We Never Learn

Posted by urbandigs

Sun May 31st, 2009 08:57 AM

A: And this will ultimately lead to more problems later on. I read this in the NY Dear John section this morning, right before I head out for work.

Via NY Post:

DEAR JOHN: I purchased my first home, a condo, for $384,000 in September. I have a mortgage of $332,000 through Wells Fargo and Fannie Mae. At the time of the purchase, my monthly income was $4,000. Since then I have lost a job and a got a new one which pays me $2,600 monthly.

My mortgage is $2,116 a month and maintenance is $194.31.

So I figured I would call Wells to see if I qualify for this "so-called" government relief program. They told me that I did not qualify -- for the loan modification program. And they told me I couldn't even refinance because I don't have enough equity.

The current mortgage is a 7-year fixed at 5.75 percent interest only. I really need to change to a regular 30-year fixed at a lower rate.

If I don't qualify for any help, who does? Do they really want me to default? As of now I haven't missed or been late on a payment. Who gets the help? J.F.

Forget John's response, my reply would have been...'why the heck did you buy a place you could not afford with an annual income of $48,000'?

This woman puts 15% down, or $52,000, and takes out a $332,000 loan while taking home only $4,000 a month in gross income! Forget for a moment that you have to pay income taxes, sure slightly less with deductions, and you have to have money to eat and survive. And what about other debt obligations - credit cards? It doesn't mention anything but certainly I think its safe to assume this buyer has some credit card debt to service?

But, lets assume the best and say she has no other debts and is of great credit! Still, this woman bought a place way above her means, and now she is wondering whether the bank 'really wants her to default'; as if its the banks fault! Its the banks fault for lending, its the person's fault for buying.

DEBT/INCOME RATIO - to calculate d/i ratio, you simply divide your total monthly debt service obligations by your gross monthly take home pay. Generally speaking, banks like to see a d/i ratio of 28% or less. This went completely out the window during the parabolic credit years of 2003-2007, when the party stopped. I was under the impression that natural market forces whipped the banks into shape, where exotic loans went extinct and underwriting standards naturally tightened. In short, I thought the banks realized that they need to start lending to people who are worthy and stop giving people a loan that cant afford one! I was wrong and the same shit is happening now, probably because there is pressure on banks to lend to stop the natural market forces from purging the excess from the system that is ultimately painful to banks. We have become a society that bails out everyone, so why stop making money when you have good ole Uncle Same to bail you out?

Back to the story. This woman made 4,000 a month, or 48K a year, and decided to buy a $384,000 house. Lets do some math. Her monthly nut is $2,116 and a monthly maintenance of $194, totaling $2,310 to service her ownership costs, and this is an INTEREST ONLY loan (hey, at least its not negatively amortizing)!

2,310 / 4,000 = 58% debt/income ratio

ARE YOU F**KING KIDDING ME!! How in the world did Wells Fargo allow this loan to go through? Have we learned nothing? Of course, macro fundamentals kicked in and this woman lost her job. Luckily, she found a new one and now makes $2,600 a month. Her debt obligations on the house alone, forget other possible debts, now takes up roughly 89% of her take home pay! Uncle Sam can forget tax collections on this woman, because her decision to buy just put her smack dab into the money pit! Now her home has lost equity, and Wells decided against refinancing her or modifying her loan to make it easier to maintain! Why would they anyway?

This woman made a very bad decision, bought a house she could NOT afford even with her 4,000 a month original job, and Wells gave a loan that should NEVER have been approved! We fail to learn from the mistakes that got us into this mess, and its probably because politicians are putting pressure on banks to lend to stop housing from falling further and keep the system going! When will we learn! How many more thousands of people are in this same situation?

One element of deciding whether or not you can afford a home, is by calculating what your debt/income ratio will be. Only you can tell how secure your job is and in this economy, nothing is certain. Debt/income ratio should at the very least, come in under 33%, or 1/3 of your take home pay. I prefer to see it under 28%. But you have to calculate in your total living costs of the purchase and your minimum payments on other debts.

This woman clearly didnt care, and probably just wanted to buy anyway - maybe she liked the granite countertops or marble bathroom. I bet a comparable rental would have been $1K/mth - $1,200/mth max. Now she will pay the price. Wells should not have granted the loan, and the market should have STOPPED this person from buying a home naturally. Yet, that didnt occur. Now, we have one more person that will likely eat up all her savings to service her living costs and max out other avenues of available credit, before defaulting. Good job America! Keep on truckin!

A Crazy Week in the Mortgage World

Posted by mortgageman

Fri May 29th, 2009 02:05 PM

This week might have been the most volatile period of time I've ever seen in the mortgage markets. Not only did I watch interest rates soar from 4.875% to roughly 6.25% in under 4 days (yes, there is a reason Noah talks about Stage 10 - the treasury impact on rates), but I now find myself asking the billion dollar question: What's next?

I'm going to try and keep this short and sweet (well, bitter sweet at least), here is what I see:

1. Today's 30 Year rate ---> 5.625%
2. Confidence? ---> Minimal
3. Bond Supply? ---> Enormous
4. Mortgage Originations? ---> Light
5. Government Intervention? ---> Immediate


For any of you reading this, that were waiting for a 4.50% rate when your mortgage professional was offering you 4.75% with zero points and it made sense for you to refinance, remember that contrary to Gordon Gecko's belief, greed doesn't always work.

The good news for those that are currently locked and have an application pending in the bank, you will be closing soon. Rates are obviously up and new origination activity is light, this means that your loan officer/broker will now have time to actually close your deal.

I find myself asking what is next these days. How much help do we actually need, will it work, and was this expected?

I understand that the Fed can come in and buy a ton of MBS/Treasuries and support their "quantitative easing" program, but this is a temporary band aid to an unstitched bullet wound - this is not a solution. At what point do we stop printing paper and realize that inflation will cross paths with us?

Mish discussed a Mortgage Market Lockup, via Mark Hanson at Field Check Group, as a side effect of this huge treasury move:

With respect to Wednesday’s episode in the mortgage market -- yes, it is as bad as you can imagine. Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse.

A good friend in the center of all of the mortgage capital markets turmoil said to me yesterday “feels like they [the Fed] have lost the battle...pretty obvious from the start but kind of scary to live through it ... today felt like LTCM with respect to liquidity”.e, leading many to ultimately shut down the ability to lock loans around 1pm PST.

The negative consequences of 5.5% rates are enormous. Because of capacity issues and the long timeline to actually fund a loan very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lender without a rate lock. This is because consumers are incented by much better pricing to lock for a short period of time…12-15 day rate locks carry the best rates by a long shot. But to get this short-term rate lock, the loan has to be complete enough to draw loan documents, which has been taking 45-75 days over the past several months depending upon the lender’s timeline. Therefore, millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund.

With respect to banks, mortgage banks, servicers etc, under-hedging a potential sell-off with the Fed supposedly having everybody’s back was a common theme. Banks could lose their entire Q2 mortgage banking earnings and middle market mortgage banker may never recover or immediately have to close shop.
I can't discount what Mark Hanson's contact is saying as far mortgage brokers submitting applications without rate locks and banks dropping large funds on loans that will never come to fruition, as it is being done. But this is not the smartest way out.

Clearly (especially in the current place and time) if the rates go up, I'm sorry to say but if you are a broker, you're screwed. Personally, I don't submit applications without rate locks as the entire mortgage environment is way too volatile. Had this been the refi boom of 2002 I probably would have, but not in times where MBS swings 10 ticks up or down on any given day.

Stage 10 Starting Already? Expect Fed To Step Up

Posted by urbandigs

Thu May 28th, 2009 12:23 PM

A: It seems there are rising concerns in the treasury market, marking what I referred to as Stage 10 of this crisis and part of endgame. From a trader standpoint, I define endgame as the final phase of a bigger situation; the end result of actions taken to deal with some sort of event or economic anomaly. There are no free lunches and many, including I, argue that there will be unintended consequences that will come from everything the fed/treasury has done to stem this crisis. I'm sure the fed is watching, but I would not expect them to announce any increase in planned treasury purchases until their next rate decision meeting.

Is the treasury market signaling growth ahead? No, and pimco-elerian.jpgI think PIMCO's CEO Mohammed El-Erian hit it perfectly yesterday:

"Your getting a lot of warning signs about this massive move we had in the 10YR yields, from 2.90% a month ago to 3.50% today, and that's not for good reasons, its for bad reasons. The market is starting to price in the enormous issuance and the fact that the treasury will have to lengthen its average maturity, when it comes to its debt. Secondly, the ratings news last week was worsened. And thirdly, importantly, people are starting to worry about potential inflation. They are starting to worry that the emergency liquidity is not going to b drained on a timely basis, because of political issues. The market is saying this is a very delicate time, and that it is very important that it is navigated well bot by policy makers and by investors."
Spot on. Higher rates could very well be the 'new normal' that we will have to get used to and it is entirely possible that we have already experienced the lowest lending rates we will see in the next decade. This is an unintended consequence of policy actions taken to stem this crisis. In my opinion, this is NOT the treasury market signaling future growth via a sharp economic recovery. Any inflation we see to start, will not be the kind that is associated with higher wages and higher asset prices - a symptom of an overheating economy. Rather, to start, I believe inflation will show up mostly in food, energy, metals, health care, etc., the stuff that shrinks profit margins and squeezes consumers wallets. The question is, what does our fed do next to combat this problem and how does that play a role in crimping growth? And for how long?

Hyperinflationists are screaming that real estate is the place to go to protect yourself from the ginormous piles of money the fed is printing that will eventual send inflation to the roof. I am not in this camp and would rather be in gold to protect against a possibility like this.

Here are my reasons:

1) Deflation will negate some Inflation - people seem to forget that we are experiencing deflation right now, and the damage has been done. Asset vales have fallen, trillions in securitized mortgage bonds losses, stock portfolios have been murdered, unemployment is soaring, debts are rising, bankruptcies are surging, and in general most people have seen a significant hit to their total net worth over the past few years whether it be from equities, falling home values, loss of job, or other form of distress associated with this slowdown. People are saving again and getting frugal after being whacked by a 2x4 by housing market forces. The initial wave of inflation will cancel out the deflation we are currently experiencing, and for all I know this stage may be occurring right now.

2) Government will understate inflation to protect Social Security - people seem to forget the govt's tendency to understate inflation when it seems to be rising and overstating inflation when it seems to be falling. Should inflation become the hyper variety, the cost of living formula for Social Security would have to be adjusted sending higher checks to recipients and putting massive pressure on the new date that the fund will be depleted. Hard to see the gov't releasing inflation data that causes such mass problems on this front, but thats just me.

3) Rates will surge if hyperinflation ensues - umm, if hyperinflation ensues, lending rates will surge. Can you imagine how affordability will be affected if a 30YR mortgage rate is 9% or 10% or higher? It happened before, and those that say it can never happen again, well, I hope your right. But in this new world, unintended consequences may include higher rates for all of us. The question is, how high, and how does the economy/consumers adapt? Do not forget that ZIRP is still in full effect and we only have higher to go from here as the fed figures out an exit strategy.

4) Housing needs credit to boom to see prices skyrocket - umm, we just experienced a parabolic credit bubble that went bust. Among other factors, this played a HUGE role in the housing bubble and bust. We are at now now, just experienced this, and now watching our banks getting nursed back to health. We are about to see regulation come in to make sure this excess doesn't happen again. With underwriting standards much tighter and regulatory watchdogs coming, I don't see a repeat of 2003-2007, when money was just handed out to anybody with a pulse and exotic loan products allowing anyone to buy something way above their means. People seem to forget that we are in store for a new, less sexy normal, and instead they look at housing as a stock that can easily rebound ('V' recovery) after a substantial fall! Me, I think we are adjusting to where we should be had no bubble ever occurred. The problem is a bubble did occur and markets have a tendency of overshooting to the downside as equilibrium is ultimately reached. Many people will never look at housing, in terms of the asset class, the same again!

5) Wage inflation needs to occur to see prices rise - probably the most important element in terms of a housing recover. In order for housing to not only stabilize, but to recover and start seeing price increases, you need to see consumers earning more and a stronger jobs market. Now, yes, I think we are in the peak of the monthly job losses right now that will show declining losses going forward as the cycle plays out, but remember that an economy the size of ours should add about 150,000 jobs a month. We are far from that and right now we have millions unemployed. So lets not kid ourselves that wage inflation is a big concern right now. If people aren't earning, and current homeowners lost a ton of equity, where is the purchasing power going to come from to sustain general price appreciation? Yes, you will see savvy deals being done and money being made out of distressed purchases, but certainly nothing in terms of sustainable general increases across the nations local markets.

