Biden Banks! Regional Banks Scramble To Unload Commercial Real Estate Loans, Fearing New Crisis (Analysts Fear CRE Exposure Could Spark Another Round Of Bank Failures)

Between work at home, Bidenflation and The Feral Reserve, commercial real estate and regional banks are suffering … and it could get a lot worse. And Joe Biden (aka, Negan) in general. Living in Negan Country!

By Kevin Stocklin, Epoch Times

The work-from-home trend has been taking its toll on office landlords and is now making its way through to banks’ commercial loan portfolios, leading some analysts to predict that more trauma could be on the way for regional banks this year.

And in the current climate of bank failures, short sellers, and nervous depositors, banks with large exposures to commercial real estate (CRE) loans are racing to clean up and sell down their loan portfolios in hopes that they will not fall victim to another round of bank runs.

“There is an estimated $1.5 trillion of commercial property debt that will be due for repayment in about 18 months,” Peter Earle, an economist at the American Institute for Economic Research, told The Epoch Times. “It’s not improbable that even if interest rates have fallen by that time, some of that real estate debt will nevertheless be impaired and have an adverse impact on regional banks.”

In step with a recent trend in the CRE market, tech giant Google announced in May that it was attempting to sublease 1.4 million square feet of vacant office space in its Silicon Valley home base in order to “match the needs of our hybrid workforce.” Despite more employees returning to their offices this year, average office occupancy rates across the United States are still below 50 percent.

According to a report by Bank of America, 68 percent of CRE loans are held by regional banks. Approximately $450 billion in CRE loans will mature in 2023. JPMorgan Chase estimated that CRE loans comprise, on average 28.7 percent of the assets of small and regional banks, and projected that 21 percent of CRE loans will ultimately default, costing banks about $38 billion in losses.

Double Hit (of Biden’s Policies)
Commercial mortgages are getting hit on two fronts: first, by the lack of demand for office space, leading to credit concerns regarding landlords, and second, by interest rate hikes that make it significantly more expensive for borrowers to refinance.

According to a June 12 report by Trepp, a CRE analytics firm, CRE loans that were originated a decade ago, when average mortgage rates were 4.58 percent, are now coming due, and in today’s market, fixed-rate CRE loan rates are averaging around 6.5 percent.

Banks that make CRE loans consider factors like debt service coverage ratios (DSCRs), which measure a property’s income relative to cash payments due on loans. Simulating mortgage interest rates from 5.5 percent to 7.5 percent, Trepp projected that between 28 percent and 44 percent, respectively, of currently outstanding CRE loans would fail to meet the 1.25 DSCR ratio today, and thus be ineligible for refinancing.

These calculations were done assuming current cash flows from properties stay the same and that loans are interest-only, but with vacancies rising, many landlords may have substantially less cash flow available. In addition, whereas interest-only CRE loans were 88 percent of the market in 2021, lenders are now switching to amortizing mortgages to reduce risk, which significantly increases debt service payments.

Refinancing Issues
Fitch, a rating agency, projected that approximately one-third of commercial mortgages coming due between April and December of this year will be unable to refinance, given current interest rates and rental income.

“It’s a very different world now from the one in which the majority of these loans were made,” Earle said. “In a zero-interest-rate environment, before the COVID lockdowns saw many businesses shift to a remote work basis, many of these loan portfolios full of office properties looked great. Now, a substantial portion of them look quite vulnerable.”

The Trepp report highlighted several regional markets, such as San Francisco, where office sublease offers jumped 140 percent since 2020, and Los Angeles, where office vacancies hit a historic high of 22 percent. Available office space in Washington D.C. increased to 21.7 percent in the first quarter of 2023.

New York has been hit hard, as well. Office occupancy rates in New York City plummeted from 90 percent to 10 percent in 2020 during the COVID pandemic, but only recovered to 48 percent this year. Revenue from office leases fell by 18.5 percent between December 2019 and December 2022.

Vacancy Rates at 30-Year High
Overall, according to a report by analysts at New York University and Columbia Business School, office vacancy rates are at a 30-year high in many American cities.

The report found that “remote work led to large drops in lease revenues, occupancy, lease renewal rates, and market rents in the commercial office sector.”

