Commercial Real Estate: A Bigger Problem Than Expected?

A coming wave of defaults on loans to developers of condominiums, office buildings and malls could do significant damage to the already deflating economy. That was the overwhelming concern expressed at a public hearing of the Congressional Oversight Panel on Thursday that focused on corporate and commercial real estate lending.

The COP was set up last fall as part of legislation that gave the Treasury Department permission to spend $700 billion to rescue the nation's ailing financial system. The panel, which is headed by Harvard Law professor Elizabeth Warren, has no legislative or official regulatory powers. It is supposed to monitor the Treasury's spending and report back to Congress as to whether it is being effective in boosting lending, and shoring up the financial sector.

Thursday's hearing was one of a number of public forums the COP is hosting on different segments of the lending market. Warren is often criticized for being too critical of banks and their lending practices. But at the hearing on commercial real estate Warren focused on how big a problem future loan defaults will be and what should be done about it.

She got an earful. Richard Parkus, an analyst at Deutsche Bank, said he thought two-thirds of all commercial real estate loans due in the next few years, hundreds of billions of dollars worth, could go bust. Jeffrey DeBoer, president of trade group The Real Estate Roundtable, fretted that problems in the lending business could cost the nation thousands more construction and real estate jobs. Next up, Congressman Jerrold Nadler of New York expressed worry that the country was headed for a lost decade of economic stagnation.

There were not a lot of solutions offered. Nadler said he thought the government should create new banks. Those banks, unencumbered by souring loans, would boost lending. Nadler said he thought private investors would be interested in helping to fund the new banks. A number of the panelists thought the government's TALF and PPIP programs meant to boost lending were helpful, but not the answer. Parkus said he thought extending terms of commercial loans set to default would only delay the problem and make it worse. As more and more bad loans pile up, he predicted, it will become progressively harder for any of them to get refinanced.

What was clear from the hearing is that commercial real estate could turn out to be a much bigger problem for banks and the economy than the Treasury Department, the Federal Reserve and other bank regulators seem to believe. "The question is what percentage of commercial real estate loans will have trouble refinancing," Parkus said at the COP hearing. "It is likely to be a big problem."

How big? In the government's recent bank stress test, examiners predicted that commercial real estate loan losses for the 19 largest banks in the nation would be far lower than the value of home loans that go unpaid in the next two years--$53 billion versus $185 billion. But Warren said she thought the two-year horizon of the government stress test may have understated the size of the banks' commercial real estate problem. The government assumed different default rates for each of the 19 banks for commercial real estate and other types of loans. Warren said the government had not given much information as to what determined the default rate used for each bank; she plans to release a report on the stress test in early June.

Parkus concurred that the stress tests probably went too light on potential losses. He expects that a little over a $1 trillion in commercial real estate loans will be up for refinancing in the next four years. Because of falling real estate prices and lower rental incomes, he said, as many as two-thirds of those loans may not be eligible for refinancing and could end in default.

Kevin Pearson, executive vice president of M&T Bank, said he thinks banks will be able to avoid many of those loan losses through loan modifications, or "through blocking and tackling," as he put it. Parkus, though, said that outlook was too positive. He countered that banks will have a very tough time refinancing the poor loans they made at the height of the credit bubble. "There are very large losses embedded in the system," said Parkus.

Source: http://www.time.com/time/business/article/0,8599,1901718,00.html

Greedy, immoral' real estate agent jailed

A REAL estate agent who duped an elderly man into selling his property to him for half its value has been jailed for two years.

John Michael Talia, 53, of Melbourne, (pictured above) was found guilty earlier this month of obtaining property by deception.

The Victorian County Court heard that in 2001, Talia bought a Burwood East home belonging to Antonino Carbone for $150,000, but it was later independently valued at $300,000.

Mr Carbone was in his 80s and in a nursing home at the time and his friend Stella Garretto was acting on his behalf when she sought advice from Ray White Real Estate in Doncaster East.

Talia's wife, rental consultant Sue Talia, told Ms Garretto her husband might be interested in buying the home as an investment property.

