existing loan. He can't refinance, because there's no retail stream. A lender is forced to take that property back but doesn't want to because there are no buyers.
"It's a daisy chain," Jones says. "In some ways it's related to residential real estate, in some ways it's related to the general slowdown of the economy. The two feed off each other. It's a race to the bottom."
Shopping centers may have been the first to go. But it's the huge trophy acquisitions that are poised to cause the largest headaches. "A tremendous number of assets were bought in '06, '07, using short-term money. These were megadeals," says Casas. Now they're coming undone.
When Casas is asked to name those transactions that must be restructured, his partner, Neil Luria, pipes up with "any building sold within the last two years." Luria, a Navigant managing director based in Cleveland, is sitting in the lobby lounge of the Waldorf-Astoria Hotel in Manhattan. He gestures outside. "Just walk down the street," he says. "L.A., Chicago, New York, all the major markets have a number of high-profile trophy properties that will go through major turmoil. They are dropping precipitously in value, 40% to 50%."
Securitization enormously complicates these large transactions. Residential mortgage-backed securities may dwarf the amount of commercial mortgage-backed securities issued, but $40 billion worth of CMBSs is due this year, $55 billion in 2010 and $73 billion in 2011.
Like pools of residential mortgages, big commercial mortgages were sliced and diced into various bits and pieces. A single building may have a dozen different tranches of debt. Senior debt alone may have been parceled out into a dozen different pieces. Those pieces could have been combined with other commercial mortgages.
The complex financing structure makes the most fundamental decisions difficult. The senior-most debt holders may want to foreclose, since they're still in the money, even with a highly distressed sale. But junior debt holders would be wiped out in such a sale, so they'd be much more likely to choose some kind of restructuring and resist foreclosure.
Who makes the decisions complicates this even further. In normal times, a servicer is responsible for collecting interest payments from the borrower and distributing that money to lenders, with amounts dependent on returns within the various risk levels. So, for example, a senior lender may get 5% a year, while the junior-most doubles that.
If a borrower defaults, however, the role of the servicer is replaced by a so-called special servicer. That entity is appointed by the junior-most debt holders still in the money and is often an affiliate of the lender. The special servicer's loyalties and desired course of action may be very different from the senior lender.
You can imagine what a workout meeting looks like. "To get 50 partners together to work at a deal for pennies on the dollar, forget about it," Fasulo says.
Expect plenty of litigation to follow, say some lawyers (naturally). "More junior classes are not going to go quietly," says Schwartz. "Hedge funds playing with other people's money are not going to go quietly." Schwartz foresees a rash of valuation-oriented litigation. Servicers, especially, "are treading in very treacherous waters," he says.
Bankruptcies don't appear to be a particularly good alternative, either, especially for owners. After the S&L fiasco, when developers routinely put their bad properties into bankruptcy while keeping their good projects, loan contracts now carry what are termed "bad-boy" clauses. These state that owners can be held personally liable for their bankrupt properties.
Pretty much all the securitized buildings are housed in special-purpose entities. Because they are single-asset LLCs, they get only 90 days from the time they file to fashion a reorganization plan with a good chance of success, or creditors can petition the court to lift any stays. That kind of timetable isn't at all realistic in these times, when just finding debtor-in-possession financing is a major undertaking.
One of the very few property-related bankruptcies so far focused on a Chicago property called Hotel 71. The complicated case was anything but satisfactory. Distressed private equity shop Oaktree Capital Management LLC actually tried to foreclose on the equity of the holding company. The developer put the company in bankruptcy to prevent foreclosure. At that point, secured lenders of the actual property commenced a second foreclosure, this one of the hotel itself. The lenders eventually carried out an auction. Bids were well below value. "We ultimately decided to take the property back," says Brad Erens, a Chicago-based partner with Jones Day, which represented the special servicer.
Erens, for one, believes commercial property-related bankruptcies will inevitably follow. "At some point, borrowers will file. We just haven't seen it yet."
But Tomlinson counters that the bankruptcy-remote structures coupled with the bad-boy-type springing guarantees will "significantly dampen foreclosures that turn into bankruptcies." He adds that bankruptcy judges will probably have to rule on the legitimacy of bankruptcy-remote vehicles. "I think they ultimately will be upheld," he says, but cautions: "There's no playbook. A lot of things will be done for the first time. Literally."
What could really bring the crisis to a head is a crackdown by regulators on financial institutions demanding they clean up bad loans. If regulators demand lending institutions revalue the assets that secure the loans and institutions demand that borrowers fork over a hefty percentage to pay down the loan, financial institutions will have to foreclose.
Even now, banks are taking a chance by holding on, says Barksdale. If they modify the loan for 12 or 18 months, "they might have an asset worth significantly less," he says. But if they foreclose, "no one is buying."
Or offers they do extract may be going for a quarter of the value banks have on the books, he says. To date, the impetus has been to do nothing, if at all possible. "Things will continue to be pushed out until there's pressure from the outside accountants and regulators," Hollowell says.
Only when owners can't pay their debt will lenders be forced into action. That was the case with 111 West Monroe Street in Phoenix. Principals at BCL didn't return phone calls seeking comment. But those familiar with the building's fate say BCL defaulted after an equity partner collapsed.
That partner: a bankrupt firm called Lehman Brothers.
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As economic activity and PONZI finance fall off the face of the earth, we enter the stretch run of the CON game known as the Bond and FIAT currency markets. Although both are headed for their ultimate demise, the path will be quite different. In 2009, these challenges will be headed your way. Prepare properly and thrive, or fail to do so and fall to your demise.
