Economic Update 2-17-09

Friends and Colleagues

Our journey through the economic darkness continues.  This week we share some thoughts from last week’s Mortgage Bankers Association (MBA) Conference in San Diego.  We also hear from Eugenio Aleman of Wells Fargo Economics regarding the pending stimulus package, and what we really need to get the economy back on track.

 

Random Sound Bites from the MBA CREF Conference

• Some commercial real estate lenders who intend to be active in 2009 include:  Symetra, John Hancock, Prudential, TIAA-CREF, Aviva, and One America.
• Wachovia research projects a 30% drop in CRE value from peak to trough.
• Going forward, the focus will be on due diligence and sustainable cash flow.
• Community banks may lead the way out of the storm.
• The “who” is back in underwriting; character is once again important.
• There is upward pressure on property operating expenses.
• When CMBS comes back, issuers will have to have some skin in the game.

Sound Bites from a panel of CMBS Special Servicers

• CMBS delinquencies are projected to rise by 6/10 from 1.4% to 4.4% of loans outstanding.
• Approx. 70% of CMBS delinquencies are from 2006 and 2007 issuances.
• CMBS loans on the “Watch List” have risen from 1% to 16% of loans outstanding.
• CRE had its share of “sub-prime” loans that were made to borrowers who were not creditworthy.
• Commercial mortgages as a % of GDP rose from 10% in 1996 to 18% or $2.5 trillion today.
• “We are not over-built like we were in the 1990’s, but we are over-loaned, by approx. $1 trillion.”

Aleman’s Thoughts on the Fiscal Package

• Some of the provisions are “useless” or even dangerous for the future sustainability of economic growth.
• Examples include tax incentives for buying a house or a car in 2009, which will spur current activity, but will ultimately just delay the day of reckoning in certain industries.
• Tax breaks for households run the risk of being saved or used to pay down debt instead of being used for consumption.
• The best strategy for a sustainable recovery must create jobs directly.
• If possible, it should be done in partnership with small businesses, since they have the potential to create the most jobs.

Per Aleman, The Real Underlying Issue is Confidence

• Investors have lost so much wealth that they no longer have confidence in the U.S. financial system.
• Until we fix our financial system it will be very difficult to bring back confidence in the market.
• Consumption has plummeted since people believe things are going to get worse in the future.
• Unless households see a turnaround in the U.S. labor market, confidence is not going to return regardless of how many tax incentives and rebates we get.
• Restoring confidence in the future is the key to restoring sustainable economic growth.

 
Well, that all sounds reasonable….but what will it take to restore our confidence in a better tomorrow?
If you have any good answers, please e-mail them directly to Washington.

As always, our saga continues, so stay tuned……