Judge Michael Bourke said Talia instructed a long-term associate to issue an appraisal valuing the house at $135,000 to $155,000 without viewing the property.

The judge said Talia, from Doncaster East, was motivated by breathtaking greed and his behaviour was outrageously immoral.

"You cheated two vulnerable people of the large part of the real value of an elderly man's home," he said.

Talia was sentenced to a total of three years in jail with 12 months suspended for a period of three years.

4 investment tips for a recession

After many years of excellent growth in the UK, the economy is now on the cusp of a recession. House prices are falling, the stock market has seen some trouble and the price of family staples such as food and petrol is shooting up. Despite this, there are ways that you can safeguard your personal economic situation and here are four useful tips to help keep your finances looking healthy.

1. Pay down your balances.

There’s never a more important time to pay down your credit card and loan balances than when you may be facing a job lay off or other financial hard times. This is similar to earning a guaranteed return, which is equal to the amount of interest you save by paying off a credit card or two. You may want to consolidate your credit card debt into one manageable monthly payment by taking out a loan.

2. Prepare for the worst.

Banks are not likely to loan money to people who have been laid off or are otherwise influenced by a trying economy. Set up a home equity line of credit now, while you are still able, and you’ll have access to the cash should you become unemployed. If you’re in need of finance, then Alliance and Leicester can provide loans at low rates, while taking a look at their loans calculator will help you work out what you can afford.

3. Buy stock.

It seems odd to buy stocks when everything is slowing down in the economy, but typically the stock market dropping is a sign of better times to come, and soon. Buy stocks now and you’re likely to experience a nice return when the economy takes a turn for the better. If you’re inexperienced in stock picking, then it is probably worth considering an ETF. These funds have low initial set up costs, and then they track the performance of a particular index. Take a look at the London Stock Exchange for more.

4. Forget about chasing bond yields.

In previous years, investors would abandon stocks and other investments in favour of bonds to try and ride out a recession or economic downturn. This time though, the stock market and economy is actually suffering due to problems in the bond market. Unless you are a highly skilled investor, it’s not a good idea to try and chase high yields sometimes offered with bonds.

Source: http://www.inthenews.co.uk/associate-article/four-investment-tips-recession-$1235555.htm

Do You Think This Really a Good Time to Buy Real Estate?

Ask a Realtor, and you will get a resounding, "YES!" Watch any news network and you will sink into the doom and gloom forecasting that will have you watching every penny you spend. While you should definitely learn to read your local real estate market, it is more important that you gain an even better understanding of your own finances and long term goals.

It is true that we are currently experiencing a buyer's market. There are a lot of deals to be had out there, with foreclosures flooding the market and homeowners desperate to unload some of their financial burdens. Prices have fallen, even dramatically in some areas. Merrill Lynch says that home prices will fall 15 percent this year, and possibly another 10 percent in 2009. And with 30 year fixed rates at record lows, why shouldn't everyone be buying?

It is not only about the economy's health but rather about your personal wealth. There is a new bottom line in the real estate market: if you have a sizable down payment and a good credit score, you might get a loan. The pendulum has swung. Lenders have written themselves into a tight spot, have lost billions of dollars, and are not willing to take the same risks they did just a few years ago. Once-upon-a-time it seemed like anyone with a pulse got a loan.

Today, you have to prove your worthiness. Lenders will be willing to invest in you if you are willing to invest in yourself. If prices continue to drop, perhaps this is time you should take to bulk up your credit score and bank account.

While you are taking this time to empower yourself, keep an eye on the market. It is much better to buy while there is a down-trend than to wait for values to begin to climb, as they inevitably will. Interest rates will creep up again. This is the time for you to be proactive in a timely fashion. The real winners will be those that prime themselves by preparing beforehand.

Article Source: http://EzineArticles.com/?expert=Wesley_Barnes

By Wesley Barnes

Bearish Sign for New York City Real Estate

By: Zero Beta Wednesday, August 13, 2008 10:00 AM

Another great article about the status of New York Real Estate

It may not be the best time to buy or own New York City real estate.