The authors predict that, even if office occupancy returns to pre-pandemic levels, “we revalue New York City office buildings, taking into account both the cash flow and discount rate implications of these shocks, and find a 44% decline in long run value. For the U.S., we find a $506.3 billion value destruction.”

As predicted, delinquencies in commercial mortgage loans are now creeping up. Missed payments in commercial mortgage-backed securities (CMBS) increased half a percent in May over the prior month to 3.62 percent, Trepp reports. The worst component of the CMBS market, which includes multi-unit rental buildings, medical facilities, malls, warehouses, and hotels, was offices, where delinquencies increased 125 basis points to more than 4 percent.

To put this in perspective, however, CMBS delinquencies exceeded 10 percent in 2012 and 2020. And analysts say that lending criteria for CRE have been more conservative than they were before the mortgage crisis of 2008, leaving more cushion on ratios relative to a decade ago.

All the same, the credit crunch at regional banks has created a vicious circle, where banks race to pare down their CRE portfolios, and the dearth of financing leaves more landlords facing default as outstanding loans mature. To make matters worse, commercial property values, which provide collateral for the loans, appear to be taking a hit as well.

In an effort to rapidly clean up their CRE loan portfolios and avoid the fate of failed banks like Silicon Valley Bank, Signature Bank, and First Republic Bank, banks are now attempting to sell off the loans, often taking a loss in the process.

In May, PacWest, a regional bank, sold $2.6 billion of construction loans at a loss. Citizens Bank reportedly has put $1.8 billion of its CRE loans up for sale during the first quarter of this year. Customers Bancorp reduced its CRE lending by $25 million and put $16 million of its existing portfolio up for sale.

Wells Fargo, one of the top four largest U.S. banks, is also downsizing its CRE portfolio, and in announcing the move CEO Charlie Scharf stated, “we will see losses, no question about it.”

“Between the Fed’s 500+ basis point hikes over the past 16 months and the failure of Silicon Valley Bank, and others, earlier this year, a credit tightening is already underway,” Earle said. “That has put a lot of pressure on regional lenders.”

A March academic study titled “Monetary Tightening and U.S. Bank Fragility in 2023” stated that the market value of assets held by U.S. banks is $2.2 trillion lower than what is reported in terms of their book value. This represents an average 10 percent decline in the market value of assets across the U.S. banking industry, and much of this decline came from commercial real estate loans.

Consequently, the authors wrote, “even if only half of uninsured depositors decide to withdraw, almost 190 banks with assets of $300 billion are at a potential risk of impairment, meaning that the mark-to-market value of their remaining assets after these withdrawals will be insufficient to repay all insured deposits.”

Joe Negan. Resident destroyer of the US economy.

Treasury Curve Points to Renewed Worries on Fed-Driven Recession (Yield Curve Approaching Recent Inversion Peak Reached In March)

61% of Bloomberg terminal respondents (including me, by the way) see Fed hikes leading to recession.

Bond traders are stepping up wagers that the Federal Reserve will steer the US economy into a recession.

Policy-sensitive front-end Treasuries led a selloff Thursday, while longer-date bonds lagged, a day after Fed officials indicated that they’re prepared to raise interest rates by another half-point this year following the first pause in the central bank’s 15-month hiking campaign. That sent the yield-curve inversion, as measured by the gap between two- and 10-year securities, to 95 basis points — a level last sustained in March — and approaching this cycle’s 109-basis-point extreme.

The price action suggests bond traders are skeptical that policymakers can avoid a so-called hard landing as they continue to press the case for higher borrowing costs in an effort to get a handle on inflation that remains more than double their 2% target.

“The Fed runs the risk of solving one policy error of being too easy for too long with another policy error as they ignore the growing credit contraction and persistent losses from higher rates,” said George Goncalves, head of US macro strategy at MUFG. “The catch-22 is that for them to ease, something now has to break or the economy has to crack.”

It’s not just bond traders who are growing concerned.

Sixty-one percent of respondents in a Bloomberg poll of terminal users conducted in the hours after the Federal Open Market Committee decision said tighter monetary policy will ultimately cause a recession at some point in the next year.

