There will be more than Banking Profits to be squeezed in the coming months

Implications: “This is the classic credit crunch,'' Geisst said. ``It might not have gotten to credit cards, it might not have gotten to car loans, but it's coming.’’ ...And yet there are those that keep trying to put a happy face on the reality of the situation. Sorry for the length of this analysis, however, this is needs to be understood by all and there is no short way of relating the enormity of the problem.

Analysis:  This writer has been writing for months about the impending banking debacle triggered by real estate’s easy credit for both the Residential and Commercial sectors and the smoke and mirrors Wall St used to sell Collateralized Commercial Paper-Mortgage Backed Bonds.    

The ripple effects are starting to be felt which this writer has said will take some time. The pundits who thought the worst was over in August/September were totally mistaken and unrealistic in their thinking and forecasts. It’s as if they were trying to will the negative situation away. The subsequent economic fall-out which some have suggested are pointing to the fact the Nation is in the early stages of a recession or near recessionary levels are starting to be quantified. It is just a matter of time before the events that are unfolding in the financial sectors begin to cascade and flow over to credit cards and other consumer debt instruments.  


What needs to happen is for those folks who can’t believe the party is over to take a good and honest look around and see, the lights have dimmed, the smell of stale beer is all around, and the band has packed up and left the building. These folks need to come to the harsh reality of current events and what the next few years will hold for the economy. Being in denial does not create the business plans which are needed to put positive plans into action to counter the effects of recession or a dramatic down turn.    


In DC one noted economist has stated that the region faces zero % chance of falling into a recession while the rest of the Nation only has a 40% chance. He continues to suggest that demand for housing will pick up in the second half of 2008, which is the same prediction NAR is making. The question once again has to be asked...where is the demand coming from and how is it being created? The real view can be read by clicking on the following link from a Washington Post Article dated January 4th 2008. And what you will read is a microcosm of what is happening in the overall economy of the Nation and this happening in one of the Top Two Cities economically in the United States. http://www.washingtonpost.com/wp-dyn/content/article/2008/01/03/AR2008010304053_pf.html      


For so called experts to be in this state of denial is going to do more harm than good. Their state of denial is totally counter-intuitive to all that is going on. Some people will point fingers at the National Media for overstating the problem...sorry but reporting that $35 billion in write-offs by the major Wall St Banks is not overstating a problem. The banks themselves are reporting these numbers, and you can be sure very reluctantly. They are not going overseas with hat in hand begging for infusions of capital because everything is OK.  


When the Global Economy is based on the free flow of capital based on strong financial fundamentals, and not smoke and mirrors as seemed to be the case the last few years, you will have real prosperity. When the system breaks down you have a free fall, and until the credit markets have signaled an all clear, that may mean years and not months. Not until then will business return to “normal”. Even when the banks regain their footing, lending will once again based on traditional underwriting standards such as what was the case in the Mid-1990’s after the last commercial real estate collapse.    


So all those high priced, highly or overly leveraged commercial real estate purchases that were bought on “forecasted” or pro-forma income that was totally unrealistic, what happens to those properties? Can they be sold to another investor...not for a profit? What will happen is the rate of foreclosures will start to rise and the smart money will be buying those properties for much less than what was paid in the last couple of years.   Here is a documented case study just published today 1/17/08 from CommercialRealEstateDirect.com, about a Texas Mall whose loan is now being reviewed for downgrade because the net income hasn’t met the original forecasted cash flow expectations...the underwriting of the debt service is the part you should take notice of and the fact that the owners tried selling this asset in 2006 and failed, which is before the current mess hit in 2007... The loan included three one-year extension options. But those were subject to the property meeting an overall debt-service coverage level of 1.03x. The loan has fallen short of that, resulting in its being transferred to the CMBS deal's special servicer, Bank of America. The loan's senior participation pays a rate pegged to Libor plus 107 basis points, while its junior participation pays Libor plus 400 bp, for a blended spread of Libor plus 230 bp, according to a regulatory filing. As a result of the transfer, Fitch said it placed the deal's $18.9 million class L, which is rated BBB-, on rating watch negative. The mall was purchased in 2003 by Cypress Equities, an affiliate of Staubach Co. The company eventually improved the property, adding a multiplex movie complex and lining up a floating-rate mortgage because it wanted the flexibility to sell the property after it had increased its value. It placed the property up for sale in 2006, but evidently failed to find a buyer. When the loan was originated, the property was 78.4 percent occupied. It had generated $4.2 million of net operating income in 2005 and $3.6 million in 2004. But the loan was underwritten under the assumption that it would generate $4.8 million of NOI. The property was appraised in 2005 at an "as-is" value of $62.3 million. It was given an underwritten-appraised value of $71.1 million, which assumed the property would be 90 percent occupied. At the time, it was 65.9 percent occupied. The property is now 90 percent leased, according to Fitch, but it is generating less than what is required to service its entire $60 million debt. The rating agency said its debt-service coverage level is 0.88x. Now you see the problem and this is but one of many properties that will experience the same fate.      


With no readily available credit the economy has to slow and with the banks in this kind of turmoil, you have the early 1990’s all over again. Will business come to a complete halt, no, but it will seem that way to many who got used to easy credit terms and high volumes of activity. Now they may actually have to look at investments the old fashioned way and decide if they make sense based on “REAL” fundamentals and the like.  


So the question is Now What, and when will those in denial come to their senses, and stop treating those that are talking about current realities as nay sayers and being unpatriotic or just being plain old negative? Its not the job of those in business to be the pitch persons for selfish agendas such as the NAR and commercial real estate brokers or media hungry economists.


Remember, this recession started with the residential real estate meltdown and will end when that market corrects itself. To think otherwise is to not really comprehend the amount of direct impact the housing sector has on the economy.  


Every recession has centered around a housing slump, so once again with the foreclosure rates escalating, where is the demand side of the housing market? Where will the mortgage money come from? The Federal Government...well Fannie Mae and all are having their own liquidity issues. So Now What?  


The now what is this is just the beginning of a slow and painful economic decent which Americans business will not be able to adjust to easily, knowing how they demand instant gratification and instant results just as the vast majority of American Citizens have no patience. If American business wasn’t so impatient, this mess would not have happened. It is due to the fact businesses, bankers and people weren’t satisfied with lower than normal returns in 2001-2003...its called greed. Of course the Federal Reserve under Mr. Greenspan has much culpability in the current mess that we find ourselves.


Mr. Greenspan was so worried about deflation and a depressed economy after the tech bubble burst and 9-11, that they artificially lowered rates to unheard of levels and did not start to raise them soon enough.   And now they pay the price for their actions.  


There is political will to interrogate baseball players but not correct the ills of how business was done in the real estate lending sector nor the will to deal with the biggest reality yet to come.  


That reality is the aging of the Baby Boomer Generation and there not being enough money to support their entitlements, which will begin knocking on the government’s door in 3 short years. Probably around the time this current mess has finally been cleaned up.


If you doubt the validity of this statement, look at what has happened to GM, and also take a look at the report by the Commission on Social Security which was created back in the mid-1990’s by then President Clinton which probably has a few inches of dust sitting on its cover.


That reality has been totally ignored just as the reality of the current economic situation has and continues to be. That is the “Now What”!