Fearing losses, banks are quietly dumping real estate loans
nytimes.com> It’s an early but telling sign of the broader distress brewing in the commercial real estate market, which is hurting from the twin punches of high interest rates, which make it harder to refinance loans, and low occupancy rates for office buildings — an outcome of the pandemic.
And that's what I think is behind much of the push for RTO. While a lot (if not most) office space is rented, corporate executives are the kind of people who could have a lot of money invested in commercial real estate. They see this large threat to their portfolios, so they're trying to keep their assets from depreciating.
> corporate executives are the kind of people who could have a lot of money invested in commercial real estate
Sure, many of them do.
But there's something else they are far more invested in: their company (through huge pay and even larger stock option grants).
I don't buy this meme that CxOs are willing to hurt company efficiency just to protect personal real estate investments, when for nearly all executive (I'm sure there's some exception but not enough to matter) they own far more share in the company than in their side business in real estate.
>I don't buy this meme that CxOs are willing to hurt company efficiency just to protect personal real estate investments
I do. Think of all the inefficiencies you've seen reported (or reported yourself) and nothing is done. On the grand scale companies have abandoned the idea of retaining talent altogether, with best performers leaving over the refusal for some 10% CoL raise and hiring/training a new person for 20% more.
I think the most dangerous part is that these aren't rational actors fully focused on maximizing long term profits. So they aren't making seemingly rational decisions.
As an alternative viewpoint, there are probably a lot of peer pressure from people we never see nor hear about that can influence these CxO's as well. They are still people at the end of the day (85% of the time or so). if their friends or [company they admire] do something they will follow suit, no matter how incompatible it is with their company.
I asked the CTO/R&D manager at a company I worked for once why he didn't bother getting talent or retaining talent, he said (paraphrasing): "Because I can't scale talent I might as well don't bother with it"
Many large corps are fine with being on the thick part of the Bell curve, their managers can easily scale if the board says they should output more, they are essentially linearizing their whole company around a point and they can scale up/down around it.
It works until someone else innovates and beats them, and then the loop repeats.
It's in some sense good that CxO's behave like this, because it leaves opportunities for smaller companies all the time.
Agreed. But, companies are owned primarily by funds that in turn are exposed. If there is some pressuring to save real estate, it’s not the C suite, it’s the stockholding giants
I think this doesn't get enough attention. The biggest shareholders in many companies are index funds like Vanguard and BlackRock, which often have the right to vote on behalf of the shares in their ETFs. Their interests are in ensuring the entire ETF goes up, and a real estate deleveraging would do the opposite.
>> Their interests are in ensuring the entire ETF goes up...
Things like automatic enrolment in 401K plans, or automatically bumping employee contributions by 1 percent will also benefit the broad market and funds.
Yes, as does curing COVID and protecting the environment.[1] And on the less good side: broad-based price hikes instead of fighting with the competition over market share in a race to the bottom.[2] It remains to be seen whether ETF ownership is connected to "greedflation", but I believe so.
[1] https://newsletterhunt.com/emails/12216
[2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2632024
You shouldn't assume this much competence of anyone, including anyone in upper management. This is a fallacy both you and the GP make, though it is a bit easier to believe that they think their company suffers because people work from home. It is a fairly incompetent attitude, with very little if any basis in real data.
Having spoken with over 100 CXOs and founders on this, this is never the issue. If you invest in corporate real estate you do it through a liquid vehicle, not owning the actual contracts.
The push to RTO boils down to:
- leaders want the over-committed. Remote doesn’t feel like that.
- they miss working in person as a team and the fuel it provides for getting things done. Remote doesn’t feel like that.
It is almost universally a gut-sense that has driven the effort.
I think it does make sense for the leadership team and their close team members to work in person most of the time.
But there’s a funny flip side to this - almost all of them are on the road most of the time. Coming back to an empty office sucks.
I’ve been building remote-first companies my whole career. I prefer frequent onsites to offices.
But in the end, the prestige of the office, social cohesion of organizing life around it, and personal sense of power from having a team around you are unlikely to be replaced by any alternative for most leaders.
What I don't think people realize is that, in general, the people that stand the most to lose from these kinds of things are not banks. Banks typically hold assets for others, not in their own right.
By far, the biggest investor in real estate is government pension funds. Government has every vested interest to enforce RTO, because without it, if companies stop leasing space, then government pension funds will be unable to pay out.