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As every government policy failure appears, public servants will stroke the fear in the ‘something for nothing illiterate’ and use it to nationalize and destroy more and more of the private sector. They will double down on the spending, borrowing, printing and taxing required to pay for the next absurd idea to come out of the G7’s capitals. Look no further than Obama’s “Economic Recovery and Stabilization” stimulus package which spends 12 cents of every dollar on economic stimulus and 88 cents for sustaining and enlarging government spending and programs. A perfect name to DUPE America the Illiterate.
Morally, fiscally and intellectually BANKRUPT public servants and crony capitalists. Now we know why the banks and financial sectors were the greatest campaign contributors in the last election cycle and Obama’s inaugural election. Decisions are being made upon political considerations, not economic ones.
This is a nightmare on WALL STREET and MAIN STREET . A one percent loss on outstanding loans and derivatives turns ALL the biggest banks in the G7 into TOAST. What do you think the odds are of this happening? 100%. Once you see the picture you will understand why they are extremely cautious with their lending; they are on a tight rope. I don’t care how much the mainstream financial media hoot and howl, these banks are WORTHLESS and so are their debt offerings.
Black clouds are gathering above the horizon. The IMF just announced that the world trade collapsed by staggering 45% in the last quarter of last year. Even the euphoria of Obama’s inauguration didn’t last long. The same day Dow closed below 8,000 as banking fears were gripping the European markets and bringing shockwaves from the United Kingdom too. British Banks got a £1TN injection which didn’t prevent RBS shares to plunge 70%. London is faced with a bloodbath. Brown admitted there is not yet a limit on how much risk taxpayers must bear as a result of his rescue plan, but he even promised financial institutions that they will get more cash if they pass it on . Looks like the Brits are too being set up for the mother of all crashes. With the UK government debt alone and future liabilities not included, this means that every new baby is born with £17,000 debt.
The industrialized economies are on the verge of bankruptcy. China will not be of much help. It has its own set of problems preventing its economy from dropping below 5%. The question is: when will the global collapse be, not whether? Will fiat currencies tank? Will there be financial chaos? Time will tell. Celente and GEAB forecast by March 2009. We will know soon!
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America will see a major economic collapse followed by riots, martial law (??) , food shortage… etc will follow. Why is US Army redeploying troops to America? Why is the Pentagon openly discussing possible collapse of American society? Martial Law?? These are all very dire predictions for the future of America.
Here’s what we’ve got: the Fed has committed to $8.5 trillion of taxpayers’ money to bail out the worst run companies and banks. It hasn’t worked. Now, they’re at a 0% to .25% on the Fed Funds rate for funds for banks, which means if you go down and you pay $100,000 for a T-bill for 90 days, your return is zero, which is to imply that there is zero risk to investing with the government. Anybody who actually believes that is going to be in for a real shock in the first quarter of next year.
http://www.thedeal.com/newsweekly/features/the-coming-commercial-crash.php
Global systemic crisis – New tipping-point in March 2009: 'When the world becomes aware that this crisis is worse than the 1930s crisis'
LEAP/E2020 anticipates than the unfolding global systemic crisis will experience in March 2009 a new tipping point of similar magnitude to the September 2008 one. According to our team, at that period of the year, the general public will become aware of three major destabilizing processes at work in the global economy, i.e.:
• the length of the crisis
• the explosion of unemployment worldwide
• the risk of sudden collapse of all capital-based pension systems
A whole range of psychological factors will contribute to this tipping point: general awareness in Europe, America and Asia that the crisis has escaped from the control of every public authority, whether national or international; that it is severely affecting all regions of the world, even if some are more affected than others (see GEAB N°28); that it is directly hitting hundreds of millions of people in the “developed” world; and that it is only worsening as its consequences reveal throughout the real economy. National governments and international institutions only have three months left to prepare themselves to the next blow, one that could go along severe risks of social chaos. The countries which are not properly equipped to cope with a surge in unemployment and major risks on pensions will be seriously destabilized by this new public awareness.
In early November, General Electric Co.'s General Electric Capital Corp. moved to foreclose on a downtown Phoenix office building in a hearing scheduled for February. The 18-story office building is just another one of those nondescript rectangles that seem to punctuate the skylines of city centers across the United States. The owner: a San Diego company with the innocuous sounding initials of BCL Inc. The foreclosure makes that Phoenix office building special, in a gloomy sort of way, and a harbinger. Throughout the U.S., massive numbers of foreclosures have swept through residential real estate. By contrast, commercial real estate foreclosures remain relatively few and far between, even in cities the economic downturn has hit hardest. Bankruptcies are even rarer.
"Lenders don't want to default. Borrowers don't want a default. So lenders have extended to the extent they can," says independent real estate investor Terri Gumula. "Everybody's holding out."
The fate of the building on 111 West Monroe Street then is a "precursor," says Christopher Toci, executive director for Cushman & Wakefield of Arizona Inc., of what he and others expect is a massive problem to come.
"It has the potential for being a God-awful mess," adds David Jones, a longtime real estate attorney with K&L Gates LLP of Charlotte, N.C.
Right now we are witnessing what in many respects may prove to be the proverbial calm before the storm. Commercial real estate owners will soon face gale-force winds on two fronts. The rapidly deteriorating real estate market has only recently hit commercial properties. More critically, loans issued in the boom years are only now coming due, with little or no prospect of refinancing. "The velocity [of distress] is going to increase tremendously," says Ed Casas, managing director for Navigant Capital Advisors LLC, which advises hedge funds and private equity on distressed real estate. "It's just begun."
Just how bad the destruction will get is difficult to say. No one predicts the kind of unprecedented devastation residential real estate has experienced, where subprime mortgages alone, which reached $600 billion in 2006 and formed the underpinnings of several trillion dollars in mortgage-backed securities, collateralized debt obligations and credit default swaps, created vast wastelands. But the commercial mortgage failure numbers could be staggering as well.