6) Destruction of wealth in shadow banking system negates most of the fed's money printing - probably the most important element here when looking at the fed's printing. The banks losses were astronomical, and they are the ones that are the biggest beneficiary of all the feds stimulus/printing. People tend to think the feds money printing is just entering the system, and all those dollars chasing too few goods will cause hyperinflation. But the deflationary destruction that hit the shadow banking system, is GREATER than the stimulus/printing the fed has done. So, imagine 2 stacks of money. Under one of these stacks is a deep money pit where the pile of cash falls into. Under the other is no hole at all. Our situation is the first of these scenarios, with most of the money filling the voids left by deflation in the shadow banking system - and not entering the system, at least not yet.

7) Money is being hoarded in excess reserves, which pays interest to banks, instead of flooding the system - (view image at St. Louis Fed) there was a reason the fed started paying interest on excess reserves back in SEPT of last year! Right when that announcement came, the banks started hoarding cash in excess reserves. This was one way the fed sterilized its actions so that money didn't flood the economy. The real question is what happens if/when this money does enter the system via bank loans, bringing the fractional reserve multiplier effect back into full force. This is one thing the fed will have to deal with later on. I would NOT be surprised at all to see the fed raise minimum capital requirements as part of their exit strategy to contain inflationary pressures of massive lending of newly printed dollars.

8) Too much money chasing too few properties? - many define inflation as too much money chasing too few goods. Well, if we are going to see housing fly because of hyperinflation, how does the fact that we have tons of oversupply fit into that equation? Do we expect future supply to stop coming in and future demand to just keep picking up? Lets be real here. The consumer is deleveraging now and this process can last a while to purge the excess and repair balance sheets! Plus, its not like sellers of homes today have so much equity built up that they have a whole new arsenal of buying power - in fact, the opposite occurred and homeowners equity is plunging. Looking at where we came from, we just experienced a parabolic credit / housing boom that saw over investment, overcapacity, overbuilding, whatever you want to call it. We have too much supply! I don't see a housing shortage in the future but I do see a peak in months of supply either being hit already or being very close, especially as short sales and foreclosure sales continue to surge as part of the natural order of markets. We are yet to see the high end jumbo prime problems really hit full force, and I defined this as part of the 'Wave 2' that is ahead of us:
WAVE 2 (yet to come) - perhaps sparked by commercial, prime, jumbo, HELOCs, credit card writedowns. How quickly we forget that the IMF recently upped their total global credit writedowns estimate to $4.1Trln - this assumes total US writedowns of $2.7Trln, up $500Bln from previous estimate (view image).
Hyper-inflation is NOT a good thing! Was the 70s good? Yet I hear people arguing with such emotion, that housing will surge if hyper-inflation kicks in. I just don't see it and I explained why. Why anyone would want hyperinflation is beyond me. Buy a property because you are ready to buy a property and need a home, can afford to buy the property, your job is secure, because your an investor and the numbers make sense, because you are happy with the deal you are getting, etc.; not because you fear hyperinflation. Nevertheless, the voices are out there.

Ben had difficult choices to make: either one, face a modern day repeat of the Great Depression or two, inflate our way out of it and worry later about letting the genie out of the bottle. He picked the latter. Only history will decide what road was the better one to have taken. We are, however, on a path to rising inflation at a time when incomes are not growing and unemployment is high - for now, deflation is still the battle with signs that Ben's inflating is working. Hyperinflation, if it comes, will wipe people of their cash. The cost of living will go through the roof. Business margins will be diminished and may businesses will fail. Unemployment will therefore see increased pressures. This can contribute to the escalating delinquencies in housing, credit cards, car loans, etc.. Banks, however, will benefit from spreads but hurt in potential future losses. Yields in the term markets will be so high and short term rates so low that banks will make a fortune on spreads - part of the plan? If hyperinflation hits, mortgage rates could resemble the deep double digits of the 1970's, great for banks but horrible for housing - again, I don't see this happening but is certainly possible if hyperinflation occurs. Is this why hyperinflation worriers bought real estate to hedge against? Not until the federal reserve steps in to stabilize the dollar by tightening will the long end come down and that is years away.

I know this is a touchy subject, and the following are my thoughts only. Everyone has their opinions, and I would love to hear yours even if it is outright the opposite of mine. We are all in this together!

Latest FDIC Data

Posted by jeff

Wed May 27th, 2009 08:02 PM

Just a quick overview of highlights from the latest FDIC data for Q1 2009 with my comments.

Sharply higher trading revenues at large banks helped FDIC-insured institutions post an aggregate net profit of $7.6 billion in the first quarter of 2009.

Profits were still down 60.8% year-to-year, but much better than the $36.9 billion loss in Q408. Besides higher trading revenue boosting profits, lower provisions for loan losses also helped. Not exactly the most durable sources of earnings improvement....lower funding costs from quantitative easing by the Fed helped; at least that's something we can depend on.

Noncurrent loans and leases increased by $59.2 billion (25.5 percent), the largest quarterly increase in the three years that noncurrent loans have been rising. The percentage of loans and leases that were noncurrent rose from 2.95 percent to 3.76 percent during the quarter; the noncurrent rate is now at the highest level since the second quarter of 1991.

No news to Urban Digs readers here, just confirms what the top 100 banks reported to the Fed recently (Bank Credit Update). So why were provisions for loan losses down, exactly?
Total equity capital of insured institutions increased by $82.1 billion in the first quarter, the largest quarterly increase since the third quarter of 2004.

TARP, TARP & MORE TARP - Have the banks raised enough capital to absorb all their loan losses and start lending again? After all, what a great time it is to lend: spreads are near record highs, real estate values are down, borrowers who would invest now are likely the conservative, value-oriented types who didn't blow themselves up.

Total assets declined by $301.7 billion (2.2 percent) during the quarter, as a few large banks reduced their loan portfolios and trading accounts. This is the largest percentage decline in industry assets in a single quarter in the 25 years for which quarterly data are available.

Apparently, the answer to my question above is no, banks are lending less, not more. Admittedly, it is a few big banks that caused the asset contraction, but I fully expect smaller banks, who generally have much lower exposures to residential real estate loans and much bigger exposures to commercial real estate loans, to soon follow suit and cut lending drastically as they begin absorbing losses in earnest.

Twenty-One Failures is Highest Quarterly Total Since 1992

And we're just getting started! However, it will be smaller institutions for the most part from here on out and systemic risk to the banking system has likely passed....although systemic risk to the FDIC hasn't.


The table above shows the quarter-to-quarter and year-to-year changes in various loan categories as well as their impacts on overall lending. Frankly, I find the data somewhat surprising, but also somewhat intuitive. Banks have generally pulled back from lending in the categories where they have screwed up, like residential home loans and construction and development loans. Why they are growing their commercial real estate (nonfarm-non-residential bucket), home equity and credit card books (year-to-year) is beyond me....could penalties on late payments and delinquencies be increasing the loan amounts outstanding here???? Certainly forbearance and loan extensions have cushioned the commercial real estate balances. My guess is that the big quarter-to-quarter pullback in credit card loans is largely seasonal, but clearly the terms of credit card borrowing have become more restrictive and may be having an impact. As losses increase, which we are already seeing in the Q109 Federal Reserve Data, my guess is that lending will tighten up in nonfarm non-residential loans (the commercial real estate bucket), C&I loans and credit cards.

Real Estate Valuation Basics Class

Posted by jeff

Tue May 26th, 2009 08:01 PM


About a year ago, my partner Jim Gannon and I volunteered to teach a continuing legal education class on real estate valuation. We thought that in the commercial real estate market we envisioned that it would benefit lawyers greatly to have some background in real estate valuation. We believed that in many cases lawyers would be the first point of contact for distressed borrowers and that an understanding of real estate valuation terms and techniques would be useful in triaging the casualties of the coming downturn. We didn't expect it to be a year before our class was scheduled, but neither did we think it would take so long for the downturn to play out. We also didn't anticipate that it would be as severe as it looks like it will be. Fate has colluded to make the class a potentially compelling forum, in our humble opinions

During the ensuing year from the time the class was conceived, we were able to not only put together what we think is a really useful curriculum, without too much heavy math, but we have also been able to add some fantastic panel participants to bring life to the material. So while Jim and I will discuss real property interests, valuation approaches, the commercial real estate pro forma, cap rates, underwriting metrics and other various and sundry elements to real estate valuation, we will also have 2 really interesting panel discussions to bring the materials to life. The first a panel on the New York City real estate market including Marty Levine of Metropolitan Valuation Services, one of the premier commercial appraisal firms in the city and Marc Shapiro a real estate attorney with leading law firm Orrick, Herrington & Sutcliffe. The second a panel on the Distressed Condominium Deal features Lee Spiegelman of PLP Companies, whose family has been in the real estate management, construction and ownership business in New York long enough to have managed properties for Freddie Mac in the 1980s and 1990s, as well as attorney Roger Roisman, of Tannenbaum Helpern, who among his varied real estate activities has recently worked with many buyers of New York City condominiums.

Fortunately, the class is open to non-lawyers, so if any Urban Digs readers have an interest in the class, by all means please attend. Come for the commercial real estate education, come for the no holds barred discussions on New York City commercial real estate trends, past present and future......or send your favorite lawyer so they can get their CLE credits (we all know they have time to spare these days).

To register call (212) 382 - 6663. Non-lawyers receive the bar member's price of $215. Tell them Jeff Bernstein sent you and you will receive a 15% discount. Proceeds go to the bar association.

Fed Buys Less in 4-7YR Auction - Treasuries Plunge

Posted by urbandigs

Thu May 21st, 2009 12:43 PM

A: Don't say I didn't warn you about the HUGE issuance upcoming to fund our gov't operations, deficits, stimulus packages, and bailouts! If/when rates surge, all those that screamed YAYYYY for the Keynesian stimulus to get stocks back up will be walking around dazed and confused wondering 'where's the growth'? There are no free lunches and its quite possible we are now seeing the lowest rates we will ever see for the next decade. This is what is called an unintended consequence to policy actions taken to stem this crisis.

You want to know strange? Equities selling off, oil selling off, and treasuries selling off all at the same time. Where's the money going? Gold perhaps? Recall my feelings that being short long end of treasury curve and long gold as a texas hedge against unintended consequences of policy actions and money printing:

"One big fear I have right now, which happens to fit as a texas hedge with my gold trade, is a sharp selloff in some bond market, in some country, somewhere, at some point down the road. Its a very possible event that could spark a global equity selloff that ultimately earns a color to depict the day it happens on! This is part of the gold trade."

The news from Across The Curve:
The bond market failed to attract even a modicum of a bid and that motivated the sale.
Keep in mind the treasury market is set for $101,000,000,000.00 of issuance in the next holiday shortened week! It seems the fed only purchased $7.398Bln of 4-7 yr notes today out of more than $45Bln submitted! Hence the market reaction. Keep your eyes on this as endgame ensues.

Contracts Continuing To Be Signed

Posted by urbandigs

Thu May 21st, 2009 09:04 AM

A: Many of you may have noticed your SAVED searches on Streeteasy.com are starting to dwindle? Are you? Speak up in the comments about what you are seeing so we can all get a clearer picture. For the past few months this market has been steadily picking up steam and it seems the past 3-4 weeks have been particularly active in seeing deals happen - and the normal euphoria that the worst is over with it. I don't need to remind everybody here of the seasonal nature of this local market, which is why you must use either a seasonally adjusted measure of activity or compare data y-o-y to see the bigger picture. How did this wall street bonus season compare to previous ones? It's active because it's supposed to be active now. But the busy season is coming to an end, and once you get past Memorial Day Weekend we get into the transition period to the slower summer months. But this year is different because of what we experienced, and that is what I think is causing many to wonder if this pickup is a sure sign of a bottom.

Going back 2 years ago, I wrote about the seasonal nature of Manhattan's marketplace:

If I were to visually design for you how the NYC real estate market is seasonal, it would look something like this, for months JAN - SEPT. I left out OCT-DEC because those months seem to me to be very erratic; sometimes hot and sometimes cold. The months of JAN - SEPT have market characteristics to them that are easy to notice and eventually take advantage of:

But when the busy season starts right after a frozen 4th quarter that saw hardly any deals done, even the slightest pickup will seem to be more than it is. People are really starting to wonder, is this it? Is this market at its bottom and on the road to recovery? Of course you know my feeling on this, no, I don't think it is because of fundamental reasons and where this market came from. Prices are still too high compared to rent ratios, unemployment is still rising, there is still a strong negative wealth effect even with the markets 38% rally in 10 weeks, buyer confidence is still depressed, and the system of credit that allowed the boom to occur is changed forever. Folks, forget about seeing peak prices here for a long long time! Right now it is a question of when do we stabilize.