“The Fed was clearly trying to send a hawkish message that they are not quite done yet and don’t think they have made enough progress on inflation,” said Michael Cudzil, portfolio manager at Pacific Investment Management Co. “You see curve flattening and rates not pricing in the full extent of hikes, so the thinking is that these hikes may bite and the Fed is closer to the end.”

Officials left their target range for the federal funds rate unchanged at 5% to 5.25% Wednesday, but projected the key rate will rise to 5.6% by the end of this year, implying two more quarter-point increases, up from 5.1% in March. They also revised higher estimates of core inflation for year-end to 3.9%, from 3.6%, owing to what Chair Jerome Powell called surprisingly persistent price pressures.

Still, markets aren’t convinced borrowing costs will rise as high as central bankers project.

The highest rate on swap contracts for future meetings by early Thursday was around 5.32% for both September and November, with July at 5.27%, compared to a current Fed effective rate of 5.08.

The Fed’s aggressive outlook for rate hikes through year-end may be an effort to dash bond-market expectations for cuts in the months ahead, according to Michael de Pass, global head of linear rates at Citadel Securities.

While The Fed paused at their recent FOMC meeting, they are expected to raise their target rate at the July meeting …. then stop. Despite being only a little over 50% of where they should be (10.12%) to cool inflation.

US Mortgage Rates UP 144% Under Biden’s Reign Of Error (Fed Likely To Pause Today But Raise Rates At July Meeting)

Biden’s “reign of error” is horrific. The inflation caused by Biden’s policies, The Federal Reserve and insane Federal spending has caused mortgage rates to soar 144% since Biden took office.

While The Fed is likely to pause today, but Fed Funds are pricing in a July rate hike.

Banks are not going to like another rate hike!!!

Biden’s Mortgage Market! Mortgage Demand Rises 7.2% In Latest MBA Mortgage Application Print, But Still Purchase Demand Still Down 27% YoY And Refi Demand Down 41% YoY

The Fed will annouce a pause at today’s FOMC meeting, so don’t look for mortgage rates to do much today.

Mortgage applications increased 7.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 9, 2023.

The Market Composite Index, a measure of mortgage loan application volume, increased 7.2 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 18 percent compared with the previous week. The Refinance Index increased 6 percent from the previous week and was 41 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 8 percent from one week earlier. The unadjusted Purchase Index increased 17 percent compared with the previous week and was 27 percent lower than the same week one year ago.

Mortgage rates declined for the second straight week, with the 30-year fixed rate decreasing to 6.77 percent. Mortgage applications were up over the week, but remained well below levels from a year ago.

Joe Biden’s new nickname is “The 5 Million Dollar Bribe Man.” Sort of like Steve Austin.

US Food Prices Are Still Up 8.2% Online (Rent Is Up 8.1% YoY As Americans Pay A Stiff Inflation Tax For Biden/Congress Spending Spree And Fed’s Monetary Stimulypto)

Tomorrow is the Federal government’s inflation report. As it stands today, overall inflation is slowing as M2 Money growth crashed. Core inflation remains persisitently high (white line), rent is still getting worse (orange dotted line at 8.1% YoY. What about food? Online food prices are up 8.2% YoY.

Shopping online is a good place to find cheaper computers and appliances, but grocery prices are still rising at a fast clip.

Prices of consumer goods sold online fell 2.3% in May in the US, the ninth consecutive month of declines and the biggest drop since the pandemic started, according to data from Adobe Inc. That was mainly due to steep decreases in discretionary categories.

Essential items like food, pet products and personal care, however, are seeing persistent inflation. Online grocery prices increased 8.2% from last year — although the pace of inflation has been abating since peaking at 14.3% last September.

Americans have been shifting more of their discretionary purchases to services over the past year, cutting spending on items for the home.

Online prices for appliances were down 7.9% in May from last year, the largest drop in digital-prices data from Adobe going back to 2014. Online prices for computers slumped 16.5% and electronics were down 12%.

The Adobe Digital Price Index was developed with the help of Austan Goolsbee before he became president of the Federal Reserve Bank of Chicago this year. The gauge analyzes one trillion visits to retail sites and more than 100 million items to track price changes.

Yes, Biden and Congress have levied a devastating tax on Americans. Rent and food are two of the largest household expenditures and they are up 8.1-8.,2% YoY.