"What worries people the most is that even healthy assets can't get refinanced," says Dan Fasulo, managing director of New York research firm Real Capital Analytics. "There's so much dislocation in the debt market. It no longer has the capacity to refinance all the loans that are coming due."
Real Capital Analytics considers about $21 billion worth of commercial real estate in distress, while almost $81 billion worth of additional property faces potential troubles in 2009. In all, roughly 5,000 individual properties are on Real Capital Analytics' watch list. Fasulo believes his current forecast errs on the conservative side.
Others believe the numbers could get much higher and that distressed commercial property in potential default may actually exceed $400 billion. Everyone expects the crisis will worsen in 2010 and remain nasty through 2011. "There will be a significant increase in default rates of commercial mortgages," says Stephen Tomlinson, senior partner in the real estate practice at Kirkland & Ellis LLP. But "you may not see a spike begin until the fourth quarter."
Christopher Grey is managing director and co-founder of Third Wave Partners LLC, which both invests in distressed real estate and advises investors. He predicts it will take three years before the market begins to recover. "There's a tremendous amount of adjustment to be made, but very little adjustment has taken place," he says.
There are ominous signs. The CMBX Indexes, which track 25 tranches of commercial mortgage-backed securities, now show "an unbelievably wide spread," says Grey, with an implied default rate of 20%.
Unsecured REIT bond spreads "are at all-time highs," Fitch Ratings Inc. reported in an outlook last month, which tagged office, industrial and retail REITs with negative outlooks. The stock market has already hammered commercial REITs, many of whose market caps have declined by more than 90% in a year. One dramatic example of a REIT teetering on the edge is General Growth Properties Inc., America's second-largest mall operator. General Growth narrowly avoided bankruptcy last year, when it was able to extend $900 million in debt repayments until February. General Growth still faces huge uncertainties with billions of dollars of short-term debt maturing soon.
Understanding why commercial foreclosures have lagged so significantly behind residences helps explain a great deal about what transpired during real estate's boom years. What's likely to happen in 2009 and 2010 offers a sobering look at assets that were considered robust and fairly safe until the fourth quarter of 2008. Now they are poised to become yet another part of the economic devastation.
Working through all this distress will be extremely difficult and time-consuming. Wrapped within those numbers is an often complex jumble of securitizations, debt tiers, priorities and liquidation preferences. In the best of times, these make decisions and workouts difficult. Now it's even more daunting.
Most of these properties are in bankruptcy-remote vehicles, which make it easy for lenders to take back assets without bankruptcy filings. What's more, current laws discourage commercial real estate-related bankruptcy filings. So it's more likely that borrowers would be inclined to just give up the keys and walk away.
However, most lenders don't want the property back, since there are few potential buyers. Money for refinancing remains almost nonexistent. With securitized assets, lenders are often at odds with each other on what course of action to take, depending on what part of the debt structure they fall. "It's a recipe for short-term paralysis," Casas says.
Commercial real estate encompasses everything from the toniest retail shopping complexes to modest strip malls, from low-rise office buildings to luxury hotels and skyscrapers. All face huge problems.
What's more, the economic distress will be wide-ranging, not just in the boom towns of California, Florida or Nevada, but in cities that stretch north to south and coast to coast, lawyers and commercial real estate advisers around the country say. "It's the same phenomenon all over," says Andrew Schwartz, a Boston-based partner at law firm Foley Hoag LLP. "The trouble is nationwide."
Schwartz cites his city as a prime example. In the past few years, real estate consortia paid huge sums for trophy properties. At the same time, star-crossed developers unveiled ambitious new developments. Now several major projects are on hold, including the $2.5 billion Fan Pier development and the $700 million redevelopment of the storied Filene's department store site. Developers can't get construction loans. At the same time, landlords of existing properties face rising vacancies and an inability to service loans.
Or take Phoenix, which was "one of the poster children for subprime mortgages," Toci says. That led to overbuilding in retail shopping centers and suburban office complexes. "A lot of [commercial] projects that were planned have either been reduced or are in trouble. One project in Tempe, a boutique hotel, just stopped," says Jeffrey Pitcher, a Phoenix-based real estate partner at Ballard Spahr Andrews & Ingersoll LLP. "We're at the stage where developers delay as long as possible the construction."
But Toci believes it's the economic downturn that is really doing his city in. "We've lost 58,000 jobs through November, and now Phoenix faces an oversupply of offices," he says. Tenants are going bankrupt, vacating properties or not renewing leases. "Operationally, there are serious weaknesses. Commercial real estate is just starting to tank."
Nearby Las Vegas is the site of one of the worst examples of residential speculative frenzy. Long after the housing bubble burst and residences were foreclosed on a massive scale, the city thought its economy safe, given its dependence on gaming and tourism. So ever-more-opulent casinos, upscale shopping centers and multibillion-dollar multiuse development projects continued to launch. But the economy has wreaked havoc on Las Vegas. That in turn has put enormous pressure on the city's livelihood.
"It all started feeding on itself," says David Barksdale, a Las Vegas-based partner at Ballard Spahr and the co-head of the firm's distressed real estate initiative. "Now it's spreading into the commercial side."
The city's most dramatic foreclosure to date came in September, when Deutsche Bank AG took over the $3.9 billion Cosmopolitan Resort and Casino project after developer Ian Bruce Eichner defaulted on $900 million in construction loans and the bank couldn't find willing buyers. But many more problems loom. Several new office complexes sprang up in the southwest part of the metropolitan area.