All too often people assume 'greedy bankers' are the ones who are going to lose. That's wrong. Bankers are the middle men. Bankers don't care. They'll get their cut.
Isn't a lot of that tied up in residential real estate investment trusts though, which offer the much more perverse incentive of pushing rents as high as they'll go, to the point of increasing homelessness?
It's tied up in both. Pension funds were severely underfunded, and unlike a 401k, they're defined benefit. Money was promised decades ago and now it's time to pay up, but they're not at where they need to be to make payments.
Thus... there's no other option. Government has had to seek out incredibly dangerous investments. The largest purchaser of hedge funds, venture cap, etc... is pension funds. People claim evil capitalists are driving greed in expected return. To the contrary. The government is demanding high rates of return, and enterpreneurs and capitalists are providing a supply.
Then, when things go wrong as they inevitably will, because you can't beat the market's valuations, everyone points fingers. But the demand for the high rate of return is primarily driven by government pension funds. Without them, a more modest rate of return would be demanded, and companies like BlackRock, Vanguard, etc, wouldn't be incentivized to purchase commercial or residential real estate in those amounts.
Real estate infuriates me to the point that I find myself hoping it burns to the ground and that the whole industry suffers.
“Real estate always goes up” is treated like a damn entitlement to the point that the financial well being of everyone under 40 today has been sacrificed to it. In 2008 it felt like the entire real economy was put on the chopping block to bail it out.
I’d love for a real estate market that looks like Japan. That way the real economy built around people actually doing things could flourish free from endless real estate idle rent extraction.
Agreed. The de-risking of the housing market has been disastrous for <= millennials.
The de-risking has come in the form of artificial scarcity caused by zoning gatekeeping and outdated fire code, amongst other things. It’s time North America took a hard look at the root causes and fixes them before there is a crisis of confidence in leadership (which is already happened to me - I’m moving out instead of buying in to the insanity.)
It really started with Greenspan's juicing the markets in the early '00s due to the dotcom bust and 9/11. We got a short reprieve after the 2008 crash. But the markets have been fucked up for a while now.
Arguably the '08 crash was bad long term too. As far as I've read, a lot of people got out of the industry after that, which made it even harder to build.
He was juicing the real estate market before the aughts, and he was even warned before the aughts. There are clear indications and evidence that he did that with designs.
I think the general consensus is that Greenspan was an ideologist and effectively a useless Fed chair since he didn’t believe in regulation. The only reason he was probably not ousted was because he had enablers with the added leverage that the economy was doing pretty well during his tenure.
> The de-risking of the housing market has been disastrous for not(1%class)
fify,
the problems are class-based, not age/generation-based. the intergenerational conflict is fed by the 1% to keep us from paying attention to how they are robbing us.
It's both. The class of younger generations who can afford to be homeowners is much smaller than it was when previous generations were that age. Sure, it was never easy for most 30 year olds to buy a home but now a 30 year old has had to have a LOT of things swing their way to even consider it.
I don’t mind this narrative and you’re true in most areas, but home ownership is so tightly correlated with generation OP’s comment in not incorrect.
At every age baby boomers were more likely to own a home than millennials at the same age.
https://research.stlouisfed.org/publications/economic-synops...
None of that would be a problem if people could just build.
We need to double the number of bedrooms in most major cities.
You probably mean we need to double the number of bedrooms available for sale/rent
> You probably mean we need to double the number of bedrooms available for sale/rent
No. I mean double the total number of bedrooms.
It is absolutely necessary public policy to completely gut the price of real estate across the country. I am aware that it'll be painful.
I'm not objecting to causing pain for property owners, I'm saying that doubling the number of bedrooms in a city is nonsensical (if you double the amount of residential area in a city, where will it go?), and also that you're underestimating the impact on the market of a relatively small increase in supply.
> if you double the amount of residential area in a city, where will it go?
You don't need to double the area, you just need to double the density, which is easily done by eliminating exclusionary zoning. The scarcity is artificial.
> you just need to double the density, which is easily done by eliminating exclusionary zoning
I think you should double-check the numbers on this before you assert something is easily done. I live in NYC--are you saying we should live in half the space that we currently live in? A 400sf 1BR apartment should now be a 2BR apartment? Please draw a functional layout for this apartment.