Lets start at the contracts signed trend for the past 6 months:

*IMO, contracts signed data is the lowest quality of all the data I collect. It is lagging in nature and only as good as the agent that updates the listing and the system that picks up on this update. It is good to watch for trends, but that is as far as I will look into it. I will try to solve this problem for UD 2.0.

When you go from a weekly average of under 10 contracts signed to a weekly average of between 20-30 contracts signed, you are bound to both hear and see this activity on the blogs and in the field. Many of you may have noticed those saved listings are now IN CONTRACT, and you are wondering if you missed the boat? I continue to call this a countertrend pickup in activity embedded in a larger adjustment process - nothing goes in a straight line and there will be deals at every price.

This is the psychological aspect of home ownership; yes there is a huge one. Put timing the market away for now and lets just talk this out. Missing out on a few of the homes you have been keeping your eye on, may make you a bit edgy and more eager to pull the trigger if another home you like happens to hit the market. Emotion plays a role here, and I always try to remove the emotional element in my consults with my clients so we can focus on what the market is doing and where the product is likely to trade given current trends. Not to say emotion is a bad thing, its not, but sometimes it may cloud the bigger picture. If my clients like something enough, they bid appropriately regardless of what I say - that's how it works. To each his own and you can't day trade or perfectly time real estate - so at some point emotion will likely lead a bunch of sideliners to ultimately pull the trigger earlier than they may have originally thought. Will it move the entire market? No, of course not! Buyers are just comfortable making the decision regardless of where the market may be headed in the medium term.

On to the data. Over the past 30 days, my widget states:


Using one of my internal sharing systems that is a direct source for brokers, I see the following data for the past 4 weeks:


A bit of a discrepancy here. I would tend to monitor the internal system more, to be honest with you. But my widget has some rules to it that fine tunes the data so who the heck knows what is really going on out there. One thing is for sure, the period of MARCH - PRESENT saw a nice uptick in activity when comparing it to the frozen market in the 4-6 months prior. This will come out in the data later on, but when it does we should focus on the year over year changes instead of the month to month advance.

For me, instead of looking at month-to-month or quarter-to-quarter pickups, I like to focus on the bigger picture and the macro fundamentals for where we might be in the cycle:

Fundamentals ---> still deteriorating, although pace of decline has slowed and confidence has risen with latest equity rally (so called green shoots)
Wealth Effect ---> still big time negative, even with the latest 38% rally
Buyer Confidence ---> still depressed, although a bit less so with the rollover from peak to the first comfort zone + recent equity rally and green shoots media blitz
Affordability ---> price/rent ratios are still out of whack and with rents declining, the fall in property prices on this ratio is muted
Availability of Credit / Lending Standards ---> tight, tight, tight...the days of e/z money are gone and you actually have to prove you can afford a property to get a loan commitment. Credit has tightened and there is more liquidity in the mortgage markets from last year, but still not anywhere near what we saw during the boom years. Another wave of the credit tsunami can change this, so my eyes are watching out for that
Inventory ---> up abut 40% from last year, and up about 100% since I started collecting inventory data in late 2007 (total inventory was about 5,400 at that time)
Rates ---> something to watch out for as part of endgame to this credit crisis, will rates surge and how will this effect both the economic recovery and housing.

Yet with all this, contracts continue to be signed as buyers are comfortable putting money to work with this market trading down to its first comfort zone; a move down that most brokers/executives denied as even possible this time last year. If this market was so strong, you wouldn't see Coldwell Banker Hunt Kennedy closing its doors! Fact is, even with this pickup being reported the first two quarters of 2009 are probably going to prove to be the most sluggish in terms of number of sales in the past 10 years.

I will leave you with HSBC's MAY 2009 Mortgage Bulletin with the following Housing Update for Manhattan, which included the following charts. I'll let you interpret them on your own and I apologize that I don't have the full report available. Notice the first chart showing the widened gap between condo & coop prices and market rents - now that rents are falling too, it makes the down move in prices more muted for this ratio of valuation premiums and affordability:

*Sources: Prudential Douglas Elliman, Citi-Habitats, Miller Samuel

Reflation Trade?

Posted by urbandigs

Wed May 20th, 2009 10:52 AM

A: Seems to be on, but for how much longer remains the question! Equities up nearly 40% in 10 weeks, gold creeking higher ever so slowly to its highs, treasuries selling off.....hmmmmmmm, sounds like a reflation move to me! The 'reflation trade' was inevitable as a result of the fed's zero interest rate policy, trillions in money printing via QE, and fiscal actions taken to stem this crisis and prevent another depression. Ben wants to inflate. Banks are rushing to take advantage of this opportunity to fortify balance sheets by raising capital through stock offerings that are dilutive for shareholders. Keep in mind that those betting on the reflation trade via equities, should think about current deflationary pressures and how cheap the company's stock is after the huge move. Also, what commodity inflation can do to profit margins down the road. An era of shrinking profit margins could be ahead of us as endgame ensues - remember, there are no free lunches.


Here is what a reflation trade looks like:

Equities UP 40% in 10 weeks

Gold UP 8% in 7 weeks

10YR Treasury Yield UP 70 basis points in 9 weeks

I gave my thoughts about using Manhattan real estate as a hedge against inflation in March:

"The combination of where we came from and what has changed that allowed the boom to take place, must be taken into account when looking into the future. In short, prices are still high and the system of credit that was in place during the boom, has deconstructed itself.

Given the artificial lowering of rates by our fed through rate cuts, lending facilities, and quantitative easing, the snap-up of rates may be quite fierce - unless of course you think that the fed can keep low rates forever and ever, without any consequences at all. I wonder about things like, how will housing perform if mortgage rates are 200-300 basis points higher? I think early signs of inflation will move the markets that make money more expensive, and that means inflation as an unintended consequence of policy, will act to depress real estate a bit further as the latter stage of the housing cycle plays out. I want to buy towards the end of that phase, not in anticipation of it for a hedge."
The re-flation trade will move markets, and as that occurs borrowing costs are likely to rise. The fed will try to contain it when they announce an increase in planned purchases of treasury securities - who knows when they announce this. We may very well be at the beginning of an era marked by declining profit margins if this inflation trade continues; especially in the treasury and commodity markets. I'll discuss thoughts on that in detail in another post.

Bank Credit Update: C&I Starts to Unravel

Posted by jeff

Wed May 20th, 2009 06:48 AM

It's time to revisit bank credit quality again, utilizing the information collected by the Federal Financial institutions Examination Council of the Federal Reserve. I've been doing this rather depressing task for a year or more now. The idea has been to chronicle the unwinding of the debt bubble using data that are not influenced by mark-to-market accounting. Additionally, because this data set was originated after the last major real estate downturn, it includes a couple of economic cycles including a the early 90s "credit crunch." As longtime Urban Digs readers know, the numbers have been shockingly bad and have given lie to the notion that the credit mess is being way over-exaggerated by mark-to-market accounting and a broken securitization system.

The delinquencies you see in these charts are real individual loans going bad as real borrowers stop paying their debts. The charge-offs are real writedowns by banks of the value of the loans they can no longer collect.

Here are the particulars regarding these statistics from the Fed's web page:

The 100 largest banks are measured by consolidated foreign and domestic assets.

Charge-offs are the value of loans and leases removed from the books and charged against loss reserves. Charge-off rates are annualized, net of recoveries.

Delinquent loans and leases are those past due thirty days or more and still accruing interest as well as those in nonaccrual status.

Now, one can argue all day that the broken financial markets have caused the broken economy and vice versa....some will even argue that the economy is now fixed. However, the data you are about to see suggests something else, and that is that we are just entering the teeth of this credit crunch, with likely negative effects on the general economy, if not the credit card market, commercial real estate market and now corporate debt market. Until now, I was not tracking the corporate loan market, believing that it was far enough away from the eye of the storm to be a side show. This may still prove to be the case, but recent trends are ominous. So here goes.

Residential Real Estate Loans:

Residential real estate lending continues to be an utter, unmitigated, butt ugly disaster....can I be any more emphatic? Here is the chart of delinquencies (View image)and the chart of charge-offs (View image).

Here are the latest clicks: 7.83% of all residential loans are now delinquent; this is the highest number on record and we blew by the peak numbers of the early 1990s a couple of quarters ago. Residential loan delinquencies are up a staggering 361 basis points year-to-year and 176 basis points quarter-to-quarter. That's an acceleration in the year-to-year pace from 243 bps last quarter and in the quarter-to-quarter pace from 101 basis points between Q3 and Q4 of last year. This disaster shows no sign of slowing down. I personally can't see how the banking system can begin functioning normally again until this stops accelerating.

Commercial Real Estate:

I like to think we were early at Urban Digs in both warning about the potential for trouble in commercial real estate and later declaring the likelihood of a debacle that would significantly impact bank balance sheets and and potentially feed back into the economy. I think we are about to start seeing the effects of that if the stress tests are any indication of the severity with which the government is regarding this problem. Of note, Sandler O'Neill, a brokerage firm that focuses on analyzing the financial services industry, recently estimated that small banks need $24 billion in additional capital to meet the same stress test standards as the big banks, due largely to commercial real estate exposure. I have been writitng for quite some time that I anticipated that there would be a second shoe to drop after the first credit contraction, from the shutdown of the CMBS market, in the form of bank lending being severely curtailed as a result of the need to absorb losses. I can tell you that I had a conversation with a relatively healthy regional bank in Pennsylvania the other day (non-performing assets are 1.58% of their loans) and the lender said to me "None of us are doing much, we are all just absorbing losses right now." I don't know how much more clearly the message need be expressed.

Here are the charts of commercial real estate delinquencies (View image) and charge-offs(View image).

Latest clicks: Commercial real estate delinquencies are now 6.94% of all commercial real estate loans; this is up 322 basis points year-to-year and 148 basis points quarter-to-quarter. That is an acceleration from the 270 basis point year-to-year rise last quarter and the 94 basis point increase from Q3 to Q4. We have clearly gone ballistic on commercial real estate losses, but we are nowhere near the depraved peaks of the early 90s at 12.57%, we are however on quite a trajectory towards that neighborhood.

Credit Cards:

Here are the charts for credit card delinquencies (View image) and charge-offs (View image). I have to admit to being wrong on credit card delinquencies. I really thought that with all the advanced warnings that credit card companies had of an impending consumer debacle and with the short length of their liabilities and ability to discourage consumers from taking on new debt, they would have been able to manage through this downturn better. However, my guess is that the severity of the residential real estate debacle is just dragging so many people under that the credit card companies are just being overwhelmed. The numbers are turning truly ugly.

Here are the latest clicks; Credit card delinquencies are now 6.61% of credit receivables (loans), this is a notch up from the all time hit, hit last quarter. Delinquencies rose 181 basis points year-to-year and 89 basis points quarter to quarter, these are accelerations from the 104 basis point year-to-year rise last quarter and 82 basis point climb quarter-to-quarter in Q408.


C&I (Commercial & Industrial) Loans:

This is the first time I am showing the chart of delinquent C&I loans, which I now believe are becoming relevant to the second phase of this credit crunch. We all breathed a huge sigh of relief back in the fall, when the run on money market funds and seizure of commercial paper market was halted, and the fear that corporate giants who borrow for their everyday cash needs in the commercial paper market would not be laid low. However, I am now worried that a version of this potential debacle in miniature could happen to the many small and mid size businesses who fund working capital needs through bank loans and lines of credit as this final loan class starts to head south in a big way. Maybe I am wrong and this is a lagging indicator, showing the final stages of a recession where businesses that held out through the downturn finally succumb, but I have a gnawing feeling that we are on the front end of this trend, rather than the back end.


As you can see from the chart above, which I borrowed from yesterday's Wall Street Journal article, which was highlighting the risk from commercial real estate loan losses under "stress" scenarios, that C&I loans are a smaller but still substantial source of risks to banks balance sheets. I believe that we are seeing the beginnings of a stress scenario for C&I loans. C&I delinquencies are currently at 3.15% of C&I loans; the prior peaks were 6.58% in Q1 1987 (not a recessionary perido, but bad corporate debt was probably a legacy of the high interest rate era of the early 1980s and severe pressure of international competition on U.S. manufacturers) 6.25% in Q1 of 1991 and 3.93% in Q2 of 2002. The latest reading was up 170 basis points year-to-year, up from a 128 basis point increase year-to-year last quarter. I will note that prior big year-to-year increases came near the peak of the delinquency cycle in 2002. The quarter-to-quarter increase of 56 basis points was actually a little smaller than the 79 basis point surge from Q3 to Q4. I would note that several retail REITs have expressed some surprise that retailer bankruptcies weren't worse in Q1 and one noted that the June/July time frame is particularly tough for retailers in trouble as their sales are down (cash flow in), while they need to start buying for the fall (cash flows out). How distressed retailers fare this summer, will say a lot about the economy and credit markets.