They broke ground two to three years ago, when "things looked great," says Barksdale. Now they're completed, but deserted. "Those buildings are empty," he says. "Those are see-through buildings."
Atlanta, on the other hand, thought itself relatively immune to commercial real estate pain. Not anymore. "I foresee a lot of commercial deals going sour," says Nicholas Sears, an Atlanta-based partner at Morris, Manning & Martin LLP. "Folks want to sell. They can't sell. Purchasers can't get new financing or assume existing debt, which can't be reduced."
Even a city like Milwaukee, which hardly went crazy during the property boom, is feeling the effects. "Banks have closed down their lending. Ninety percent of commercial lenders are just not lending right now," says Nancy Haggerty, a Milwaukee-based partner at Michael Best & Friedrich LLP. "Even some long-term lenders like life insurance we're just not seeing any more."
As the crisis unfolds, there will be inevitable comparisons to the savings & loan crisis of the late 1980s and 1990s. Easy money created a speculative boom and massive supply in commercial property, followed by a banking failure, a wholesale takeover of distressed properties by the federal government and a yearslong sorting out. Professionals, however, caution against a quick analogy.
"A lot of people are trying to draw parallels to the early '90s, but I think it's certainly a different animal," says Martin Caverly, a Los Angeles-based principal at private equity real estate fund O'Connor Capital Partners. Unlike two decades back, there isn't a huge oversupply of commercial property, except for retail, he explains. But the ownership structure of property is far more complicated and opaque, with crippling debt structures and a lack of affordable financing, which make workouts and disposition difficult.
"More and more my belief is that it will be a larger and deeper correction," Caverly says. "The deleveraging process will go on for quite a long time."
What's certain is that in terms of debt to value, many commercial properties of various shapes and sizes are well underwater.
"From a 90% loan-to-value, it's now a 130% loan-to-value," Tomlinson says.
Transactions are pretty much stalled right now. Grey estimates commercial deals in 2008 declined 90% more than in 2007. Even distressed players are in no hurry to buy. At a real estate conference late last year, a panel of private equity principals divided their world into two camps: Those with properties admit they're overbought and want to sell. Those with cash are sitting on their hands.
"It's very much a wait-and-see," says Pitcher. Potential buyers "want to see where everything settles out. They're looking, but they don't know where the floor is."
The shift has been dramatic. In early February 2007, Blackstone Group LP paid a staggering $39 billion for Equity Office Properties Trust. Most of the 100 million square feet of commercial real estate was financed by debt. During the next six months, Blackstone recouped $28 billion by selling off a little more than half of the properties. That included $7 billion New York property mogul Harry Macklowe forked out for some prime Manhattan real estate. Macklowe financed his purchase primarily through bridge loans from Deutsche Bank. At the time, Blackstone's maneuver was hailed as a brilliant model of leveraged dealmaking: Buy a property portfolio with short-term debt and quickly reduce debt levels by offloading a portion of the properties.
The music stopped in June 2007, when the credit crunch hit. Macklowe, for one, flamed out in spectacular fashion. He was stuck with loans he couldn't service and hugely overpriced real estate he couldn't hold. Deutsche Bank ended up taking back seven properties, selling five for huge losses. The sale of the other two fell through, and they are back on the market.
The Blackstone-EOP deal, it turns out, represented the last great hurrah. How Blackstone will dispose of its remaining properties is as yet unanswered. "They can't sell that stuff," says a rival PE investor. "There's not enough debt on the planet to float those trades."
In fact, the kind of flips Blackstone pulled off had been popular at least since 2005, when commercial real estate really began to heat up. The returns were equally dramatic as the Blackstone-EOP shuffle, although not necessarily on the same mega-scale. Biltmore Holdings LLC, for example, bought the 111 West Monroe Street building in Phoenix along with a vacant downtown redevelopment site in April 2005 for $20 million. After investing a further $6 million in upgrades on the office building, Biltmore Holdings sold the two properties for $52 million in February 2007. BCL paid $40 million for the building alone.
Why commercial real estate, which mirrored residential real estate, boomed is easy enough to understand. Financing was plentiful. Securitization was commonplace.
In some ways, the more expensive the asset, the easier it was to finance the purchase.
Why the collapse of the commercial real estate market didn't occur sooner is equally obvious: cash flow. Tenants filled buildings and paid rent. Because the terms of most loans were anything but onerous, as long as borrowers made interest payments, they were safe. "Rents haven't backed up far enough. Vacancies haven't ballooned high enough" to reach crisis point, says Richard Hollowell, a managing director with Alvarez & Marsal Real Estate Advisory Services. That won't happen for another three to six months, Hollowell believes.
"Until the fourth quarter of 2008, you didn't see a significant deterioration of property fundamentals. Even deals done at the top of the market were covering debt service with cash flow or reserves," says Tomlinson.
"Defaults won't materialize until reserves are depleted, and they can't [cover debt service]."
Even through the summer of 2008, with credit markets frozen, there wasn't the kind of wholesale panic that was sweeping through residential real estate, and a false sense of hope prevailed. The Macklowe debacle wasn't repeated, and more optimistic observers viewed it as an outlier. "Overall, businesses were treading water. Underlying fundamentals were holding up," says Gumula. Commercial real estate owners "could make their debt service, so defaults were rare."
All that changed after the mid-September financial meltdown. "Up until Lehman, we were pleasantly surprised by tenant activity," she says. "Yeah, deals took longer to get signed, but up until September, plenty of leases were getting done."
Since then, it's been a dramatically different story. The economic downturn began take its toll on commercial occupancy rates. Typically made for three, five or seven years, commercial real estate loans are coming due, with few financial institutions willing to offer refinancing even at onerous terms. The combination can be deadly.