Bloomberg reported today that losses on Wall Street have are going to cause years of lost city and state tax revenues.

From Bloomberg,

Wall Street’s mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services, Mayor Michael Bloomberg said.

Some companies are seeking refunds from the city on taxes they paid ahead of time, saying losses have cut their tax liability to zero. The banks pay tax on 110 percent of earnings in advance as a “safe harbor,” protecting against penalties for underpayment.

“It will be a number of years before Wall Street starts paying taxes again,” the mayor said at a press conference yesterday in Manhattan. “They will carry forward all of those losses.”

Financial firms posted $501 billion in writedowns and credit losses worldwide since the start of last year, a figure the World Bank predicts may rise to $1 trillion as the credit squeeze sparked by the subprime market collapse worsens. The tax drain is particularly serious in New York, where Wall Street accounts for 20 percent of state revenue and about 9 percent for the city, state Comptroller Thomas DiNapoli has said.

“If the World Bank’s prediction that the large investment banks will book up to $1 trillion in writedowns because of the mortgage crisis is true, then Mayor Bloomberg is absolutely right,” said Lynn Turner, former chief accounting officer of the U.S. Securities and Exchange Commission. “These guys won’t be paying taxes for some time.”

While 20 percent of state revenues and 9 percent of city revenues are substantial enough, this only scratches the surface on the effect that the credit crunch will have on the city.

As Andrew Cuomo goes after the banks for their involvment in the ARS market, the death of this market means that municipalities in New York and the rest of the country will find it much harder to raise debt. Add on to that the monoline blowups and we see a city that will either have to pay more to finance its services and programs or find it cuttting them to keep a balanced budget. Many of these services make many New York neighborhoods desireable places to live.

In addition, overall downsizing across Wall Street will lower income taxes and, more importantly, steer jobs and their wages away from the city. It is my contention that incredible renter demand is the tide that lifts all real estate in New York, and if we see that demand ween, look out below. Today it was announced that Wall Street is increasingly outsourcing its “grunt work” overseas. (hat tip AR). While a small piece of a much larger trend, the young professional is an important demographic to the New York City economy. As Wall Street bonuses shrink, the many merchants with businesses in the city will hurt as well.

The last blow for New York real estate will be a rise in property taxes to try to cover these lost revenues. In June it was announced that an anticipated property tax cut may have to instead be a tax hike.

This all has a very reflexive ring to it, and reminds me of a classic “boom-bust” cycle that would make George Soros proud. What convinces me more is that there are many people out there who beliieve that New York City real esate is untouchable and will escape this crisis relatively unscathed. While foreign investment may soften the blow, I think the New York real estate market could be a ticking time bomb.

Own Real Estate But Not A House

A Nice Article from Robert Stammers at Investopedia last 08.13.08, 5:00 PM ET

Historically, real estate has had a low correlation to stock and bond investments, but buying and selling physical property is not nearly as simple.

Enter real estate derivatives. These instruments allow investors to gain exposure to the real estate asset class without having to buy or sell properties by replacing the real property with the performance of a real estate return index. These derivatives are based on swaps, where one party swaps one exposure for another. In this way, investors can get exposures to either real estate equity or debt without ever buying a real estate asset or lending capital with real estate as the collateral.

The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI) is the accepted index created to provide an instrument to gauge the investment performance of the commercial real estate market. Originally developed in 1982, the unleveraged index is made up of more than 5,000 properties worth a total of about $309 billion (as of 2008) from all the U.S. regions and real estate land uses.

Although this index has been in existence for more than 20 years, it is only recently that data has become transparent enough to allow it to accurately and appropriately track the performance of equity real estate. With real estate data becoming more transparent and transaction information becoming easier and less costly to obtain, real estate indexes have become more relevant, leading to the creation of an increasingly efficient derivatives market

Source: http://www.forbes.com/investoreducation/2008/08/13/derivatives-realestate-swaps-pf-education-in_rs_0813investopedia_inl.html