And to what end? The population of NYC is ~8 million. You think the population should double? Where are all of the new people moving from, and what should we do with the houses they are currently living in? You don't need to double the total supply of housing to dramatically affect the housing cost--you just need to increase the supply of housing for the people who are looking right now, which is a much smaller number than the total number who live in the city.
New York is a real outlier among American cities and I'm sure its needs are different. Here in Seattle, three quarters of the land available for residential use within the city limits is zoned exclusively for single-family housing. This is absurd. Yes, the population of the city should double: the alternative is that all those people will be pushed out into ever-further reaches of suburban sprawl.
Density doesn't mean making spaces smaller, it just means making more of them. Usually this is accomplished with more floors. If you look at NYC, a huge portion of it is buildings are <= 12 stories. NYC is unique in its density and is certainly a model for other cities in the US, but in terms of fulfilling its own livability needs.. it will have to become denser through height. Even NYC must address its demand with additional supply within Manhattan -- up is the only way to go.
Instead what we see today in NYC is the same as what we're seeing around North America. NIMBYism, heritage protections, gatekeeping, lawsuits, FUD, political grandstanding, etc.
There aren't enough people in most major cities to come anywhere occupying that many bedrooms. Are there enough people in rural areas, suburbs, and minor cities that want to move to major cities to supply renters for them?
> There aren't enough people in most major cities to come anywhere occupying that many bedrooms.
Right now.
But that's because it's too expensive to live there, so people move to outlying areas. But if the cost of housing starts to drop, people will start moving in, which will stymie the cost declines.
I'll admit that I'm not intimately familiar with all of the large cities in the US, but Seattle would be a slam dunk. The suburbs are way more populace than the city itself.
Same with San Francisco, although that city has more problems than just a shortage of housing.
I'm not sure to classify New York City, but Manhattan could easily double its bedrooms with no shortage of demand.
You ain't gonna make it cheap, exactly, in those places. Look at Manhattan compared to Seattle - there's ALREADY far more dense housing in NYC than Seattle, yet prices stay high. People will be willing to pay more for those places with more amenities. That will continue.
But you're gonna make it a lot more livable and arrest the rate of inflation.
It may never be cheap, but it should be possible to drive down the cost of housing to the cost of construction. A big part of getting lots of building done is to take a chainsaw to existing regulation.
* No minimum lot size
* No parking space requirements
* No single family zoning in the city - minimum is multi-family, 15 stories.
* No requirement to match the character of the neighborhood
* No height based additional setbacks
* No rent control
* Get rid of the anti-dorm laws[1]
* No historical preservation without the city buying the property in question
* No building plan for the city - replace it with a "shall issue" policy where the city has to have some affirmative reason to block the permit or it gets issued by default.
There's probably a bunch more that should probably be done away with; those are the ones I can think of off the top of my head.
---
1. It's very common in cities to ban dwellings that house more than x (typically 4) un-related adults.
Voting with your feet is the most practical option.
I know it's not what seems like the most fun solution but there is merit in this.
For anyone in their 20s or 30s.. you only have so many years even if it seems life is long. If your current city makes it impossible to have the housing you want you have two choices. Try to change it, which is noble but can take many decades. Or move.
I can't fault anyone for trying to change it since improvement is a great cause. But do you want to find yourself 60 years old, still waiting for those changes?
I'm on the younger side of GenX so not in my 20s anymore. But when I was in my 20s I wanted to desperately live in my chosen city (Manhattan). I tried everything but it was way too expensive to reasonably rent, forget buying. I gave up and moved and bought a nice house for less money than a closet in Manhattan.
The compromise here could be you can now have vacations in Manhattan. There's an odd thing that happens to most of us where we become convinced we HAVE TO live in certain places and we get tunnel vision because of that. Personally, I think the sweet spot is living 20-40 minutes of such places. It tends to be more peaceful further from downtown areas, considerably more affordable, yet still close enough you could day-trip it and enjoy the amenities.
> I think the sweet spot is living 20-40 minutes of such places
Well it's more than that (where is it cheap 20 minutes from Manhattan?), but in general you're right.
Move out to the suburbs, far enough that it's cheap(ish) but you can still visit.
There are really really good reasons why certain places are expensive vs. cheap. Having no access to walkable areas, fresh food, education, safe water, or public amenities in general is not a dignified way to live for most people. It's not about fun, it's about your health, community, support system. Changing that situation in cheaper areas is not necessarily going to be easier than changing housing affordability.