In boom days, borrowers could regularly obtain 90% financing. Those days are long gone. According to a Cushman & Wakefield Sonnenblick-Goldman LLC survey last month, the few financing deals quoted or completed were typically 60% loan-to-value.
Retail complexes were the first to exhibit signs of distress. That makes sense, since many shopping centers got whacked by both the residential real estate meltdown and the more general economic malaise. With the residential real estate boom came exurban sprawl. "One of the first amenities is a neighborhood retail center," Jones explains.
After the subprime crisis, however, residential developments were stillborn. The population that retail developers had expected never materialized.
Local retailers find it increasingly difficult to pay the rent, and they close stores. The retail developer defaults on an existing loan. He can't refinance, because there's no retail stream. A lender is forced to take that property back but doesn't want to because there are no buyers.
"It's a daisy chain," Jones says. "In some ways it's related to residential real estate, in some ways it's related to the general slowdown of the economy. The two feed off each other. It's a race to the bottom."
Shopping centers may have been the first to go. But it's the huge trophy acquisitions that are poised to cause the largest headaches. "A tremendous number of assets were bought in '06, '07, using short-term money. These were megadeals," says Casas. Now they're coming undone.
When Casas is asked to name those transactions that must be restructured, his partner, Neil Luria, pipes up with "any building sold within the last two years." Luria, a Navigant managing director based in Cleveland, is sitting in the lobby lounge of the Waldorf-Astoria Hotel in Manhattan. He gestures outside. "Just walk down the street," he says. "L.A., Chicago, New York, all the major markets have a number of high-profile trophy properties that will go through major turmoil. They are dropping precipitously in value, 40% to 50%."
Securitization enormously complicates these large transactions. Residential mortgage-backed securities may dwarf the amount of commercial mortgage-backed securities issued, but $40 billion worth of CMBSs is due this year, $55 billion in 2010 and $73 billion in 2011.
Like pools of residential mortgages, big commercial mortgages were sliced and diced into various bits and pieces. A single building may have a dozen different tranches of debt. Senior debt alone may have been parceled out into a dozen different pieces. Those pieces could have been combined with other commercial mortgages.
The complex financing structure makes the most fundamental decisions difficult. The senior-most debt holders may want to foreclose, since they're still in the money, even with a highly distressed sale. But junior debt holders would be wiped out in such a sale, so they'd be much more likely to choose some kind of restructuring and resist foreclosure.
Who makes the decisions complicates this even further. In normal times, a servicer is responsible for collecting interest payments from the borrower and distributing that money to lenders, with amounts dependent on returns within the various risk levels. So, for example, a senior lender may get 5% a year, while the junior-most doubles that.
If a borrower defaults, however, the role of the servicer is replaced by a so-called special servicer. That entity is appointed by the junior-most debt holders still in the money and is often an affiliate of the lender. The special servicer's loyalties and desired course of action may be very different from the senior lender.
You can imagine what a workout meeting looks like. "To get 50 partners together to work at a deal for pennies on the dollar, forget about it," Fasulo says.
Expect plenty of litigation to follow, say some lawyers (naturally). "More junior classes are not going to go quietly," says Schwartz. "Hedge funds playing with other people's money are not going to go quietly." Schwartz foresees a rash of valuation-oriented litigation. Servicers, especially, "are treading in very treacherous waters," he says.
Bankruptcies don't appear to be a particularly good alternative, either, especially for owners. After the S&L fiasco, when developers routinely put their bad properties into bankruptcy while keeping their good projects, loan contracts now carry what are termed "bad-boy" clauses. These state that owners can be held personally liable for their bankrupt properties.
Pretty much all the securitized buildings are housed in special-purpose entities. Because they are single-asset LLCs, they get only 90 days from the time they file to fashion a reorganization plan with a good chance of success, or creditors can petition the court to lift any stays. That kind of timetable isn't at all realistic in these times, when just finding debtor-in-possession financing is a major undertaking.
One of the very few property-related bankruptcies so far focused on a Chicago property called Hotel 71. The complicated case was anything but satisfactory. Distressed private equity shop Oaktree Capital Management LLC actually tried to foreclose on the equity of the holding company. The developer put the company in bankruptcy to prevent foreclosure. At that point, secured lenders of the actual property commenced a second foreclosure, this one of the hotel itself. The lenders eventually carried out an auction. Bids were well below value. "We ultimately decided to take the property back," says Brad Erens, a Chicago-based partner with Jones Day, which represented the special servicer.
Erens, for one, believes commercial property-related bankruptcies will inevitably follow. "At some point, borrowers will file. We just haven't seen it yet."
But Tomlinson counters that the bankruptcy-remote structures coupled with the bad-boy-type springing guarantees will "significantly dampen foreclosures that turn into bankruptcies." He adds that bankruptcy judges will probably have to rule on the legitimacy of bankruptcy-remote vehicles. "I think they ultimately will be upheld," he says, but cautions: "There's no playbook. A lot of things will be done for the first time. Literally."
What could really bring the crisis to a head is a crackdown by regulators on financial institutions demanding they clean up bad loans. If regulators demand lending institutions revalue the assets that secure the loans and institutions demand that borrowers fork over a hefty percentage to pay down the loan, financial institutions will have to foreclose.
Even now, banks are taking a chance by holding on, says Barksdale. If they modify the loan for 12 or 18 months, "they might have an asset worth significantly less," he says. But if they foreclose, "no one is buying."
Or offers they do extract may be going for a quarter of the value banks have on the books, he says. To date, the impetus has been to do nothing, if at all possible. "Things will continue to be pushed out until there's pressure from the outside accountants and regulators," Hollowell says.