Foul Powell On The Prowl! Fed Is Set to Pause and Assess the Effect of Rate Hikes, Bull Market Ahead! (US Inflation Seen Staying Elevated)

Foul Powell on the Prowl!

Federal Reserve policymakers are about to take their first break from an interest-rate hiking campaign that started 15 months ago, even as they confront a resilient US economy and persistent inflation.

The Federal Open Market Committee on Wednesday is expected to maintain its benchmark lending rate at the 5%-5.25% range, marking the first skip after 10 consecutive increases going back to March of last year. While officials’ efforts have helped to reduce price pressures in the US economy, inflation remains well above their goal.

Source: Bureau of Labor Statistics, Bloomberg

Investors’ focus will be on the Fed’s quarterly dot plot in its Summary of Economic Projections, which is expected to show the policy benchmark rate at 5.1% at the end of 2023.

By contrast, markets are pricing in the possibility of a quarter-point hike in July followed by a similar-sized cut by December, and some Fed policymakers have emphasized that a pause in the hiking cycle shouldn’t be seen as the final increase.

Fed Chair Jerome Powell, who’ll hold a press conference after the meeting, has suggested he favors a break from hiking to assess the impact both of past moves and of recent banking failures on credit conditions and the economy. His commentary will be scrutinized for hints of the committee.

Remember, there is still over $8 TRILLION in Fed assets held sloshing around the economy. The Fed never really removed the excess liquidity and it continues to stoke asset bubbles.

Bear in mind that The Fed is pausing at 5.25% Fed Target Rate, while the Taylor Rule suggests rate hikes to 10.12%. So, Foul Powell is pausing at just over the half way mark.

Of course, Biden’s and Congress’ massive spending spree is causing inflation, and The Fed has no control over Biden/Congress irresponsible spending.

Welcome To The United Banana Republics Of America! US Debt At $31.8 TRILLION And Growing Fast, Unfunded Liabiliities At $188 TRILLION, Personal Taxes Will Be Rising To Pay For This Outrageous Spending Splurge

Nicolas Maduro of Venezuela must be envious of Joe Biden. I don’t think even Maduro has the stones to have his politiical opponent charged with espionage in the run-up to a Presidential election. Particularly when the US President has been bribed by China and Ukraine and has similiar sensitive document hoarding issues (at least Trump didn’t leave boxes of sensitive documents in a garage like Biden did when he keeps his Chevy Corvette).

So where do we sit today after Biden has signed the debt ceiling increase and massive spending splurge?

First, look at the crashing bank deposit problem. Well, the solution is for The Fed to fire up the money printing press! Keep on printing!

My former colleague at Deutsche Bank, Joe Carson, has a nice writeup entitled “Long-Run Effects of Budget/Debt Deal Are Not Investor-Friendly: Higher Rates and Taxes Are Coming.” Carsons shows that taxes will indeed be going up. And the tax burden is being shifted towards individuals.

And away from corporations.

This not surprising if you have read Nobel Laureate George Stigler’s treastise on regulatory capture. Essentially, big corporations (big media, big tech, big banking, big pharma, big defense, big agriculture, etc.) essentially own Congress, the Biden Administration and Federal regulators. After all, Biden has been bribed with millions of dollars by China and Ukraine and, like a Banana Republic, has is avoiding prosecution and instead prosecuting his political opponent, Trump. Don’t worry, if they get Trump that will indict DeSantis for something.

US debt stands at $31.8 TRILLION with $188 TRILLION in unfunded liabilities (which means higher personal taxes and much more debt).

Babylon Bee: ‘The U.S. Is Not A Banana Republic,’ Says Biden While Showing Off Cool New Uniform

Fed Inferno! Is The Federal Reserve Actually The US Economy? Or Is The Fed The DNC De Facto Treasury?? (M2 Money UP 167% Since Nov ’08)

Fed inferno!

One has to wonder about The Feral Reserve. Since The Great Recession of 2008, The Federal Reserve has printed a staggering amount of money (know as QE). There is still about $8.3 TRILLION in monetary stimulus sloshing around the economy.

And M2 Money printing is up 167% since November 2008.

So, despite the talking heads from The Fed and CNBC, etc blathering about Fed tightening, there remains over $8 TRILLION in monetary stimulus chasing asset prices.