> Having no access to walkable areas, fresh food, education, safe water, or public amenities in general is not a dignified way to live for most people.
These things are easily found outside of Manhattan (in my example, or whichever large downtown area you prefer).
In my little suburb I can walk to just about everything I could need, multiple farmers markets for fresh food (probably more than in Manhattan since there are many farms within an easy drive; not too many farms in Manhattan!), top rated schools, public parks, libraries, theaters, etc.
The only thing missing here compared to Manhattan is tons of bars within walking distance for the nightlife. There are a couple breweries within walking distance so that's good enough for me, given all the tradeoffs.
> These things are easily found outside of Manhattan
True, but in my experience every place that’s satisfactory on these fronts is also getting insanely expensive, even the suburban areas. I currently live in a walkable small town and COL in walkable areas is essentially the same as, say, Astoria, without nearly as many transit options or amenities.
I'd challenge that. I recently moved and was able to find a place that had all that and was cheaper. Having lived in big cities all my life, I totally believed that only big cities had this. Of course, now that I challenged myself to look outside the box, I was finally able to find something.
I don't know of anywhere that I can move to in Canada that has the zoning rules I want and also a hospital. I'm not sure I could even find a place sans hospital. I think that means I have to vote with my ballot, not my feet.
what zoning rules do you want?
Calgary, Edmonton.
That’s what our family did.
> “Real estate always goes up” is treated like a damn entitlement to the point that the financial well being of everyone under 40 today has been sacrificed to it. In 2008 it felt like the entire real economy was put on the chopping block to bail it out.
Real estate took a bath in 2008. So much that it scared developers and investors so much that they slowed building to ridiculous paces
If you want reasonable housing prices in the US you need either:
- to change demand so people want to leave today's dense and expensive cities and stop competing-up the prices. The "RTO is all about commercial real-estate" true-beleivers think remote work alone could do this, but the last few years aren't providing strong evidence of that. Density and geography have other appeals.
- or, some way to re-start massive construction in those in-demand areas to push rents and individual-unit pricing down... but in this case, the price of the real land would actually go way up (there's no development if there's no future value > present value)
Hear hear. It's time for a teddy Roosevelt figure to come along and gut real estate investors.
The US no longer has politicians like Teddy Roosevelt anywhere in sight.
I mean, Bernie was pretty close until the machine behind the Democrats worked as hard as they could to force Biden. They almost took Bernie off the ballot here in New York when it was clear Biden was getting the nomination.
I realized the other day, and I might've been in denial about it, but I cannot return to my home city as it's just too expensive now. Even if I wanted too I simply couldn't afford it without introducing quite immense financial stress into my life.
In some way I hope it crashes as well, just so I can get back in if I wanted too, but on the other hand, so many of my friends and family have bought into the "real estate always goes up" mantra that if it goes backwards, they will be ruined financially. With interest rates up and their mortgage repayments going up dramatically, I've already seen more divorce than I ever imagined I'd see. The financial pressure just broke marriages.
In hindsight, I'm probably better off now that I moved away to a cheaper place in the mountains and leave nearly debt free. I invest my money rather than give it back to the bank with interest.
all those 'we are all in this together' billboards you saw posted up in 2020 wasnt for the frontline workers or cashiers.
Why would frontline workers need further encouragement after their 12 hour shifts when they were already being rewarded in the form of window displays [1] and gift cards [2] to Chipotle and Bed Bath & Beyond?
[1] https://www.travelandleisure.com/travel-news/monuments-hotel...
[2] https://newsroom.chipotle.com/2021-04-27-Chipotle-Invites-Fa...
I’ve seen this conspiracy theory so many times, and it just doesn’t hold water for me. Let’s see some actual evidence, not baseless speculation.
To be clear, it looks like we're talking about commercial real estate here.
And commercial loans look nothing like what you would use to buy a home with.
Most of them are 5 year (there are others), interest only and a massive balloon payment at the end. They are written based on the income of the property & its value. We're seeing these markets unwind, and it isn't going to be pretty.
Commercial property across the board (not just offices) has been in a strange place for a long time, and it isn't getting better.
Commercial real estate was a minor meme at one point.