Only when owners can't pay their debt will lenders be forced into action. That was the case with 111 West Monroe Street in Phoenix. Principals at BCL didn't return phone calls seeking comment. But those familiar with the building's fate say BCL defaulted after an equity partner collapsed.
That partner: a bankrupt firm called Lehman Brothers.
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As economic activity and PONZI finance fall off the face of the earth, we enter the stretch run of the CON game known as the Bond and FIAT currency markets. Although both are headed for their ultimate demise, the path will be quite different. In 2009, these challenges will be headed your way. Prepare properly and thrive, or fail to do so and fall to your demise.
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As every government policy failure appears, public servants will stroke the fear in the ‘something for nothing illiterate’ and use it to nationalize and destroy more and more of the private sector. They will double down on the spending, borrowing, printing and taxing required to pay for the next absurd idea to come out of the G7’s capitals. Look no further than Obama’s “Economic Recovery and Stabilization” stimulus package which spends 12 cents of every dollar on economic stimulus and 88 cents for sustaining and enlarging government spending and programs. A perfect name to DUPE America the Illiterate.
Morally, fiscally and intellectually BANKRUPT public servants and crony capitalists. Now we know why the banks and financial sectors were the greatest campaign contributors in the last election cycle and Obama’s inaugural election. Decisions are being made upon political considerations, not economic ones.
This is a nightmare on WALL STREET and MAIN STREET . A one percent loss on outstanding loans and derivatives turns ALL the biggest banks in the G7 into TOAST. What do you think the odds are of this happening? 100%. Once you see the picture you will understand why they are extremely cautious with their lending; they are on a tight rope. I don’t care how much the mainstream financial media hoot and howl, these banks are WORTHLESS and so are their debt offerings.
Black clouds are gathering above the horizon. The IMF just announced that the world trade collapsed by staggering 45% in the last quarter of last year. Even the euphoria of Obama’s inauguration didn’t last long. The same day Dow closed below 8,000 as banking fears were gripping the European markets and bringing shockwaves from the United Kingdom too. British Banks got a £1TN injection which didn’t prevent RBS shares to plunge 70%. London is faced with a bloodbath. Brown admitted there is not yet a limit on how much risk taxpayers must bear as a result of his rescue plan, but he even promised financial institutions that they will get more cash if they pass it on . Looks like the Brits are too being set up for the mother of all crashes. With the UK government debt alone and future liabilities not included, this means that every new baby is born with £17,000 debt.
The industrialized economies are on the verge of bankruptcy. China will not be of much help. It has its own set of problems preventing its economy from dropping below 5%. The question is: when will the global collapse be, not whether? Will fiat currencies tank? Will there be financial chaos? Time will tell. Celente and GEAB forecast by March 2009. We will know soon!
Monday, February 23, 2009
ACORN's Stimulus
(Info From Other Blogs)
ACORN's Stimulus for various vote fraud and extortion rackets. The legislative package provides these funds without the usual prohibition on using government money for lobbying or political activities. Obama proves again he is a FRAUD and LIAR!
With a new president ensconced in the White House, it's time to roll out the goodies for loyal supporters in left-of-center political advocacy groups such as ACORN.
The latest economic stimulus bill promises to do just that by providing a huge bailout --up to $5.2 billion in taxpayer funds -- for some of the same liberal groups that helped get Barack Obama elected.
The three relevant fiscal provisions are buried deep in the $825 billion monstrosity known as the proposed "American Recovery and Reinvestment Act of 2009."
Title XII of the spending legislation backed by the Democratic congressional leadership and the Obama administration would dole out $1 billion in old-fashioned slush funds for the Community Development Block Grants (CDBG) program. Local politicians love CDBG because it is flexible. The program gives them wide latitude when spending grant money and allows local leaders to use federal dollars on local projects that they wouldn't dream of spending their own local tax dollars on. ACORN loves CDBG because it is adept at lobbying for CDBG funds.
A separate $10 million is provided in the stimulus package to develop or rehabilitate low-income housing under the Self-Help and Assisted Homeownership Opportunity Program (SHOP).
But the biggest chunk of the $5.2 billion comes in the form of $4.19 billion for foreclosure relief through the Neighborhood Stabilization Program.
Although ACORN operatives usually get their hands on such funds only after they have first passed through the U.S. Department of Housing and Urban Development or state and local governments, the new spending bill largely eliminates these dawdling middle men, making it easier to get Uncle Sam's largess directly into the hands of the same people who run ACORN's various vote fraud and extortion rackets. And the legislative package provides these funds without the usual prohibition on using government money for lobbying or political activities.
The current version of the stimulus package would allow nonprofit groups to compete with states and localities for $3.44 billion from the $4.19 billion Neighborhood Stabilization Program allocation. The remaining $750 million from the program plus the $10 million in SHOP funds would be set aside exclusively for nonprofit groups.
Probably chief among the groups to benefit from stimulus spending will be ACORN, the infamous network of 100-plus left-wing activist groups.
As everyone who hasn't been in a coma for the last year knows, ACORN and President Obama go way back.
You may remember in October when ACORN's CEO, "chief organizer" Bertha Lewis, appeared in a YouTube video in front of a banner reading "Working Families Party: Fighting for Jobs and Justice," and endorsed Obama for president. (The Working Families Party, a minor New York party, is an ACORN affiliate.) This plea to voters eliminated any doubts that the most diehard benefit-of-the-doubt-giving ACORN supporters may have been harboring that ACORN's voter-registration and get-out-the-vote drives were aimed at getting conservatives and Republicans to the polls.