Lastly, here are the charts for total bank loan and lease delinquencies (View image) and charge-offs (View image) .

Latest Clicks: Total loan and lease delinquencies clocked in at 5.7% of all loans and leases in Q1, versus an all time high of 6.33% reached in Q1 1991. For all intents and purposes we are in the same kind of banking crunch as the early 90s - when a lack of funds caused widespread maturity defaults (a refi crisis). Delinquencies were up 280 basis points year-to-year in Q1, an acceleration from the 229 basis points last quarter. The quarter-over-quarter increase did moderate from 116 basis points in Q3 vs. Q4 of 2008 to 85 basis points in Q1. Interestingly, banks appear to be dealing with the bad loans more aggressively than in prior periods, with charge-offs at 2% of all loans and leases, down slightly from 2.03% last quarter and above the prior peak of 1.9% in Q4 1989.

There is no way to sugar coat these numbers, they are horrible and the fact that new loan types continue to see accelerating losses, while the initial problems still have not slowed down is discouraging to say the least. I hope those green sprouts turn to big oak trees....and quickly.

Manhattan Bears: Beware What You Wish For

Posted by urbandigs

Tue May 19th, 2009 11:12 AM

A: Know this, vultures eat dead things and it can't be that yummy! I just experienced my 3rd casualty of war yesterday, and 2nd lost deal in 2 weeks, as discovery during the diligence process revealed issues with the building that my buyer was about to buy into. And then it dawned on me. All the buyers that are eagerly awaiting this market to crash and trade down 50%, 60% or more, should beware what they wish for. The forces that come into play to take a market down that much, may make any buyer very wary of pulling the trigger. In today's market, you know my pyramid range of where price points seem to be trading, what would you do if your offer is accepted and you find out that the building has deteriorated financially because of the severe local slowdown? Its a catch 22 right? The slowdown is the reason why prices have traded down, yet the slowdown is also why some buildings are finding it harder to manage their finances. So which do you want?

vulture-eats.jpgEverybody wants an amazing deal, everybody wants to be a vulture buyer, and that is all fine and part of the natural order of markets. But be aware of what vultures chomp on - dead things!

I think its safe to say that in boom times, where prices are rising and maintenance increases are easier to absorb, buildings were able to more easily handle their internal finances. They were also able to secure HELOC's and refinance to take care of capital improvements and/or other issues that needed to be addressed. However in times like today, where prices have fallen to the first comfort zone, discoveries of big debt, maintenance increases, dwindling reserve funds, capital improvements, rising number of residents in arrears for maintenance payments, etc., the building may find itself in a bit of a pickle. And that puts the seller in a spot, because in the end it will all be discovered.

Not all buildings are mismanaged, and in fact, most buildings probably are in fairly good shape. But beware the effect of a local slowdown, as this can change at any time.

Here's the rub: buyers today are cautious enough without needing any further motivation to walk away from a deal! Yes, they may be happy with the price they got on the deal but how do they feel if they find out the building has taken a turn for the worse as a result of either mis-management or this severe slowdown? Will the buyer say its priced into the transaction terms? Or, will the buyer try to renegotiate or simply walk away?

The extent of the issue plays a big role here. If its only financial, you should ask why is there a hole and what funds were used for; if its capital improvements, well that likely had to be done anyway and improves the building. In this case, find out what was done and what the board plans to do to re-fill the hole? If its an assessment, how much is it in total and can the deal be salvaged by a concession? In situations like these, uncertainty is a deal killer!

Everybody wants a deal and the biggest bears on Manhattan real estate talk about a correction peak to trough that sees prices fall 50%-70% from their highs before all is set and done - via an overshoot to the downside. But let me tell you what forces make a market fall so severely:

a) rising unemployment
b) rising crime rates
c) huge service cuts to the city
d) deterioration in quality of life, or perceived deterioration in quality of life
e) families no longer wanting to raise their kids in the city
f) rising taxes to fill budget gaps - hitting affordability
g) much higher borrowing costs - hitting affordability
h) rising homelessness on streets
i) zombie condos, unfinished projects, empty retail stores
j) deteriorating building financials, rising number of arrears

etc..These are the things that make a market fall so sharply and are almost impossible to cover over. This entire list has not happened yet (and I hope it doesn't happen), but certainly these are things that could mark the end game of a crisis with its core on wall street. I was quite bearish for very real reasons 18 months ago, and now I am way less bearish than I was because the process started; but we still have a ways to go before a solid foundation can be built to sustain a recovery. Right now, I would update my 'muddled L' recovery to look more like a muted 'W' recovery with the final growth spurt a big question mark and more of a muddled stabilization for a while. It seems Keynesian stimulus will have its moment, although it will be temporary.

Nobody wishes the above noted forces on any city, and certainly not the one that this blogger lives in and loves so much. What I see right now is more and more buildings dealing with lower reserves, rising defaults of residents, lawsuits against developers, higher debt, and lower operating revenues as a side effect of his slowdown. Its showtime and now is when building management must come through for its shareholder/residents.

Its a trend worth watching, and nothing to get all excited about yet because its not a widespread problem. If anything, boards should be preparing for tough times ahead and hopefully started this process many months ago. Afterall, it will affect all owners of a building if finances were not managed properly. Buyers should come to expect that immaculate buildings with huge reserves and excellent management, will be harder to find as this cycle plays out. Will we get through this, yes! Is this expected, yes! Buyers want it all (low price, low rate, immaculate building, etc..) and sometimes its impossible to deliver. Something has to give and if you are a vulture buyer seeking a steal, be aware that the food may not be the best eats in town! PS, I have nothing wrong with vulture buyers!

In the end, buyers who want this market down much further should wonder how the forces that could do so may affect their willingness to live in this great city; and the building they decide to buy into. Beware what you wish for, because it may drive you to want to live elsewhere! I hope the powers that be know what they are doing to prepare for adverse scenarios, should it play out that way. In the end, the market will do what the market wants & needs to do to maintain equilibrium. Nothing I say here will change that.

Zombie Condos: The Mortgage Zone

Posted by jeff

Sun May 17th, 2009 08:28 PM

Zombies.jpgI thought I would share some more information from the Zombie condo study we continue to work on here at Guild Partners. As we try to quantify sell-out velocities on the condominium projects that are in the unenviable position of trying to sell in this environment, we are picking up some data points that I think are relevant to our potential condo buyers here at Urban Digs. So here goes:

In most of the buildings we have looked at the pace of sales has slowed considerably in 2009. In fact, in one, there have been no sales in 2009 (where a sale is defined as the filing of a deed....and frankly we have no way of knowing what the normal elapsed time is from closing to deed filing, so these sales could have actually closed last year). Considering the hurdles thrown up against getting a mortgage in a building that is not 71% sold, I am sure you won't be surprised to know that in the buidlings we have researched at least a third of the units sold since the close of 2008 were bought for cash (or least no mortgage has been registered yet).

You might also be surprised to know, that considering the state of the market, it only looks as if 10% or so of the units sold were sold to bulk buyers/investors, and that is only if one assumes that every unit purchased by an LLC, Corporation or LP is an investor. I am sure there are reasons why someone, especially the very wealthy, might buy one of these units through a partnership, even if they planned to live in it.

Just to briefly review the current state of affairs as it pertains to mortgage financing of condominiums; Fannie Mae has declared New York City to be a declining market, and as a result, their policy is not to allow conforming mortgages to be made in buildings with fewer than 71% of the units contracted for (note this is contracted for, not closed). Now savvy Urban Digs readers know that Fannie doesn't do Jumbos and that many condo sales in New York City fall into the Jumbo bucket anyway (despite the boost to the Jumbo definition enacted under the Economic Stimulus Act of 2008). However, most big banks take their underwriting cues from Fannie Mae (titter titter), and so they have also adopted the 71% rule, at least from what I have been told. So, I was curious to know what mortgage lenders, if any, were lending in the condominium buildings we are looking at, and what kind of Loan-to Value ratios (LTVs) they were accepting.

So which lenders are extending mortgages to those buying in condo buildings in New York City. I have actually compiled a list of the lenders who have lent to buyers in the buildings we are researching, where the mortgage was filed since January 1.

Now recall, the only data I have is on actual sell outs of units indicated by a deed having been filed, I don't actually know how many contracts have been signed in a building (and frankly, contracts don't seem to be worth that much in this environment because people want out of them and exploiting lots of loopholes to get out). As a result, the list of lenders I am going to share with you is not necessarily a list of folks who will do loans in buildings that are not 71% contracted, but they are folks intrepid enough to do deals in new condos where from our research, more than 1/3 of the potential sales haven't closed. So here is the list.


As you will notice, there are a couple of lenders on this list who aren't exactly household names, and many are very local players. Interestingly, where these institutions have been making loans they are all taking a very similar approach. They are lending at low loan to value ratios, that is, the median loan being made is just 59% of the purchase price of the condominium. Now this makes a lot of sense (banks doing something sensible?....I know). The big worry for a bank lending to a new condo with lots of unsold inventory is that anyone who wants to sell will be creating like unit to like unit competition and could potentially drive the value of a particular condominium configuration in a building way down, in their search to find liquidity. By lending a smaller percentage of the purchase price, banks insure that if they have to foreclose on a unit and sell it they won't take too big bath. Interestingly, the highest LTV loan made by anyone except Wells Fargo, was a 77% LTV loan by Patriot National (a small well run Connecticut bank), and this loan is still a bit below the classic (or now back in fashion) 80% LTV loan. Further, Wells Fargo who is the only one doing 80% or higher LTVs, is letting customers get this leverage level by using 2 seperate loans. My guess, although I don't have a way of verifying this, is that the second loans are much higher interest rate second liens. I personally have an issue with this way of thinking about underwriting, which I will be writing a piece about, but suffice it to say that in many corners this would still be viewed as a more conservative method than giving a straight out 80% LTV loan.

So there you have it, even if you can't afford to be an all cash buyer of a condo these days, you may be able to find a low LTV mortgage. You might even be able to find a lender who will lend on a condo in a building where less than 71% of the units have been closed (or may even be in contract). There are bargains to be had out there. Condo developers have turned to bulk investors to move product indicating a willingness to flex on price to move units.

Fitch Slashes Prime RMBS to Junk

Posted by urbandigs

Fri May 15th, 2009 03:41 PM

A: Not that it matters right? Green shoots, green shoots! Hey bartender, pass the kool-aid, Jo-Bu needs a refill! No surprise here, expect more as time goes on and the problem expands to higher quality debt classes.

jobu.jpgVia HousingWire.com, "Fitch Slashes Prime RMBS to Junk":

Fitch Ratings downgraded multiple Citigroup Mortgage RMBS series from triple-A to junk today after placing them on negative rating watch. The ratings agency made the downgrades as part of an ongoing review of prime and Alt-A RMBS transactions as the housing downturn continues to unwind.

Many of the vintage 07 series involved in Citigroup’s RMBS downgrades migrated to double-C from triple-A but several made the leap to triple-C from triple-A.

The agency also slashed five series of Bear Stearns RMBS from triple-A to double-C, and one from triple-A to triple-C.

Bank of America Funding’s RMBS on the most part maintained its triple-A rating, although a single series previously placed on negative ratings plunged from triple-A to triple-C.

Fitch recently revised its surveillance methodology for prime and Alt-A residential mortgage-backed securities to incorporate ResiLogic’s mortgage loss and default model, which determines a base-case loss expectation in conjunction with a transaction specific assessment of the pool’s actual performance.
This is the part when performing stuff starts to non-perform, spreading from subprime to alt-a to prime. This is NOT just a subprime problem, and at this stage I don't know how anybody out there can possibly argue this.

This is an overall debt problem and includes whole loans on the books of financials in addition to securitized assets that are starting to deteriorate in the higher quality debt classes. I wondered about this when I questioned whether the stock markets were getting the duration of this problem right, in early April referring to Mike Mayo's note that as one class of the banks balance sheet gets cleansed, another deteriorates:
Not sure how he confirmed that the whole loans were only marked down to an average of 98 cents on the dollar, but from what I am hearing many of these loans are marked down more and sitting on 'accrual (hold) books', which are marked on the spot based on loan defaults and overall book performance - you are not selling, so mark-to-market is meaningless. By the nature of being a hold book this is nothing new, illegal or other - just how it is. Loan loss provisions are done on a quarterly basis, not as assets stop performing.

If the total loans in the book deteriorated 5%, well then the entire book is remarked down 5% from the previous mark or par. It's backward looking. In this regard, Mike Mayo is correct to assume future adjustments because only the eternal optimist would think that higher quality debt classes are completely unaffected by this slowdown; heck the low bids for these loans are telling you that there is downside risk not priced in properly. So it is fairly safe to say that whole loan books considered good with no plans to be resold in PPIP, are behind the curve in terms of their current market value and present a valid concern for the future. In addition, if banks are allowed to suspend mark to market accounting on these loans and carry them at par or close to it then PPIP will have no influence since there will be no upside for the banks to take something off the books.