Just moments ago I read that regulators are raising flags about banks' plans for unwinding their derivatives portfolios. Then I come here to read this. Likely happenstance. Maybe no connection. But a little jarring. Then again, they say there are no coincidences!
https://www.reuters.com/business/finance/us-bank-regulators-...
To be clear, I owned a big bank risk platform for about 10 years and this is an ever reoccurring story and nothing I read in the article you linked feels concerning or abnormal. Particularly on the living wills, stress testing, and capital reserves it’s a bit of a game of chicken between regulators and the regulated. The reality is things are considerably better than they were in 2007.
> I owned a big bank risk platform for about 10 years
Have you written about this anywhere? I can’t decide if it was mindnumbingly boring or the ride of a lifetime (leaning towards the latter).
The ride of a life time :-) maybe some day. I still have substantial equity LOL
Hahah well once that equity pays out, post the stories to HN please!
I live in perpetual wonder that here in the US I have locked in a 30 year 2.3% mortgage, which I use for leverage, whereas back home in the UK people have to refinance every 2-5 years and so their mortgages trend roughly over the prevailing base rate for the term of the mortgage.
Yes this article is about commercial real estate but it shows something is actually very broken from a credit market perspective - my loan is probably going to be underwater for the financier (JPMC assumed from FRB) for the rest of the term (just on the fed rate, but then I'm also making a margin on the leveraged capital. And tax deductions on the interest.).
> I have locked in a 30 year 2.3% mortgage, which I use for leverage
> but then I'm also making a margin on the leveraged capital.
Do you mind expanding on this? I’d like to understand what you are doing, as a fellow ridiculous mortgage holder.
A not very degen version of this is taking money that you might spend on your mortgage at a rate under 3%, and putting it somewhere safe that earns more than 5% (not hard to find).
Isn't what you describe using your own capital to use as an investment instead of paying down the mortgage?
How do you use the leverage (debt) from the mortgage to put in a 5% investment?
I already owned the house free and clear. Was offered stupid (good) terms for a mortgage so I took it. Used the money to create a return that pays back the monthly interest and principle while still creating a return AND tax deduction.
Ah, thanks for the explanation. Unfortunately not something I can do.
It's called a humblebrag. Person responded offtopic to demonstrate how savvy they are investing, then steered back on topic with a brief anecdote.
Don't cry for JPMC. They most likely hedged the interest rate risk when they bought the bundle that included your mortgage (or some slice of it). I doubt that they are really underwater, at least not by much.
You can get a fixed 30 year mortgage in the UK. Most people choose not to. There's nothing intrinsicly different about mortgages in the UK compared to the US.
At that rate? lolno. When interest rates were low you would pay more than that for a 10 year fix. Now with high interest rates one bank is bragging about having the longest fixed rate mortgage at 15 years. The US government strongly incentivizes long-term low-rate mortgages in a way the UK government does not.
You guys are moving the goal posts. He said you can't do it, now you say it's not as cheap. That's with hindsight of where the interest rates went. If they had gone up it would have been a good deal.
The cost is the whole point. Any 30-year mortgage that might be on offer in the UK (turns out, actually none at all available to the average homebuyer) would be a far worse deal, even given the interest rate changes we've seen.
Was there any point when you could get a 30 year fixed loan at 3% in the UK?
It makes sense that some banks might be offering them now at 7% since they have little to lose but I don’t think low interest longterm fixed mortgages are really possible without significant government interference (like in the US).
All this is true. The US government does significantly subsidize home loans. However they do this for all lengths of mortgages, not just the long ones.
They're doing it so quietly it ends up in the new york times.
Every six months or so since 2021.
This triggers sub prime deja vu.
These articles don’t provide the complete picture. Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans.
They may not be future underwater loans. Buyers are speculating on a distressed asset someone is willing to let go at a discount. Might be worth nothing, but also might be worth something. Banks have more stringent regulatory requirements with regards to these loans than speculators.
From the piece:
> For investors, the attraction of snapping up discounted commercial real estate loans is that the loans could be worth a lot more if the industry recovers in the next few years. And in the worst-case scenario, the buyers get to take possession of a building at a discounted price after a foreclosure.
“Buy when there is blood in the streets” — Baron Rothschild
> Might be worth nothing
In the US it's more or less impossible for the loans to be worth "nothing". They are usually secured by the property itself. But the loan itself is worth less if it's in default, rather than not quite yet in default. So it can be a better deal for a bank to sell it away now rather than later.