ACORN's national political action committee, ACORN Votes, also endorsed Obama. ACORN national president Maude Hurd said Obama was "the candidate who best understands and can affect change on the issues ACORN cares about like stopping foreclosures."
You may also remember that during last year's primaries, the Obama campaign paid $832,598 to Citizens Services Inc., another ACORN affiliate, for get-out-the-vote activities. It's also well known that Obama led a voter drive for ACORN affiliate Project Vote, represented ACORN in court, and lectured at ACORN on organizing techniques.
Then-candidate Obama promised a gathering of community organizers in December 2007 that he would involve them in the policy process. "Before I even get inaugurated, during the transition, we're going to be calling all of you in to help us shape the agenda. We're going to be having meetings all across the country with community organizations so that you have input into the agenda for the next presidency of the United States of America."
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"Stimulus" Hidden Healthcare Horror
Much of the criticism of the $787 billion stimulus bill is focused on its cost. But what's really at issue is a matter of life and death. Buried deep in the package, there is an expensive new healthcare program that could jeopardize the health, even the lives, of millions of patients.
The bill funnels about $1 billion into government-run "comparative effectiveness research" (CER). Sounds innocuous enough -- that's a relatively paltry sum given the package's $800 billion-plus price tag. But CER will have profound effects on the availability of top-notch treatments in this country. Stripped of bureaucratic jargon, it is the precursor for a national healthcare rationing board.
CER basically involves comparing different pharmaceutical drugs, medical devices, and other treatments in order to determine which is most cost-effective for fighting a particular disease. Theoretically, that sounds like a good program. But, in practice, CER will likely be used to justify rationing and restrict patient treatment options.
That's been precisely the result of CER programs in other countries.
Britain's comparative effectiveness agency, the National Institute for Health and Clinical Excellence (NICE), recently denied approval for the osteoporosis drug Protelos. NICE officials claimed that it was too pricey to be covered by the country's public insurance system. Never mind that research shows that Protelos's cheaper alternatives aren't effective for one out of every five osteoporosis patients. Countless Britons will now suffer from preventable bone fractures.
Canada's government-run healthcare system is equally stingy about approving state-of-the-art medical treatments. One recent example: A 57-year-old man living in Alberta went in for treatment for an arthritic hip. A specialist recommended he receive a cutting-edge surgery known as "Birmingham" hip resurfacing. Public bureaucrats denied the man coverage for the procedure, claiming he was "too old" for it. Worse still, they forbade him from paying for the procedure himself on the private market.
Virtually every government-run CER program ends up closing off patient access to the best treatments in the name of "cost consciousness." When bureaucrats are put in charge of medical care, cutting down on bills is prioritized over fighting disease.
So it's imperative that this CER proposal be closely scrutinized and that, at the bare minimum, appropriate checks be put in place to insure the program doesn't compromise patient health. The deeper the government's involvement in the healthcare sector, the more life-or-death decisions are handed over to callous budget analysts instead of individual physicians and patients.
It's important to note that CER wouldn't just determine the care options for patients covered under public health insurance. The program's determinations will affect everyone. The federal government is the single biggest buyer of pharmaceutical drugs in the country. If, based on CER findings, the government decides to stop covering a particular medicine, public programs will stop buying it from its manufacturer. But medical companies will have a hard time turning a profit on a particular treatment if the government isn't a customer, and many will be forced to simply stop producing it altogether.
There are plenty of proposals included in the stimulus package that aren't actually tied to economic recovery. But CER is the only one that threatens the lives of countless Americans. It's too dangerous to be ignored.
Sunday, February 22, 2009
Ahmadi Nezhad's New Task: Presenting Mehdi To The World Barack Hussein Obama The Anti Christ
Iran's president believes Allah has chosen him to prepare the world for the coming of an Islamic 'savior' called the Mahdi. Iran's president believes the islamic 'saviour' mahdi is barack hussein obama!
Iran presents the anti christ obama the mehdi to the world
Presenting Mehdi To The World, the ANTI CHRIST Barack Hussein Obama!
La Herradura (13 Nov.) Content to have executed the wishes of his boss in sending a message of congratulation to the new American President-elect, Mr. Barack Obama, the fanatic Iranian President has set himself a new “mission”: presenting imam Mehdi, or the Shi’a Muslims messiah, to the world.
Regardless of the fact that his initiative has triggered more criticism than approval by the clerical-dominated establishment, which generally considers the message as “hasty”, “unconsidered” and “ill advised”, Mr. Obama must realize the important significance of the decision, meaning that the man who has sent him the message is not Mr. Ahmadi Nezhad, but the leader, and therefore his reply must be addressed to the right man: Ayatollah Ali Khameneh’i, the man who in the Iranian system, takes all major domestic and foreign decisions.
Meantime, and while waiting for Mr. Obama taking the helms in Washington, Mr. Ahmadi Nezhad has called on Iranian experts in economy to “draw plans for solving the world’s financial and economic crisis based on Iranian indigenous methods” and urged Iranians to “present the Imam of the Rightfulness to the international public”.
According to Shi’a Muslims, Mehdi, their twelfth imam who went into hiding in a well in the city of Samarra, in Iraq, when he was eight year-old some 1.400 years ago, would reemerge when the world is saturated with sin, corruption and injustice. This is why Mr. Ahmadi Nezhad, in true believer in the powers and mission of imam Mehdi, has, with all members of his cabinet, pledged to him in writing to prepare his reappearance, due to take place from a well in Jamkaran, near the holy city of Qom, 150 kilometres south of the Capital and the cradle of militant Shi’ism.
His relationship with the Waiting imam is such that according to his close aides, when he went for the first time to New York to address the United Nations General Assembly three years ago, the hided messiah visited him while delivering his speech. Does anyone know where Obama was on that day?