Moving on to the point, while one toxic area of the banks books gets cleansed by PPIP we should expect another area to start increasing in toxicity due to the nature of this crisis.
Interesting times ahead as we deal with the second phase of this crisis.

Manhattan Sales Trends: The Bigger Picture

Posted by urbandigs

Thu May 14th, 2009 11:30 AM

A: I really don't get the fascination with month to month increases in activity as a foundation for making an argument that a bottom is in or that we are on the road to recovery. For housing sales numbers, especially Manhattan, there is a STRONG SEASONAL PATTERN! So, either you seasonally adjust the numbers OR you compare year-over-year to get the bigger picture! If you choose to ignore this, and instead focus on month to month trends or quarter to quarter trends, you are getting a very misleading picture! This is the exact type of spin that the NAR, and specifically David Lereah, used to argue against a falling housing market in 2006, 2007, and for most of 2008. And now, they lost all credibility. You want to see Manhattan sales trends, look at the bigger picture and understand that this is a seasonal market that must be analyzed year over year!

I can see the Bracha Blog did a whole piece how, 'Contract Out: There Is Something In The Air', focusing only on Manhattan sales trends from February, March and April 2009. This information should be interpreted as anecdotal and not used to establish any meaningful trend or to build an argument that we have turned the corner.

Nobody denies the pickup, but to cherry pick data and focus only on the near term bottom and where we came from since in order to build a bullish argument, is an exercise in futility. Let me show you why.

Here is the past 10 years of Manhattan sales activity for co-ops and condos, courtesy of MillerSamuel:


Looking at month to month pickups, without rationalizing why this pickup may be happening, gives you a very narrow window into what is happening. Doing so means you ignore the seasonality of this market and usually leads to a false interpretation of a trend. Ask yourself:

1. Why ignore the seasonal nature of this market, and where we just came from after the Lehman collapse?
2. Why ignore a 38% stock market rally and that short term effect on buyer confidence after a sharp move down in prices?
3. Why ignore macro economics and simply interpret the pickup as evidence things are on the road to recovery from now on?
4. Why ignore year over year trends which clearly show Q1 as being the most sluggish in the past 10 years!

Why ignore all of these things? It was like ignoring alt-a when subprime collapsed and everyone stated that it was 'contained'. Remember that? They chose to ignore the bigger picture of this crisis. That didn't work out too well. Well, looking at a quarter to quarter pickup in activity and ignoring all of the above is outright silly! Either you do so and drink the kool-aid, or you analyze the right way and understand where this market is in the grand scheme of things.

Why not tell it like it is? What's the problem here? Why can't I say, yes, there is a pickup in activity but I strongly believe it is simply a counter trend pickup in activity embedded in a longer term correction - comparing y-o-y will show a slowing market. When you look at the graph above, its clear that is what this is!

When Q2 sales data comes in, it will show a tick up from the Q1 data and be interpreted by media, brokers, and brokerage executives as a sure sign this market has finally turned the corner! YAYYYYYY - champagne for everyone!

As I noted above and stated many times here, YES, there is a pickup in activity and YES, it will show up in the Q2 data when comparing it to Q1 - the trend that hope is being built on. I learned long ago to ignore such trends and focus instead on the seasonal nature of markets, trending macro fundamentals, the state of the consumer, the state of the credit/banking system, and the state of buy side confidence for the asset class.

I am estimating that Q2 sales, released July 1st or so and reflecting April-June, comes in around 1,700-1,800 or so - a significant pickup from Q1 but well below Q2 from 2007 and 2008 and either at or below trend for the past 10 years. Putting both together, it will seem that the first two quarters of 2009 will prove to be the most sluggish in the past 10 years. That's the bigger picture. Comparing month to month or quarter to quarter non seasonally adjusted data is quite misleading; so interpret at your own risk.

Bond & MarkDavid Enter CRE

Posted by urbandigs

Wed May 13th, 2009 03:34 PM

A: More a sign of the changing times. Make no mistake about it, if the future was bright for residential sales volume in Manhattan there would be no need to expand your business model into a sector (commercial) that is hurting big time right now! Either you innovate, or you cut costs, or you get more production via more agents, or you expand into new markets to get that extra production! I would not look at these moves as a sign the commercial sector is getting hot - its not! In fact, its very very depressed. Rather, these moves are a sign that new revenue must be squeezed from somewhere, and commercial is the closest and most likely match. Whats amazing to me is the lack of innovation or even the lack of interest to innovate in this marketplace! If there is one thing consumers should expect from a good old fashioned slowdown, its innovation that benefits them! If the big boys don't, somebody will; trust me! Streeteasy.com already innovated their way to basically solve the public MLS problem for Manhattan real estate - so what's in store for the brokerage model?

Via The Real Deal:

Bond Launches Commercial Division

The expansion wasn't the original plan. In the midst of this fall's economic fallout, Ricciotti said, Bond was considering closing the 19th Street office, which is the oldest and smallest of the company's five offices.

"We thought, 'if we're going to cut any expenses, why not that one?'" he said.

Instead, Gerage approached them about joining the company and almost immediately became "a raging success," Ricciotti said, by specializing in sales of mixed-use buildings priced between $5 million and $20 million. Gerage brought two agents from Coldwell Banker and hired several more, and the office is now overcrowded, necessitating an expansion of the 53-desk office, Ricciotti said

"We were very excited, and rather than take a step back to cut expenses, we increased revenues instead," Ricciotti said.

MarkDavid Enters Commercial Market
"We decided to expand because a lot of people we helped find apartments were looking to start businesses and asked us to help them," Fromm said. "We used to refer them out. Since we have relationships with landlords who have retail and office space, we were able to put deals together."
These are not stupid moves and they are not unexpected moves. It's very clear that the times, they are a-changin'. And change is happening. It will continue.

The change thus far has been on the brokerage side of the model - that is, reduce ad budgets to brokers, shutting offices, canceling perks and holiday parties, eliminating food deliveries for sales meetings, tightening split levels, weak performing marketing cutbacks, etc..

We are yet to see any change in the actual business model that benefits the consumer! I see the Rutenberg Realty 100% Agent Commission Model as attracting more and more brokers because less deals doesn't necessarily have to mean less income - giving a boost to the virtual realty's 'rent-a-desk' transaction model that benefits agents. I also see the Thomas Demsker flat fee sell side consulting model over at NoBrokersPlease.com. A step in the right direction. It wont be long for more innovation to come out focusing on the consumers and making transactions more efficient and making market trends and valuations more transparent for all - after all, what the heck is really going on out there? Time will tell, but I have a feeling this industry will be vastly different in 2 years time.

I wonder how prepared the big boys are, especially after seeing Realogy post a $260M net loss for the 1Q. I would expect Q2 to be significantly improved though, as the 1Q represented the after-effects of a frozen 4th quarter, but the long term prospects continue to be very pressured. I just don't see sales volume getting anywhere close to what we got used to in 2007 (I see sales volume below trend for a number of years) and if borrowing costs rise further, it will continue to be a drag on the company's ability to squeeze out maximum profits.

Pricing in Downturn Risk May Lose A Dream Home

Posted by urbandigs

Wed May 13th, 2009 11:04 AM

A: I'm going to do a discussion here that will probably surprise many of you out there. The topic is the gap between where products seem to be trading out there and where buyers are comfortable doing a deal at considering potential downturn risk. Its mostly a psychological one, and less an affordability issue. Buying a home today, as opposed to during the credit/housing boom, is a decision that I think most people find relatively easy. They know the deal is more attractive than it was, they know they want to own rather than rent, and they usually know what their budget is. The question is of timing and motivation to pull trigger. This is a change in psychology from the boom years of 2003-2007, when a rising asset clouded some of those noted emotions. Who cares when you can sell at a 20%+ premium in a year from now right? Well, not anymore. When I look at today's marketplace, I see a savvier buyer pool that wants and expects a deal. But how much downturn risk can you get if the market isn't there yet? Lets discuss.

First off, while the buyer writes the check and determines the market value of any property out there, it is the seller that must agree to it! So enter a host of variables that may affect the transaction:

a) financial stability of the seller
b) nature of the sale - death, divorce, financial, personal decision, relocation, etc..
c) emotional attachment to the property - do not underestimate this!
d) general motivation or effect of anchoring on seller's psychology

...just to name a few! In most situations, these emotions and conditions really affect the seller and the price that the seller expects to procure for their wonderful and unique property. Sometimes it doesn't matter what the seller broker says to the owner when describing the current market and a likely range of where to expect bids to come in at; they don't want to hear it! Other times the seller is desperate to move the property, and will hit any bid that comes in within 15% of their asking price. It varies so greatly.

Which brings us to the other side of the equation ---> the buyer.

Knowing what I just said, how does this affect a buyers ability to get the property at a discount to where the market seems to be trading? What does "seem to be trading at" mean anyway? Well, a few months ago I told you all that the market seems to be trading in different ranges based upon price point - with the nature of this recession deeply affecting the higher end:

HIGH END ($5M+) - down aprox 25% - 40% from peak
HIGH/MIDDLE ($2M - $5M) - down aprox 25% - 30% from peak
MID END ($1M - $2M) - down aprox 20% to 30% from peak
LOWER END (Under $1M) - down aprox 15% - 25% from peak
*this was stated 2 months ago, and I would raise the range of the high/middle deals to down aprox 25% - 35% from peak levels - similar to high end range.

This is where deals seem to be happening. I tell you as soon as I am comfortable, and that was a few months ago. But when a new buyer sees this they immediately try to price in a downturn risk on top of where the market is trading. This is proving harder to do right now considering where we came from and the first wave down for our local market; a downturn that so many brokers and executives deemed highly unlikely only a few short years ago. Pricing in downturn risk was easier to accomplish before Lehman (recall my 'Low Ball Bids & Cold Feet' discussion on buyer behavior last July), when the market had not yet had this wave down.

The point here? Well, you need to look deep into yourself if you are a serious buyer in this marketplace right now and you happen to stumble upon your dream home! In the past few months, a few of my clients lost a property that they really liked because their confidence level was not high enough to warrant only paying the discount of where the market is trading now. Read that again if it didn't sink in. They were not wrong in their actions, it was just that their confidence level too depressed to raise their bids to a level where the property seems to be trading. Its a sign of the times and a look into how buyers are thinking about this market.

155-franklin.jpgWith the blessing of one of my buyer clients, I will explain in detail one of these situations. One of my clients bid on 155 Franklin, a TriBeCa condo loft that sold in mid 2006 for $3.05M. I estimated that this pre-peak sale probably rose another 10-12% before peaking, and then that this price point is down about 25%-30% or so from mid 2007 peak level deals. So I sent over the following simple assumptions just to see where this unit might trade for today (how high they bid to get he deal is another story):

$3.05M + 12% to peak = $3.416M peak valuation

$3.416 - 25% = $2.562M current probable if down 25%
$3.416 - 30% = $2.391M current probable if down 30%

As a broker, here is my advice to these buyers:

We bid below that range and got a response right in that range, but decided not to raise the bid or accept the sellers counter even though it was right where it was expected to be. Negotiations stalled for a few weeks. Surprising? No, because the buyer's confidence was not high enough to warrant raising the bid to get the deal at a level that amounts to where this market seems to be trading today. The buyer wanted some downturn risk as a premium for buying a mid-high end property in this market at this time. We tried raising our bid one more time, still below the range, and turns out the property went into contract two weeks later for a price I'm told was higher than the counter we got from the seller. I'm curious to see what this property ultimately traded for.

I see this trend across the board for most, not all, of my buyers. Which tells me that I don't think I am alone here. I would guess that most brokers out there are working with buyers that are not OK with buying a property where it seems to be trading today, but rather, would like to price in further downturn risk that has not happened yet - making it tough for us brokers to make the minds meet. This is absolutely fine and expected given the nature of this slowdown, the near term outlook, and what we have been through. Can you blame them?

That is where the variables affecting the seller come into play - is the property you are after owned by someone that is willing to sell at a level below where the market seems to be trading today? If not, you should expect the property to trade somewhere in the range I stated above. Every property is unique, with different characteristics affecting both demand and affordability, so its impossible to generalize the entire market as being down X%. So if you are ready & able and stumble upon a dream home where the seller is realistic to accept an offer somewhere in the range I stated above, you may not be able to price in downturn risk for the near term. Ask yourself, do I lose a dream home just because the property is trading where the market seems to be right now, and not where it might be in 12 months time.