These investments should have immediate positive value at the right price, but there are potential edge cases that are catastrophic to such a speculative play (maybe have to tear the building down, future dispute wrt claim, etc). Unlikely, but possible.
It doesn't seem wildly unlikely: there is a fundamental shift in how office spaces work.
But the other side is possible too: even if the loans had a guaranteed long term value (like SVB's bonds), they could be an issue in the short term. More so if getting the value out of the loan requires both time and effort (eg: legal costs).
Yes, and we do hear sometimes of a massive pile of taxes due, coming with the building.
>> In the US it's more or less impossible for the loans to be worth "nothing".
Totally disagree. A loan can absolutely be worth nothing, especially if it is a 2nd/subordinated lien.
Imagine you buy a house for $1000 with $800 borrowed ($700 first lien, $100 second lien.)
If the home goes down in value 30%, the second lien is worthless. The administrative and legal cost of recovering the second lien may be greater than the recoverable value of the second lien, which in this case is $0.
You're describing a situation where the second lien is underwater. This is not itself the value of the loan.
Just in the obvious case, if the borrower continues to pay, the lien is worth the future value of its cashflows. Not everyone who goes underwater on a loan simply stops paying.
In the US, even loans in default tend to have some value, because speculators are willing to buy the debt and attempt collection.
>> You're describing a situation where the second lien is underwater. This is not itself the value of the loan.
Correct, but once underwater, an default renders the loan worthless.
Underwater+Default --Usually--> Worthless 2nd lien
>> Just in the obvious case, if the borrower continues to pay, the lien is worth the future value of its cashflows. Not everyone who goes underwater on a loan simply stops paying.
Totally agree, but not everyone has a choice (divorce, lost job, floating rate rises, wages fall, etc.)
>> In the US, even loans in default tend to have some value, because speculators are willing to buy the debt and attempt collection.
Yes, for recourse states, not for non-recourse states because the later only offers the liquidation of the home as collateral and nothing else. https://www.quickenloans.com/learn/the-difference-between-re...
> Correct, but once underwater, an default renders the loan worthless.
Incorrect. A loan in default can usually be pulled out of default, or otherwise re-structured to keep the borrower current. They are not worthless. In fact, there's a whole sub-industry devoted to this called "special servicing". Even for underwater loans, people tend to want to repay their loans.
You are directionally correct that as a loan gets further into default, it loses value, but this is not a step function, and it certainly doesn't happen instantly on default. You're over-indexing on an exceptional outcome from an exceptional time -- even in 2008, the vast majority of distressed borrowers weren't walking away from their loans.
Then, just take the example and imagine they declare bankruptcy. That loan is going to be worth 0 in the vast majority of cases.
Loans go to zero. It happens in real estate, it happens in oil and gas, it happens in other places I'm sure. It's not especially common, but it happens.
>> Then, just take the example and imagine they declare bankruptcy. That loan is going to be worth 0 in the vast majority of cases. >> Loans go to zero. It happens in real estate, it happens in oil and gas, it happens in other places I'm sure. It's not especially common, but it happens.
It is common, but at the end of a cycle. The chances of second lien loans being worth zero are higher and higher as leverage increases. This is for two reasons:
1. The greater the leverage, the smaller the required downturn to turn everything underwater. With 5% down mortgages, a 5% decrease in housing values makes you underwater (esp once you consider transaction fees.)
2. The greater the under-water, the less incentive owners have to continue paying, especially in non-recourse jurisdictions where no bankruptcy is required. Owners do "jingle-mail" where they mail the keys to the bank (figuratively) and walk away without having to declare bankruptcy. The bank is left with the mess.
Freddie Mac is already pushing to do 2nd lien HELOCs (https://www.housingwire.com/articles/freddie-macs-proposed-h...) and Fannie is considering it.
> the less incentive owners have to continue paying
People keep saying this, but the only time they can come up with examples are when the owner wants out of the property. In the case of a home loan, being underwater is meaningless if you're not going anywhere. Most people will continue to pay because they need a place to live. I have yet to hear of someone who was underwater on their primary home loan and decided to stop paying it and default just because. For an investment property I could see that happening. For the house that you plan to live in for the next 20 years? No.