The information that I want you to see is Ahmadi Nezhad speaks for the Muslims of Iran. He says Obama is the mehdi or their twelfth imam. The mehdi or 12 imam is the ANTI CHRIST OF THE BIBLE. Iran is telling us Obama is the anti christ.
Here is a qutoe from Ahmadi Nezhad: “My new duty, our new duty is to present the imam of rightfulness to the world, to the international community. We must try hard to make the international public opinion to know and to listen to the message of Mehdi”, Mr. Ahmadi Nezhad insisted.
Mehdi is the anti christ and ahmadi nezhad is telling us to listen to Obama and change international public opinion.
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What Should We Make of Mahmoud Ahmadinezhad’s “Letter to the Noble Americans”
On November 29, 2006 the dubiously-elected President of Iran, Mahmoud Ahmadinezhad, had published in his name an epistle to the people of the United States. Herewith is an analysis of, and commentary upon, this letter1 (with relevant quotations of Ahmadinezhad’s reproduced):
Right after opening with the bismillah, invoking Allah the Merciful and Compassionate, Ahmadinezhad prays that God will “bestow upon humanity the perfect human being promised…and make us among his followers.” This perfect human being is none other than the Awaited Mahdi, usually called the Twelfth Imam in Iranian Shi`ism. The Mahdi is “the rightly-guided one” who will, according to both Sunni and Shi`i traditions, come before the end of time to create a just global caliphate. (The major difference is that for Shi`is he has already been here, and will return from hiding; for Sunnis he has yet to emerge into history: a comeback v. a coming out, if you will.) Ahmadinezhad uttered the same prayer twice, back in his September, 2006 address before the U.N. General Assembly.
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A dispute that has marked duodecimo (Twelver) Shi'ism for over 1,000 years.
The duodecimo Shi'ites believe that Allah created the world for the family of Muhammad and bestowed all power on 12 descendants of his favorite daughter Fatimah. The last of the 12, one Muhammad bin Hassan, known as the Mahdi (The Guide), disappeared in 940 AD, ushering in a period of "ghaybat al-kubra" (Long Absence) during which no government anywhere in the world has legitimacy. The return of the Hidden Imam, the Mahdi, will mark the end of the world as we know it and the start of a new and perfect one.
The theological division among Shi'ites concerns a simple question: What should believers do while the Imam is absent? One doctrine, known as Intizar (waiting) maintains that the best that believers can do is to be patient and wait until the Imam decides to return. Followers of that doctrine are known as Muntazeris (Those Who Wait).
That doctrine is opposed by another known as Ta'ajil (To hasten). Its adepts believe that believers should act to hasten the coming of the Mahdi. The Ta'ajilis (Hasteners) insist that believers should seek to unite the entire Islamic ummah and lead it into battle against the "Infidel," with the view of provoking a final showdown for global domination in the hope that, when the crunch comes, the Hidden Imam will return to ensure the victory of the Only Truth.
Throughout history, the overwhelming majority of Shi'ites in Iran have subscribed to the doctrine of Patient Waiting. The new elite, however, is decidedly seduced by the doctrine of Hastening the Return. President Ahmadinejad openly claims that the aim of his government's actions is to hasten the coming of the Mahdi.
The Hasteners have put together a powerful coalition backed by large segments of the military and security services. This includes the Fedayeen (self-sacrificers) of Islam, the Coalition of Islamic Associations, the Hezbollah (Party of Allah) and the United Front of the Followers of the Imam.
“My new duty, our new duty is to present the imam of rightfulness to the world, to the international community. We must try hard to make the international public opinion to know and to listen to the message of Mehdi”, Mr. Ahmadi Nezhad insisted. I have repeated what this crazed devil said in Nov 2008. He believes Obama is the mehdi or their twelfth iman. The mehdi or twelfth iman is the anti christ of the bible. So is their any doubt who Obama really is now? The Shi'ites muslims in Iran think Obama is their saviour mehdi. Ahmadi Nezhad has been quoted as proclaiming this. If Iran thinks Obama is the anti christ do you still think he is just a guy with no birth certificate? Who do you think the "daddy" is now!
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This 60 minute blog talk radio program gives Americans real insight into the threat we face from Islam. A former muslim Walid Shoebat converted to Christianity now exposes the truth about the koran. It is an extremely revealing and interesting 60 minute program that will make you question who Obama is and what the koran teaches about christians and jews. If you ever wanted to know who the "man" behind the curtan is and what "it" has planned for this world listen and learn. This interview is a window into the near future. A show for people seeking the truth.
Walid-Shoebat-former-Palestinian-Terrorist.mp3 (14.4 MB) (Right Click To Download and Save)(Left Click To Play)
The Andrea Shea King Show | BlogTalkRadio Feed
Walid Shoebat, former Palestinian Terrorist - Feb 21,2009
Walid Shoebat, former Palestinian Terrorist Interview
My suggestion is to take notes as Mr Shoebat explains the threat that is all around us. It is the hidden threat that an angel of light is operating on a local and national stage. The threat is real. Become aware of this threat. Most Americans are not aware of this threat because of its hidden nature. It is as the host said a cancer growing in America.
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Ryan Mauro founded World Threats dot com, and is tonight's guest to discuss the film that exposes the 35 Terrorist Training Camps that are right here in the U.S. - Too Important of an episode to miss!
35 Terrorist Training Camps in U.S., video exposes this
WorldThreats.com
The Christian Action Network
Home Grown Jihad Terrorist Camps Around The US
Anti Terrorist Links
Paul Revere BrigadeThe Paul Revere Brigade rallies to guard against Islamic jihad.
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