If the market gets illiquid again (think 4th quarter 2008 after Lehman), all bets are off and a bid pricing in downturn risk can be hit at any time. Oh what a whacky market!

Keep Your Eye on the Credit Markets

Posted by urbandigs

Tue May 12th, 2009 04:30 PM

A: Its what got us here in the first place! Credit is looking MUCH better - so keep your eyes on it and don't be fooled for a moment that the world is saved and nothing can bring us back to the hell we just came from! Credit has been leading the equity markets for the past 20 months or so; or I can say equities have been lagging the credit markets for the past 20 months or so, whichever you prefer. Looking at credit now, and where it has come from (always know where you came from!), its significantly improved! This is one reason why the stock market was ready for a sustainable fierce bear rally - as credit improves, investor confidence rises especially in financials that were severely beaten down. Ahh, but there is a danger with such renewed confidence! If you look today, credit is much tighter and many believe the fed/gov't has achieved their goals and fixed the financial problem for good! That is exactly when I want to get more worried - when hope creeps back in. All I am saying is, just keep your eye on credit, because if another wave is coming, it should show up in credit first just as it did in late 2007 and late 2008 before a sharp wave down came! Ignoring distress in credit markets at this stage of the game is highly dangerous - and I wonder now since credit has come in so much, are eyes starting to turn away?

Take a look at the significant improvement of some of the more widely used credit indicators to check in on the distress level in the financial markets:

TED Spread - measures the spread between 3-MTH Libor and 3-MTH Treasuries - normal being around 50bps. The wider the gap, the higher the level of distress because money flocks to safety in short term treasury market sending rates lower, at the same time lending between banks experiences a rise in credit risk, sending rates higher. The result is a widening gap. The TED spread is that gap and current is at 72.41:


- the rate at which banks lend to each other in London wholesale money markets; stands for London Interbank Offered Rate. Bringing LIBOR down was crucial in getting banks to lend to each other w/out fear and avoiding another wave of distress with adjustable rate mortgages due to reset higher - the last thing we needed for all those with ARMs. With LIBOR down so much many with adjustable mortgages actually reset to a lower rate! But before we start celebrating, know that its the recast that is more troubling. Here is 3-Mth LIBOR:


CORPORATE BOND SPREAD TO TREASURIES - spread between corporate bond yields and 10-YR treasury yields can tell us the level of distress in the corporate bond market. Like the TED Spread, a widening gap is a signal of distress in the corporate bond market as rising credit risk sends rates higher.


It's all in the natural order of markets. What amazes me the most is the dramatic shift in psychology from a 'financial Armageddon' scenario to a 'worst is over, V-shaped recovery' scenario over the course of the last 9 weeks! People really believe, and hope seems to be creeping in as the rally in equities, and specifically the financials, create the illusion that a new foundation for growth is set. Outside of fiscal stimulus and government jobs, what will drive growth for the years to come? And who says we won't get another wave of distress in the credit markets leading to higher interbank lending rates? Again, the natural order of markets at work.

This could last a bit longer as it seems blistering clear to me the stock market has been chosen to be the recaptilization vehicle for this latest round of money raising by the banks. Just look at bank stocks leading to the latest rounds of offerings (Goldman, Wells, BoA, Morgan Stanley, Northern Trust, Microsoft, Capital One, Ford, US Bancorp, KeyCorp, BB&T, Bank of NY Mellon, etc.) to raise capital via share dilution. Lets not kid ourselves here, the TARP kitty was running low and bank stocks were prime for a bear rally - the perfect setup for a short squeeze pumping the banks to levels that restore enough confidence as to allow for an offering. Some might say the game is rigged, but because it played out from the lows in the marketplace after a 60% drop in stocks, how can anybody argue that the banks were not ready for a rally?

While euphoria sets in now that the credit markets are on a path to more normal levels, focus starts to shift away from credit and onto growth expectations. I say, resist that urge because you might miss a reversal in the credit markets if one comes. It's an issue of belief here, and I am just not ready to believe that all is well. Its hard to declare us out of the woods with rising commercial delinquencies and the fact that defaults are spreading to higher quality debt classes.

The Fed vs Treasuries: Stress Tests Forgot About Rates

Posted by urbandigs

Mon May 11th, 2009 11:53 AM

A: One big thing the recent bank stress tests do not spend a lot of time on, is what happens if borrowing costs surge because of unintended consequences with the treasury market? It seems instead the stress tests focused on unemployment, GDP, and house prices. BUT WHAT ABOUT RATES? We are where we are with super low rates and seeing LIBOR come in dramatically - what is this doesn't last or we get another round of surging borrowing costs? With the treasury market selling off during this most recent rally, an environment is setting up where the fed will have to step in and purchase large amounts of treasury securities. This is part of the plan and is not news. So far, the fed has announced plans to 'print' about $1.25Trln as they purchase agency securities and help provide liquidity in that market. They capped treasury purchases to $300Bln, in essence saving their ammunition for later use - hmm, why would they do that? With treasury issuance set to soar to raise $3.25Trln of debt for this fiscal year, demand will have to come internally from our fed in some way, shape or form. Expect it, especially if our foreign funders decide to wind down both holdings and future purchases of our treasuries.

Umm, 30YR mortgage rates went to 4.675% because of uber aggressive action by our fed and a zero interest rate policy. LIBOR came in big time because of this kitchen sink action and policy - increasing the confidence amongst banks lending to each other. Rates are at all time lows and a refinancing wave that likely avoided a catastrophe with expected upcoming ARM resets. We are likely at the floor of interest rates right now. The challenge will be for the fed to keep rates this low, and prevent them from rising. But if they do rise, how does this change the stress on the banks and their toxic holdings if consumers/businesses either:

a) can't meet debt service obligations if rates rise, or
b) affect the housing market and housing prices if rates rise bringing down affordability?
c) banks NIM's?

As Calculated Risk just said to me:

"...a large portion of the capital required is coming from preprovision earnings over the next two years - and that requires healthy NIMs. Right now many of the banks are running net interest margins of over 400bps (nice), but that changes if rates increase."
Seems like something worth watching out for, dont ya think? In a perfect world, there would be no need for our fed to step up and buy treasuries in what amounts to modern day printing of money, to keep rates low. But this is far from a perfect world and the fed will do exactly that. The last thing the fed wants, or anybody for that matter, is for the treasury market to roll over sending borrowing costs higher for everyone. Many, including myself, feel this to be one of the unintended consequences unique to this slowdown. I just dont think the fed can successfully hold down the natural market forces associated with the treasury market.

Bloomberg's article, "Mortgages Over 5% Mean Fed Purchases as Bonds Slump", suggests that we have become a society that can't handle mortgage rates over 5%:
The world’s biggest investors are increasing bets that Federal Reserve Chairman Ben S. Bernanke will boost purchases of Treasuries as the steepest losses on government debt since 1994 send mortgage rates above 5 percent.

The slump in Treasuries the past seven weeks pushed yields on longer-maturity bonds up by more than half a percentage point and sent average rates on 30-year mortgages to the highest since the start of April, according to North Palm Beach, Florida-based Bankrate.com.

Investors anticipating an expansion of the Fed’s Treasury purchases were disappointed after the Federal Open Market Committee’s April 29 meeting, when policy makers left the size of planned buybacks unchanged and said the economy is showing signs of stability. The government is likely to sell a record $3.25 trillion of debt this fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., to finance bank bailouts, economic stimulus plans and fund a growing budget deficit.

“If all of a sudden this rise in the 10-year yield feeds into higher all-in mortgage rates, that’s when we think the Fed will come in with a vengeance” to increase its Treasury purchases, said Joseph Balestrino, a money manager at Federated Investors in Pittsburgh, which oversees $21 billion in bonds. “We are a buyer.”
Recall what modern day printing, via OMO at the NY Fed, means:
The electronic credit was 'created' out of thin air by the fed, and BAM, you have more money injected directly into the economic system but first deposited into the banking reserve system! In this case the newly minted electronic money goes to the primary dealer's account that sells the assets to the fed. This is the 'printing money' that is associated with quantitative easing and is what hyper-inflationists worry about. The entire process is very dollar negative. Don't believe me though, the fed states it clearly:

How will purchases under the agency MBS program be financed?

Purchases will be financed through the creation of additional bank reserves.
I would not be surprised to see the fed announce that they will INCREASE PURCHASES OF TREASURY SECURITIES TO OVER $1Trln, at some point in one of their statements during the next 2-3 quarters. Questions we should ask ourselves is:

1) how will this affect the treasury market (borrowing costs tied to bond yields) and for how long?
2) how will this affect the US dollar?
3) how will this affect dollar inverse trades: precious metals, oil, other commodities?
4) how will agency debt be affected if purchases are shifting to treasuries?

Here is what the dollar has done so far, over the past year when deflation hit and the fed aggressively lowered rates - notice the rise in the US dollar for most of 2008 (a swelling of the US dollar is called for by Fisher's Debt-Deflation theory), as banks started to hoard dollars and asset prices fell:


Its worth watching out for this because it's not out there now, but may be there in the future and change the playing field in the world again. Either we adapt or die. Let's see what happens as we go through 2009.

Is the fed big enough to move the treasury market? If so, for how long? Will debt deflation and its dollar swelling tendencies overpower the dollar negative nature of aggressive quantitative easing policy? This really is a story that will pave the road ahead - will it be smooth or will it be rocky? I think we will have another rally in treasuries when the fed announces an increase in purchases, bringing rates down again, but I doubt it will last for long. This is when you may see the dollar inverse trades heat up. In the end, I think the fed is not powerful enough to control longer term rates for long, and so I would expect generally higher rates in the future. I think this, and higher taxes as a side effect of policy/slowdown, can potentially combine to spark the next wave of this process - prolonging the duration of this recession. The question is, how healthy are we when higher borrowing costs and taxes hit home and can consumers/businesses handle this shock?

Trading Mentality: The 8th Deadly Sin

Posted by jeff

Sat May 9th, 2009 07:39 PM

My daughter has autism and we have become used to the many challenges that presents for our family, so when she put a quarter in the CD player of my car, I wasn't really fazed. The second quarter, she quickly inserted the next day; before anyone could stop her, which caused the CD to become jammed was in the scheme of things a minor annoyance. In fact, I am actually enjoying listening to the radio now. It's been so long. Unfortunately the new music seems to be less than compelling, but this afternoon I heard a sampled rap-type mix combining Nat King Cole's "Lush Life" including the lyric "I was wrong" overdubbed with Jim Cramer being pilloried by Jon Stewart and proclaiming "I was wrong". President Obama and others were also sampled talking AIG bonuses, the meltdown on Bear Stearns, etc.

The crux of some of the criticism leveled by Stewart and some of the other tidbits that were sampled in the song was....."You big money traders saw this coming a mile away and didn't do anything about it and you got paid millions before and after." I was kind of blown away that mainstream music was addressing these issues.

What really struck me about the song was that unfortunately for the potential enlightenment of the masses, it didn't really address that fact that if you were a trader you might very well have known the ultimate outcome of what was going on....or had a strong sense of it and still not have been in a position to do anything about it. Even if you strongly suspected that eventually a reckoning would come, timing is everything. Even if you were Warren Buffet, the longest of long-term investors, who has very little pressure to perform even on an annual basis, you might have proclaimed derivatives "Weapons of mass destruction" and still written many that came back and bit you in butt. The financial markets really don't allow many people to take very long-term positions regarding things they think are wrong or right, without trading around those positions. You just can't afford to stick with a position that's going against you for too long. Some guys who have the temperament (and authority) to take this kind of pain....like Carl Icahn when he shorted internet stocks a bit too early....make out like bandits after absorbing large hits.

It really struck me, that although Wall Street continues to employ some of the best and the brightest, the "trader mentality" (no offense Noah) means that you often have to ignore what you really believe in order to survive in the short to intermediate term. If you read the recent New York Times article How Lehman Brothers Got Its Real Estate Fix, you'll understand that the guys who have it right for a period of time during a big move, can often over-ride guys with experience who try to remind them that "It's never different this time." You may have also read about how Wall Street firms doubled down on the very same positions that were killing them, thinking they were oversold. Some players may have been hallucinating and thinking these bonds were going back to 100 cents on the dollar and everything was going to be fine, but my bet is most figured there would be a lot of blood, but the bonds were worth 50 cents on the dollar not 20 or 30. It's a trading mentality....why not just walk away from the asset, when there is so much uncertainty and no liquidity. As I have opined in the past, when a highly leverage-able bubble asset implodes it has its own gravitational force that sucks people in, even those who never played during the bubble. It takes experience to know to just stay away, unless you have a real long-term view and ability to hang with your position (my guess is residential foreclosure buyers are going to learn this lesson in spades).

