If Commercial Real Estate in the US blew off the face of the economy, would anybody notice? Apparently not.
The sector that most recognize as being responsible for the recession of the early 90's is collapsing at a pace greater than that of the residential meltdown that started in '06. While not as large in nominal terms, CRE tends to pack a bigger punch due to the larger size of the individual loans. They are concentrated in the small regional banks, where only a few loans could make up a great portion of the banks total loan book.
The chart below puts the price drop in perspective (courtesy Calculated Risk):
As usual, commercial lagged residential by about 18 months. But the rate of decline has been even more rapid, putting it at a similar total decline in about half the time taken for the residential market.
However, the Moody's CRE index may be a bit misleading due to the illiquidity in the commercial space and relative few transaction inputs. Actual price drops in some areas could be much greater or much smaller, depending on the individual market involved.
We were given a decent demonstration of this market bifurcation yesterday when Colonial Bank was taken over by BB&T after being shut down by the FDIC. BB&T made the actual value of Colonial's loan portfolio available - and the results are disconcerting. Colonial's total loan book was found to be worth only 63% of the marks being carried. The construction portion of the portfolio was found to be worth only 33% of their carried value. The table below is a comparison with other major bank mergers of the past year and a breakdown of asset markdowns:
The above information should not be understated. Bank portfolios are deteriorating even as the economy is supposedly recovering. So while GAAP accounting principles have been temporarily suspended, the losses are still there - and growing. In other words, the administration has lathered the pig with lipstick. But it is still snorting and rolling around in mud - thus not fooling anyone.
What should concern people most is that the FDIC has waited so long to halt operations at this insolvent bank. If capital ratios are allowed to become so impaired before any action is taken, one must ask, "how many others are in a similar position?" The fact that the FDIC Deposit Insurance Fund (DIF) has essentially run out of cash, leaving it with only a line of credit with Treasury is the probable explanation. And if this is the case, why has this line of credit not been tapped into by the FDIC? Could there be some undesirable strings attached for the FDIC, perhaps yielding more regulatory power to the Fed that is the sticking point? I touched upon this recently in Geithner Throws A Hissy-Fit Over Power Struggle.
We can ask questions and ruminate over the possibilities without end. But what is definitive is that the FDIC does not have the ability to absorb losses of any amount let alone loss rates in the 30% range. And the reality of the banking system appears to be showing through the "paper it over" solutions given in the past year.
This is going to get interesting. Stay tuned.
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