It has often been remarked that events in history repeat themselves even across thousands of years. Wars, famines, dictators, and economic cycles, especially economic cycles, all seem to have identical patterns in the manner they unfold. It is certainly true when you compare D1 to our current depression D2. I have written several articles concerning this and this is just one more in that series to journal the unfolding of events. I have spoken often about my concern that the “second shoe” has not really dropped. That “shoe” is the collapse of the commercial real estate market. I worry because of a number of reasons. First the size of the “nut” is much larger than home mortgages, but more importantly it is the downward spiral effect that occurs when the commercial real estate market deflates.
When someone loses their home because they lost their job, one family is impacted. However, when a commercial site goes down, many families lose their income and homes, contractors and vendors suffer, and that affects the entire economy in a much more profound manner. During D1, after the market crashed, many people lost their jobs and homes, and that’s when a mortgage was only $2,000. Then the happy talk started, just like now that things were “showing signs of recovery”. By 1933, everyone was talking that D1 was about over. Then the commercial portfolios carried by the banks began to default in record numbers. There really was no way that banks could cover those loses. By that time people had little or no faith in the banking institutions of the time and they began to “run” the banks to get their money out. President Roosevelt declared a “banking holiday” and well the rest is history.
The parallels to the events unfolding right before our eyes is very much in rhythm with those events. When you read that foreclosure filings fell 10% in January from December, don’t get too excited. According to Realty Trac, foreclosures are 15% higher than they were a year ago and there’s likely to be an increase in foreclosure activity in the next few months, as the government’s crappy mortgage modification program continues to fail. So are things getting better?
Now look at the commercial portfolios. James J. Saccacio, CEO of RealtyTrac noted that “if history repeats itself we will see a surge in the numbers over the next few months as lenders foreclose on delinquent loans where neither the existing loan modification programs or the new short sale and deed-in-lieu of foreclosure alternatives works.” In other words, another storm is a-brewing in the market. The continued reluctance of banks to tackle the foreclosure problem is astounding. There’s near-universal agreement that principal reduction is the key, but we are left with lame programs, like this one announced yesterday by CitiMortgage. The so-called “strategic non-foreclosure” continues the “extend and pretend” policy that bank lenders have pursued over the past year. From the banks’ point of view, the longer they keep you on the hook, the better it is for them. Avoiding the mess of foreclosure allows them to keep the fictitious valuations on their books and in this new Citi program, ensures that some of the costs of carrying the dud loan get transferred to the borrower, who in all likelihood, will end up defaulting. Some experts believe that a new round of foreclosures could trigger a double-dip in housing prices.
A new report from the Congressional Oversight Panel (that’s Elizabeth Warren & Co, the TARP watchdogs) about the looming storm in the commercial real estate market. The report predicts a wave of losses, totaling $200-$300 billion, from commercial real estate loans could “trigger economic damage that could touch the lives of nearly every American.”
A snapshot of Dallas Fort Worth gives you an example how the commercial crash of D2 has started. Commercial property foreclosure filings in the Dallas-Fort Worth area top $1 billion (that’s one area for one month!) for the upcoming April sales. That’s much higher than commercial foreclosure posting totals in recent months. “It’s certainly the highest we’ve seen in this cycle,” George Roddy of Foreclosure Listing Service said Monday. The Addison-based foreclosure-tracking firm counts 333 D-FW commercial properties scheduled for auction by lenders next month.
During the last few months, the auction totals have averaged about 250. Among the properties set for sale next month are the Element Hotel in Irving, with $13.1 million in debt, and the Firewheel Distribution Center in Garland, with $13.1 million in debt, according to Foreclosure Listing Service. Part of Allen’s Star Creek development on State Highway 121, with about $15 million in debt, also made the April foreclosure list. The biggest current foreclosure posting is still the Four Seasons Resort and Club at Las Colinas, with $183 million.
Although the 400-acre resort has been facing auction for several months, owner BentleyForbes and its lenders have reached a “standstill agreement” while debt negotiations continue. BentleyForbes officials said earlier this month that they “expect that a resolution will be reached in the near future.” But it’s not unusual for a mortgage holder to continue posting a property for foreclosure while talks go on. Not all properties listed for foreclosure each month are actually sold by the lender. Many times, the borrower reaches a new mortgage agreement or delays the forced sale.
As I see it, the PTB cannot “prop” this up much longer. They have been able to keep the stock market in a false positive because they own the central bank printing the money. In fact, they privately hold 165 central banks globally. However, at the rate things are still spiraling downward, they can’t print money fast enough. They were trying to create hyperinflation, they have failed. We are still very much in a deflationary curve and no one wins in that mode, not even the PTB. They have been focusing on bringing sovereign economies down and they failed to factor what is really happening. Are they really that stupid? No. Simply, they didn’t do well in history class.