It's not that Wall Street was dumb they were too smart by half. Many believed they could get out in time or trade their way out of losing positions and sure there were those who were just drunk on success, wealthy enough to not care about getting fired and playing with other people's money. In fact there were many of them and they were in positions of authority. A great example of this were the many commercial real estate players, who when they didn't make high bidder on a property they liked, wrote the mezzanine debt for the high bidder, who they thought overpaid, in hopes that if the winning bidder had an issue, they would own the property at a price they thought was fair. These guys thought they were super smart, but somehow it didn't occur to them that with so many others playing the same games, if the mezzanine debt defaulted, it was very likely going to be because the whole real estate hyper cycle had turned down and they would end up owning an asset in a downward spiral.

The Street and the country seems to still is be in the thrall of traders and the trading mentality, how else could Boaz Weinstein be allowed to lose $1.8 billion for Deutsche Bank, after the worst of the market debacle had already taken place and then head out to raise money for his own hedge fund, which is expected to start trading this summer.

As I sat down to write this article I went back and listened to some of Jon Stewart's tirade about how CNBC didn't question the fabrications being spouted by various CEOs and CFOs during the crisis and the misguided action in the markets caused by this lack of scrutiny. Even Stewart caught on to the fact that traders, some of whom don't beat their wives or kick their dogs, in addition to many individuals were being caught up in the whole package of lies and errant market action based on the misinformation.

In my mind the new sin of the market decline in this bubble cycle has been the....I can always get out/get short....trader mentality. No one remembered the "Roach Motel" rule of bull markets. It's easy to get in, but you can't always get out. Come to think of it, the trader mentality has permeated our entire culture. Can't afford the down payment on the house right now? take an option ARM and refi before the teaser rate expires. Hey the federal and state budgets look good! let's pork it up while we can. Can't take the pain of a downturn? let's lower rates and print money, we can always deal with it when the economy rebounds.

It's gonna be very interesting to see the future impacts of the lesson of the 8th deadly sin.

Our Creditors Aren't Missing a Trick

Posted by jeff

Thu May 7th, 2009 05:31 PM

Apparently, Urban Digs now has worldwide readership. While my recent piece, The Buck Has Been Passed, didn't spark very much discussion here at home. It seems our creditors overseas did notice it. According to CBS Marketwatch:

In a monetary report dated Wednesday and posted on the People's Bank of China's Web site, the central bank said the quantitative easing policy pursued by the Fed may help keep bond yields at low levels in the short term. But over a longer period, higher inflation expectations, interest rates and central bank measures to take extra liquidity out of the system could cause a sharp adjustment to bond prices, the report said. The central bank also said plans by the Fed and other central banks to drive lending rates lower by buying their own government debts risks depreciating major currencies.

Nothing gets by these guys. Me thinks Uncle Sam may have to start including a Hershey Bar or some other enticement with each T-Bill he tries to sell going forward....you know "A spoonful of sugar"..... and everything. The sell off in treasuries today was in part attributed by the media to the aforementioned report. Makes sense to me.

Why Wait?

Posted by urbandigs

Wed May 6th, 2009 02:57 PM

A: Stress test leaks everywhere. Bank stocks surge on optimism that JPM, GS, AXP, MET, & BK are all in the clear! Companies expected to be directed to raise cash include Citigroup, Wells, and Bank of America. All banks are surging regardless if they passed or are being directed to raise capital. Suggested ways of raising capital include selling off of assets, converting preferred to common thereby boosting TCE, or from the private sector. Keep in mind that converting preferred to common does not add capital to the balance sheet, but does eliminate dividend costs and boosts TCE. Fed regulators are said to focus strongly on TCE as time goes on.


JP Morgan
Goldman Sachs
American Express
Bank of NY Mellon


Bank of America
Wells Fargo

Suntrust & Key Bank are rumored to require more funds from a report last week. The leaks are clearly intentional, and delivered to have a soothing effect on the market on the eve of the release of the full report. This is not by accident folks. Bank stocks are reacting very positively. The report tomorrow will detail out the performance of each bank based on 12 loan categories.

After the Broadway show is done and everybody gets a chance to digest the fed's findings, we will start to hear whether or not the job performed is trusted by the street and the analysts. So far there have been calls that the baseline scenario for the tests are meaningless, putting the reality more in line with the adverse scenario of the tests. Then you got Yves Smith at NakedCapitalism raising concern over the capacity to conduct accurate stress tests for two main reasons:

1) not enough regulators or enough time to digest the complexities of our modern banking giants
2) not a clear understanding of the risks involved with positions held on the books of these banking giants

Yves chimes in:

In the early 1990s, when Citi almost went under, it had 160 bank examiners working SOLELY on its commercial real estate portfolio (Citi has a lot of junior debt against buildings that turned out to be see-throughs).

I would welcome reader input (especially from bank examiners and accountants), but it is pretty clear 100 people and a few weeks (or even a few months) is grossly inadequate for a bank the size and complexity of a Citigroup. Citi has operations in over 100 countries. All 100 examiners can do is make queries along narrow lines, and work with the data presented. This scale of operation won't allow for any verification or recasting of data. There isn't remotely enough manpower.

And do you think these examiners are in any position to assess the risks of CDS, CDOs, swaps, foreign exchange exposures, Treasury operations, prime brokerage, to name just a few? I cant imagine US bank examiners have much competence in FX risk (Citi trades in a lot of exotic currencies, too), and that's one of the easier to assess on the list above.
I think the days and weeks after the actual report is released, will bring out the criticisms of the data procured - credibility time! I just don't see how everybody will trust the quality of the data. Lets see.

The JUMBO Problem - Manhattan Wont Help Banks

Posted by urbandigs

Wed May 6th, 2009 12:00 PM

A: Wave 1 of the credit crisis brought a lot of pain but seems to be behind us now leaving the residual damage to the real economy. Of course I am referring to the carnage brought on by subprime, near prime, and option ARMs to the banking system. The first wave took some of our biggest banks, insurers and IBs, and took the markets for a roller coaster ride. This wave is behind us because most of the damage done to the banks is in the past - writedowns were taken, capital was raised/injected, and fed facilities help to keep the financial system functioning. The efforts by the fed to bring down the indexes tied to ARM resets will help us avoid another wave of defaults that would have come this year and next - potential wave averted. But for the ARMs, don't forget that its the recast that will negate any savings from a rate reset downwards. A recast is when the loan is re-amortized to the higher principal amount for the remaining loan term, raising the minimum monthly payments as the payment cap no longer applies - lots of recasts lie ahead. Lets keep it real here folks. But the real problem that seems to be largely ignored is what is going on in the jumbo market and prime market! Delinquencies are rising, fast. We must ask ourselves, is it right to ignore this or is it right to be cognizant of what could be the next wave of this crisis; especially when the high end in Manhattan is struggling like it is.

Bear rallies have a tendency of re-installing hope and euphoria that all the bad news is behind us and so called green shoots will blossom into a full gear bull market. In my trading days, we called this the 'sucking in' phase - pace of decline slowed, bad news sent shares surging, shorts got murdered, and retail investors get sucked into the rally as the move nears maturity. I don't care what the VIX says, expect plenty of volatility moving forward if this crisis does indeed prove to be of the tsunami kind. The stock market is a pricing mechanism and is currently discounting ('re-pricing') the removal of the 'world is over' scenario and pricing in rosier times ahead. That is why even bad news sends shares soaring leaving many baffled. But what if rosier times are farther out than what stocks are currently pricing in - making stocks more and more expensive? That's the million dollar question and the argument I bring forth. After what we have been through, it pays to at least be aware of what is going on out there for what could be what Bernanke calls another, 'credit market relapse'.

I want to re-introduce this chart (a bit outdated right now in regards to JUMBO & PRIME delinquencies) by T2 Partners on Page 16 showing us the rise in delinquencies by loan type/class - notice the 3 problem areas (subprime, alt-a, option ARM) and the 2 higher quality areas hiding at the bottom (jumbo & prime):


Looking at this chart, you can see the types of loans that sparked this credit crisis in 2007 and caused such problems for those holding securitized mortgage bonds; they included subprime, alt-a, and option ARMs. Then you see prime & jumbo way underneath, holding firm but showing the initial trend of distress. Its as if we could view this in waves:

WAVE 1 - sparked by subprime, alt-a, option ARMs. Fed facilities, rate cuts, and Treasury capital injections handled this wave. Option ARMs will reset lower, bringing payment relief to many of these homeowners. Loan recasts will ultimately come and negate some of this relief. Those with 3YR ARMs will have 2 years of rate relief before seeing their first loan recast if they have not refinanced into a new loan product. Subprime/Alt-a/Option ARM etc., recognized losses so far have been about $684Bln with this first wave, and banks both privately and publicly raised about $690Bln as of the 4th quarter of 2008 (view image)! I'm generalizing here as there were other factors contributing to losses during the crisis, but the point is that the bulk of losses were from these three areas of credit.

WAVE 2 (yet to come) - perhaps sparked by commercial, prime, jumbo, HELOCs, lbos, credit card writedowns. How quickly we forget that the IMF recently upped their total global credit writedowns estimate to $4.1Trln - this assumes total US writedowns of $2.7Trln, up $500Bln from previous estimate (view image).

Some math: $684Bln in global losses taken so far as of Q4 2008 compared to $4.1Trln in total IMF expected losses for global institutions. That leaves some room for more stuff I think.

Now some of the writedowns have been taken towards the 2.7Trln estimate already, so its a matter of where we are now and what may be left ahead of us - I don't know who has access to that kind of transparency right now; not even the federal regulators. Clearly the issue is not the stuff that already was dealt with, but the stuff that is marked as performing yet the actual pace of deterioration is accelerating - in other words, a performing loan book / bond is starting to non-perform. What are the marks on these guys and how does the recent accounting change cushion the possible blow that lies ahead?

I can't find any up to date data on delinquency rates for jumbo and prime, but I did see this latest article noting a report out of Barclays Capital about a "disturbing trend" among so called jumbo loans:

Loans to borrowers who bought pricey homes are going bad at a faster clip. Barclays Capital notes the “disturbing trend”–worsening delinquencies among so-called jumbo loans that are too large for government backing. The investment bank tracks the share of loans that roll into delinquency every month, and nearly 0.88% of jumbo loans made in the first half of 2007, for example, went delinquent in March from February, up from 0.77% in the previous month.

Some of those delinquencies will become foreclosures. Foreclosure starts have jumped by 221% among jumbo loans made to prime borrowers, or those with good credit, according to March mortgage report from LPS Applied Analytics. That’s more than among any other loan type.
If the trend continues these higher quality and larger debt classes could produce losses that will have to be absorbed by the banking system - which is why banks seem to be hoarding cash in reserves to the tune of 1.1Trln to deal with the upcoming losses expected from business and household loans. Banks are preparing, are we? It's safe to say that Manhattan's high end / commercial sector blues won't help matters in the near term - unless people think the high end and commercial sector in this great city is unaffected by this slowdown and will continue to perform. Tomorrow we get the stress test results, and I just don't see how the gov't will collapse the markets at this stage of the game. But who knows. After the stress test Broadway show passes, its back to reality and that is why caution is still warranted as to the wavey nature of this crisis.

The Buck has Been Passed

Posted by jeff

Wed May 6th, 2009 10:40 AM

I'm going to take a potentially pre-mature victory lap for my piece "Let's Not Face it the Banks are Bankrupt". The story of many large banks, potentially 10 out of the top 19 needing to raise large sums of capital to be "well capitalized" in the government's eyes has been leaked so widely, that it doesn't even matter. We have already been told that none of these banks will be allowed to go under and that they are fundamentally sound and will be able to raise public capital independently or not, whatever.


In the words of Simon Johnson, a former chief economist of the IMG and now a professor at MIT's Sloan School of Business:

"The stress test was a clever stalling action from a tactical point of view," Johnson said. "They wanted to wait until the economy showed signs of bottoming out. Now, everyone's more relaxed, and they can go easier on the banks."

Frankly, the one big remaining issue I saw for banks and the economy as a whole was the potential for the commercial real estate debacle to lay waste to what remaining capital the banks had. But this news is now on the tape. Yesterday, the Wall Street Journal quoted chapter and verse the bear case for bank losses from commercial real estate and correctly pointed out that it would be hardest on the in many cases until now unscathed local and regional savings banks and S&Ls, who never got into any CDOs, CDSs or SIVs, but stuck to their knitting lending to local businesses and gulp.....real estate owners and developers.

Noah had asked me to mention the pending wave of CMBS paper due to mature over the next couple of years. As reported by Globe St., according to REIS there is $166.7 billion in CMBS paper maturing between now and 2012. The news here is pretty grim, with delinquency rates rising quickly, up 42 basis points quarter to quarter in Q1 to 1.76% and 300% year-to-year (albeit off very low levels). REIS sees the delinquency rate potentially hitting 6% by year-end.

