Fortune telling, though a terrific ice breaker at cocktail parties, is not the most practical process amongst economists and Wall Street Analysts (albeit a sometimes common trait). Conditions change rendering old conclusions inadequate, while offering limited ability to gain future insights. We don’t have a crystal ball to delve into the future, but this paper does the next best thing in connecting the dots and uncovering the factors to consider when determining the impact of commercial real estate loan default. We hope that the reader analyzing these factors as they fluctuate will find this paper to be a more useful tool than solely reading static conclusions. Currently, these factors and the conclusions that stem from them, indicate the potential for a negative effect on both the economy and hence, the stock market.
FACTORS WHICH AFFECT THE SCALE AND BREADTH OF CRE DEFAULTS
Despite the smaller market size of commercial real estate (CRE) loans, the volume of CRE loan default is expected to be comparable to that of residential loans.
This past Wednesday traders and economists cheered the latest rise of the dollar to a new 10 month high against the Euro. As many celebrate the coming week coloring eggs or eating matzah, the debate should circle around whether this signifies U.S. economic recovery or are other nations simply beginning to deteriorate at a faster rate than the U.S?
Can you have Easter without eggs? St. Patrick’s Day without the shamrocks? How can you have a recovery without consumption based on “real” demand? Current demand is driven by increased government spending financed by unsustainable government debt. Though it may have been effective to halt the onset of a systemic economic collapse in late 2008, its continued dependence diminishes its efficacy and distorts the strength of the economy given a consumer base whose wealth has significantly eroded, burdened with debt, and perceives a higher risk of unemployment/decline in income. In May we were excited about the market’s upside, however expressed caution over possible corrections in the August, September, and beginning of the 2010 time periods. It is because of these points that we believe a correction within the stock market could again be foreseeable in the near term. Let us review the three most common consumer demand drivers: wealth, income and credit.
Amidst cold evenings and the Administration’s latest declaration that the economy is in a recovery we need to be mindful that we’re not out of the blizzard just yet should we continue down our current path. In May 2009, we addressed warning signs suggesting that the economy being cheered on by many economists appeared unstable, which we still maintain. Areas of concern still exist.
Background: Much of the attention of the housing crisis has focused on homeowners and lenders. Often, the business press uses the word “lender” to include the role of “servicer” as though the differences between them are inconsequential. These differences do in fact matter. This paper will shed light on the power of the mortgage servicing industry to determine the outcome of mortgage delinquencies to the detriment of investors and homeowners. An environment of increasing delinquencies provides servicers with incentives to pursue their own self interests at the expense of investors and borrowers. Existing compensation structures, lack of oversight, informational asymmetry and consolidation of the mortgage servicing industry ensure servicers can act in their own interests with limited impunity. This paper further suggests a servicer with restructured incentives aligned with that of the investors would make the government bailout plans more effective in keeping homeowners in their homes.