>> People keep saying this, but the only time they can come up with examples are when the owner wants out of the property. In the case of a home loan, being underwater is meaningless if you're not going anywhere. Most people will continue to pay because they need a place to live. I have yet to hear of someone who was underwater on their primary home loan and decided to stop paying it and default just because. For an investment property I could see that happening. For the house that you plan to live in for the next 20 years? No.
Only if you have a real choice. Reasons people will default:
- Divorced, force seller; especially common as finances go downhill
- floating rate on 2nd mortgage/HELOC is no longer affordable
- Lost job, have no money to pay mortgage. defaults
- Job change with lower income. Have money, but not enough to keep up with payments
- property taxes re-assessed, no longer affordable. tax liens pile up on home
Fair for 2nds. yes.
Yea this is a crucial point. The capital reserve requirements since the financial crisis on these assets is crazy high for a systemically important institution. Offloading to a less regulated entity would significantly improve the value of the position.
As I've learned sometimes businesses are unable to properly value something that, intuitively, has a clear nonzero value. Classic example would be selling something with an ongoing royalty of e.g. 10% of future profit.
The UK has huge swathes of empty commercial property.
The book value of the property is related to prospective rental income. It is - bizarrely - sometimes more profitable for owners and investors to maintain the fiction of high rental value without any income than to drop the rental value to something realistic and take a realised loss. Even if that's generating real income.
I would guess it's the same in the US.
This leans suspiciously towards subprime-all-over-again, where the nominal value and security of investments is being wildly overstated.
At some point it's going to have be unwound, which will create some interesting readjustments.
Yeah I think the world collectively needs mark-to-market rules for real estate quite urgently. This "we will give you 6 months free rent but never lower the rent rate" scam is pretty toxic.
Taking possession of the real estate might not even be the worst case scenario for the buyer of the loans, it might be their plan A all along.
They won’t all end up underwater, and they’re not necessarily being sold at full price. Banks have additional duties to maintain their portfolio for additional regulatory reasons that don’t apply to other institutions. We saw this play out for First Republic last year.
Other investors clearly think that the loans have some value. Some loans may not go into default, but banks down want depreciated assets on their books, other lenders may prefer to restructure the loans at higher interest etc.
A lot of commercial loans require certain rental rates, which is why you’ll sometimes see large vacancy instead of price reductions. This could be one tool that allows that to change. Maybe with a price cut the tenants will be viable, but the bank would rather offload that risk to someone willing to restructure the loan.
Yeah, how about someone would buy these loans, combine them into pools based on risk and sell on as a great investment tool suitable for every risk/profit profile?
>> Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans.
Banks dont want to be in the business of landlording properties which have gone into foreclosure or bankruptcy. However, there are players out there who are happy to take on the job of landlording or renegotiating debt in bankruptcy -- if they can enter the investment at a favorable price. Those are the buyers.
> Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans.
There are many investors who would like to buy the loan for cheap due to their risk tolerance and/or recouping time horizon and/or non-obvious benefits.
Firstly, it is clear that publicly listed banks have to remove loss makers from their loan portfolio because it affects their quarterly earnings. This is the reason why they'd take a small loss now than a large loss later.
Among the buyers, there could be someone who wants to own the land and the building for future generations - and buying the loan for cheap and foreclosing it might get them an amazing real estate. They could potentially keep this valuable thing in a trust for future generations - aka their time horizon may be over 50 years to recoup it.
Other investors might already be a roster of clients who want cheap office space but might not be able to buy the undervalued building. Buying the loan for cheap lets them get some cash flow and later foreclose on the building so that the roster of clients can be filled in for future use.
Others have funds of corrupt money from foreign lands they want to put to taxable use.
The real value seems to be that there are buyers who want the building but don't want to meet the buyers at the price, so they'd rather buy the loan and hope the current owners foreclose.
Other real estate firms. Example: back in the day Veritas bought a bunch of distressed properties including many rent-controlled homes; they recently defaulted on $1 b of loans on them; the buildings are sold to Prado Group.
Just have the Fed take it. They've already printed enough money to buy $2.4T in 'mortgage-backed securities', what's a few more $T on the pile?
Because that would be stealing from everyone who holds dollars by increasing the supply
The article literally lists many examples of buyers of the loans, one in the first few sentences. I find it hard to believe you even opened the article.
Motivation = make money.
Method = pay less than face value.
The eternal dream that a fool will suddenly appear holding their money? And to be fair, there are almost always some of them around.