The government however, is well aware of the issues in the CMBS market and their potentially nasty impact on banks. To wit, some nuggets from Bernanke's recent testimony to Congress

"Conditions in the commercial real estate sector are poor. Vacancy rates for existing office, industrial, and retail properties have been rising, prices of these properties have been falling, and, consequently, the number of new projects in the pipeline has been shrinking. Credit conditions in the commercial real estate sector are still severely strained, with no commercial mortgage-backed securities (CMBS) having been issued in almost a year. To try to help restart the CMBS market, the Federal Reserve announced last Friday that recently issued CMBS will in June be eligible collateral for our Term Asset-Backed Securities Loan Facility (TALF). "

The government is also no doubt aware that banks are both extending existing loans (Loan Extensions Bridge to Nowhere?) and not making new loans, because they don't have enough capital to recognize their bad loans in any compressed period of time, much less lend (Excess Reserves Go Berzerck as Lending Flatlines).

No doubt the powers that be understood that the death of the CMBS market was a big enough problem (Death of the Shadow Banking System), without banks siezing up as well. It was only a matter of time before lending which was flatlining...sustained partly by extensions of existing loans and drawdowns on lines of credit....started to decline as actual defaults started rolling in.

So it is just in time that the stock market turned, the consumer came out of their bunker and markets began to loosen up....yes credit markets sometimes follow equity markets (it happened in 2003 too). De-levering is creeping into the system. REITs are coughing up properties and doing dilutive equity deals. They are alsobuying back debt at cents on the dollar in some cases, which can be highly accretive.

All of this courtesy of quantitative easing (The Path of Delevraging - Quantative Ease Please). The Fed has taken out the big money guns and threatened to drown anyone who was short anything and it has been working. The only thing investors hate more than losing their money, is seeing others make money, while they sit out. Those who have sat out this rally may be toast (I would include myself here, but luckily I was stupid enough to be nibbling all the way down....I finally gave up, just about the optimal time to load the boat.)

Those in CMBS land, leveraged loan land or anywhere else risky who don't get long look like they are going to get flattened. Now I'm not a big bull here, I still think the future is going to be quite rocky, but having been a professional investor, I have a feel for how much pain can be absorbed before capitulation sets in (Noah I'm feeling your pain) and this rally has all the marks of sucking in everyone before it's done. Unfortunately, my radar doesn't see out far enough to know what will actually happen once the inevitable correction sets in.

The stock market leads consumer confidence.....but all you wizened Urban Digs readers already know that.....and so the painting of the tape has had its intended effect in the real world. People feel like the storm has passed and despite the recapitalization of the banking system for the 2nd, or is it 3rd time, Ma and Pa won't be pulling their money out of the bank.

The financial mess has been swept into a pile and is being washed away by the monetary hosers. The buck has been passed. This is now on our creditors' shoulders. China, Japan, BRIC and ROW, I wish you all luck. I hope Uncle Sam can pay you back, but if not it will go down in history as the greatest non-military victory of one nation over others since Reagan and company convinced Russia to get into an arms race and that drove them bankrupt. We tempted all these guys into playing our game...capitalism. We even showed them that sovereign defaults are not to be feared, we sharked them by throwing a few hands. Now they are all in....so what if were bluffing? everyone goes broke with us.

The question is, now that we have transferred all the bad debt and liabilities for our diversion into insanity onto the federal government and taxpayer, can we service this debt, without pure monetary devaluation. We are gonna find out.

Noah also wanted me to mention that the bond market dosn't act so great (View image)
and the dollar looks a little shaky (View image).

Have a nice day!

Keeping Broker 'Uptick' Reports In Perspective

Posted by urbandigs

Mon May 4th, 2009 06:22 PM

A: Everybody is hearing about the 'uptick' in foot traffic and deals since prices in Manhattan completed their first wave down from peak. The 4th quarter was dead, the 1st quarter started out dead and then got a bit busier, and the 2nd quarter saw continued increase in traffic/action. The drop off of sales volume in the 4th quarter really marked the beginning of the rollover in this market; even though we were trending down every so slightly for most of 2008. For brokers, who happen to be the source of these uptick reports, the months of MARCH & APRIL & now MAY brought with it a gradual increase in confidence and traffic. Funny, because the equity markets hit their lows in March and are now running on a 30%+ gain in less than two months. I wonder if there is a correlation there? Anyway, brokers are reporting on a month-to-month observation of increased action while I think it would be more prudent to put this market into perspective by observing year-over-year trends. So, how do we stand compared to this time last year, the year before, and the year before that? Warning, it may not be as rosy as the reports!

The NAR is famous for spinning data to the positive by noting month-to-month pickups in activity, even though the y-o-y comparison would show a continued deterioration in the marketplace. Data can be presented in so many ways!

The number of sales in Manhattan's 1st and 2nd quarters should reflect the action reported by brokers during the period of NOV through APRIL or so - removing the variable of lagging new dev closings. The reason for this is that it generally takes a deal 60-90 days to go from contract signing to closing (reasons include securing the loan, preparing the board package, mgmt review, board review, etc.); so if the broker reports on action and deals signed today, it will only be reported in 2-3 months when the deal closes. Front line reporting is very useful, but it could also cloud the bigger picture.

Here is a chart showing you the NUMBER OF SALES in Manhattan's 1st & 2nd quarters, dating back the last 10 years (the 2nd quarter of 2009 is not in the books yet):

*data courtesy of MillerSamuel

THE GOOD: When 2Q data comes in, I am confident it will show an uptick from the 1Q
THE BAD: Taking a step back, year-over-year, sales will likely come in at the lowest pace in 10 years

Both statements are accurate, yet one is misleading and the other is being ignored? As you can see, the 2nd quarter usually tracks well with the first quarter action. Each quarter likely reflects the previous 2-3 months activity, so its lagging in that sense. If only I had more contracts signed data directly from the internal system, we could learn a lot more. Moving on.

You can see the outlier in 2007 as the Manhattan market saw a surge in activity. That spike was the period leading up to the credit boom's peak and the subsequent fall reflecting the illiquid nature of Manhattan sales volume after the Lehman bankruptcy - classic overshoot and now undershoot of activity. Will prices follow the same pattern? This market is likely experiencing the most sluggish action in over the past 10 years! Yet we hear reports that sales are picking up. Picking up from what, dead silence? Nobody is denying that on a month to month basis activity is rising, but if you put it into context of where we just came from and how it compares to this time last year, and the year before, and the year before that, etc..clearly this is a market experiencing its slowest action for this time of year in the past 10 years. Puts it into perspective doesn't it.

There are over 9,000 agents doing business in NYC. Even in a market that sees sales volume year over year down some 47%, you will have agents reporting on a pickup in activity - and as I reported, I am hearing and seeing this pickup in foot traffic myself. But for every top producer benefiting from a pickup in action, trust me, there are many more brokers out there struggling to survive. Plus, what is this pickup being compared to - a period that saw barely any deals done? Even I reported on the pickup in activity, but I called it something different - 'a countertrend pickup in activity embedded in a longer term correction'. I still believe this as buyers seem to continue to price in downturn risk and every deal seems impossible to get executed.

But some will have you believe that this pickup in action, both in foot traffic and in deals signed, is a sure sign of the bottom. That is where you must be cautious as higher foot traffic does not necessarily mean that fundamentals have reversed course - that is where I differ from my peers. Putting things into perspective (even with the pickup in activity), this market is not nearly as active as it was this time last year so we must take the pickup in activity bit with a grain of salt! People want to know when the market will recover, and I worry that these headlines paint a misleading picture of this market and recovery argument on faulty logic. The drop off in 1Q action is sure to lead to a similar type drop off when 2Q numbers are released in July; on a year to year basis. Yet, there was improvement month to month as accurately reported by agents.

As long as this equity rally lasts, there will be a reflation argument out there that is enough to make even cautious buyers pull the trigger with prices down from their peak; that is, if the time and the property is right! And I think this is what we are seeing now. Remember there are deals at every price!

I don't buy into the sustainability of this countertrend pickup in activity because fundamentals continue to deteriorate, and to expect wage inflation in the near future is certainly way too optimistic for me. Let proctologists pick bottoms because as far as I am concerned, we wont know the bottom is in until we have already passed it. Arguing for a recovery based on a 2 month pickup in activity is quite silly, especially when sales volume is so much lower than it normally is for this time of year - again, the bigger picture.

Lets keep it real, because if sales volume all of a sudden gets sluggish again it will lead to another bout of illiquidity leaving brokers wondering why properties are not moving again even with prices down X%. What would be more interesting is if brokers can reveal WHERE the bids are coming in at for these signed deals being reported! That would be useful. Are we seeing an improvement in the strength of bids bringing deals back closer to 2006 levels? Or are properties still receiving bids closer to 2004-2005 levels, yet now we are seeing sellers willing to trade there? Don't forget the nature of this slowdown and that it is affecting the higher price points much more severely than the lower ones. One thing is for sure, WE NEED MORE DATA TO REALLY KNOW WHATS GOING ON OUT THERE!!

Zombie Condos: Fat in the Middle

Posted by jeff

Fri May 1st, 2009 03:57 PM

Zombies.jpgSo I've been crunching away on my zombie condo data. It's tedious work, but as you grind through the data, pictures start to be revealed. Okay, I will admit to being a bit of a research junkie, something a lot of folks get no thrill from. But I get a charge out of finding out things other people don't know....or at least can't prove (it can make you money). So what have I learned about zombie condos?

First off, the city's database, as sub-optimal for doing large scale research as it is, has tons of great data; you just need to figure out where to get it. Want information about the debt on a property? Don't try to look at the mortgage documents; they are not necessarily all there (in my experience) and don't always have numbers in them. Find a unit that has been sold and look at the partial mortgage release. This is the document where the developer's bank let's you, Mr. Buyer, off the hook on the debt attributable to your little piece of heaven, while implying that the developer stays on the hook, for the rest of the units for the rest of perdition. As a service to you and the developer, the lender lists all the debt that has been heaped upon the stamp-sized parcel of land over the years as well as the various and sundry loans the developer took out to actually build the building.

I know, I know, you can't thank me enough for that nugget of wisdom. But bear with me, I do actually have a point to make. By actually looking at the documents for every lot in the building (every piece of land in the city has a block and lot that identifies it and when it goes condo the original lot is subdivided into as many lots as there will be condo units) you can find out how many units have sold and what they sold for (and even the size mortgages people took out....smaller lately). Combine this data with the debt data and you can get a pretty good feeling for whether the developer is going tapioca or not (assuming they don't have a ton of cash sitting waiting to be given to the bank to make up for shortfalls).

So if you are looking at buying a condo in a new development building (you will have to pay all cash if the building isn't 71% sold), you may want to go through this exercise or hire someone to do it for you. Having a bankrupt sponsor is not good for owner relations or property values.

By the way, your broker can look at their "MLS" system, which uses broker reported data to get at the same information. However, these data are stale compared to the city's data, probably because brokers are not good about reporting it in a timely fashion, whereas lawyers register your deed with the city promptly.

So what about the "zombie condos," those where they have not contracted 71% of the units and where people can't presently get mortgages to buy? I have found some interesting data so far. First, some buildings were built with reasonable enough loan to costs and enough upside in the sell out price, that even after selling only 50% of the units, they actually could pay off the principal on the loans outstanding....these guys are in a better position to bargain with buyers, although they still have all that accrued interest to pay (numbers which can only be guesstimated because they don't draw all the construction funds at once and often have reserve numbers in their budgets that can be reversed if things go smoothly).

Most interestingly, zombie condos are fat in the middle and skinny at the tops and bottoms. That is....and this is totally intuitive, but I have now seen the empirical data to prove it....the first apartments that sell out are in the middle of the building because no one wants the lower floors. The penthouse and upper floor sales also seem to be a bit less desirable because of costs. This may not be true all the time, but is likely being impacted by the collapse of the $5 million and above market as a result of this crisis. One of the big problems for developers is that much of the value in these buildings was locked in the ground floor retail units (which also are not selling well), that many built into the buildings and the upper floor apartments/penthouses. So in many cases they have sold out half the units or more, but a disproportionate percentage of the profits have not been realized. So if you go looking for a unit in a partially sold condo, you should push hard for a deal on any high floor or low floor units, there is a lot of unsold supply out there. Who knows, you might even have a floor to yourself for a while.

I will be putting together a list of "undead condos," those where there are still units that need to be sold, but the developer has cashed in enough dollars that they are probably not going to have to turn over the building to the bank. This is probably the least ugly place to go fishing for deals. It will take me a few weeks, so let me see how it comes together and if/how I can make it available to our readers.