Is The Fed ACTUALLY the US economy? Or is The Fed the financing arm of the Democrat party?

Yes, The Fed looks like they are pausing .. rate hikes.

Walk Away Conrad! Fitch Downgrades REIT Sector To ‘Deteriorating’ As REITs Underperform S&P 500 Index (SF Hilton/Park 55 Hotels Owner Walk Away From Payments)

Like the song “Walk away Renee,” the owners for the San Francisco Union Square Hilton and Park 55 Hotels are walking away from their sizeable loan payments. San Francisco is definitely feeling the blues.

But it isn’t just San Francisco. Phil Hall reports that Fitch Ratings reduced its 2023 outlook for the U.S. real estate investment trust (REIT) sector outlook from “Neutral” to “Deteriorating,” citing the tumult in the commercial real estate space.

While Fitch noted that most of its rated REITs “have the capacity to withstand such a slowdown within rating sensitivities [and] those with ample dry powder could capitalize on distressed property sales by weaker capitalized players.” But at the same time, the ratings agency warned that banks – which account for nearly half of the $5.5 trillion commercial mortgage market – saw their lending levels drop by 20% between February and April, with more tightening expected.

“At minimum, this will lead to further contractions in CRE credit, further limiting conditions for property transactions,” Fitch added in its announcement of the outlook reduction, adding that “CRE transaction volume has steadily declined since early 2022 due to the confluence of operating fundamentals pressure, higher interest and capitalization rates, limited buyer financing, and looming recession risk. The rapid jump in rates has resulted in unusually wide value discrepancies between buyers and sellers across most property types and markets, particularly in the struggling office sector. Our forward-looking U.S. equity REIT ratings incorporate assumptions about future property disposition volumes and valuations.”

Fitch predicted the U.S. economy will go into a recession, most likely late in the year – a previous forecast put the downturn at mid-year – and forecasted property performances will vary by sector over the next two years.

“Sectors experiencing strong fundamentals, such as industrial and shopping centers, will likely see some cooling in demand, with tenants showing greater reluctance to lease space, including delaying decisions, resulting in less pricing power for landlords,” Fitch continued. “Tighter lending conditions and weaker economic growth will add to the secular pressures facing some property formats (e.g. office, enclosed malls). The office REIT sector has met, or modestly underperformed, our low expectations during 2023. Leasing volumes have generally underperformed as occupiers add the business cycle to the list concerns and reasons for conservatism, along with secular pressure from remote work. Conversely, the industrial sector, although no longer white hot, continues to deliver above average occupancies and outsized rent growth that have modestly exceeded our projections.”

While Fitch stressed that REITs were “unlikely to directly encounter meaningful stress” based on the recent problems in the banking industry, although it also acknowledged that it did not expect “REITs’ access to unsecured revolvers will be impeded, although facilities up for renewal will likely see higher pricing and some banks have reduced appetites for traditional bank syndicate activities, such as making funded term loans – particularly in hard hit sectors, such as office. We also do not expect meaningful portfolio vacancies caused by bank tenant failures, which are unlikely to be widespread.”

The NAREIT All-equity index has gotten pummelled by the S&P 500 index since The Fed started tightening monetary policy to fight inflation …. that The Fed helped cause in the first place.

Under Biden, the US is beginning to morph into a lawless Socialist sewer like Venezuela. Joe Maduro??

Simply Irresponsible! Biden Signs Grossly Irresponsible Debt Ceiling Hike/Budget As Cryptos Demolished (Bitcoin Down -6%)

Simply irresponsible. Biden’s budget that is!

Biden signed the debt ceiling bill craftted by McCarthy (RINO-CA) and Schumer (Communist-NY). Its allows for uncontrolled spending and borrowing for at least 2 years. And as Milton Friedman once said “There is nothing more permanent than a temorary Federal program … or debt limitiations.

With Biden signaling that government has gone wild with no controls on fiscal responsibility (and Elizabeth Warren flailing her arms and screaming for regulations on cryptocurrencies), cryptos today are getting demolished.

China, Japan and the BRICs realize that there are no controls on ANYTHING coming out of Washington DC. Insane spending, an insane Federal Reserve, corrupt DOJ and FBI.

Doctor, doctor (Yellen), we’ve got a bad case of Federal corruption.