patrick.net

Original images found in an archive I had, reposted in memory of the last real estate bubble.

Buckle up; it's commercial this time...
The Bigger Short
“Overall,” they write, “actual net operating income falls short of underwritten income by 5% or more in 28% of loans.” This was just the average, however: Some originators — including an unusual company called Ladder Capital as well as the Swiss bank UBS, Goldman Sachs, Citigroup, and Morgan Stanley — were significantly worse, “having more than 35% of their loans exhibiting 5% or greater income overstatement.”



These income overstatements might cause defaults under any circumstances. But it has been particularly dangerous in a severe economic downturn like the one caused by the coronavirus pandemic. “There is an economically and statistically significant relation,” Griffin and Priest write, “between originator income overstatement and distress.” That is, loans where the fundamentals were misstated are, unsurprisingly, more likely to go bad during this crisis. All these banks are swimming naked.

From anecdotal evidence I def think that there are many lenders who may "tweak" ones income stats to make a loan and therefore moar money for them possible, but the big conventional lenders are very strict and detailed and want to know each source of money on your down-payment or income and will verify it, otherwise they won't give you a loan. For example loans or gifts from family members or friends may or may not work towards your loan worthiness. I did not get the impression that lending was loose even though we could have paid cash by liquidating most investments. Rather the opposite.

This is great!!!

And loans without 20% down are almost non existent at traditional/conventional lenders, you may get 5-15% down with fha and mandatory mortgage insurance, but only up to a certain loan amount which varies by county and is not that much compared to actual house prices. Some "creative" lenders bridge that via a 2nd loan with higher interest which is immediately taken out against your new house similar to a heloc, but that def is dangerous and I don't know how many people would go for that risk and high interest, maybe those who need to keep up with the joneses by any means necessary ;)

I don't see how commercial lending doesn't implode. It's not like your typical suburban mall was in good shape to the begin with, now it's spread from brick and mortar retail to reasturants (many of which have gone under) and office space (which has lower demand due to the new work from home trend)

This will not end well. Never does. We've seen this movie before and know how it ends. Time for the big short 3.0?

Man, seeing that subprime primer seriously brought back warm feelings of nostalgia. I'm so surprised. Back then I sent it to my college economics teacher and he showed it in class.

GreaterNYCDude says

I don't see how commercial lending doesn't implode. It's not like your typical suburban mall was in good shape to the begin with, now it's spread from brick and mortar retail to reasturants (many of which have gone under) and office space (which has lower demand due to the new work from home trend)

This will not end well. Never does. We've seen this movie before and know how it ends. Time for the big short 3.0?

Commercial yes unless they slowly but steadily convert the offices into private real estate, i.e. apartments and multi unit housing complexes / condos.

GreaterNYCDude says

I don't see how commercial lending doesn't implode.

It will be hit, but it's not going to be too bad. The requirements for commercial lending are a complete pain in the ass. Remember, savvy investors will take out insurance that may be covering rents on some of these places. If you don't have customers you're broke, so you look to make sure to protect yourself. Expensive, but I'm sure there are policies out there that cover pandemics.

I also think the restaurant closure thing is overblown. Carry out was still going on. You can make solid to great money with just a chef and a helper. Cut the staff. Turn off the lights. Lower the heating and electric bills.

Offices will probably be the worst. Even restaurants that closed, someone will swoop in and start a new one. The companies that had revenue increases during covid are not going to renew leases.

Either way most commercial notes are short, but the hit will be spread out over 5 years likely. Noticeable but not overly damaging in my opinion. Warehouses are also filling the void with online shipping and supply chain. IL is losing population, but warehouses are popping up every 1/4 mile on expressways heading into Chicago.