Over-leveraged: To borrow too much money and be unable to make payments on the debt.
To state the obvious, in the real world you need cash to pay off debt.
In Washington, D.C. and Wall Street, you just need a bunch of suckers.
It is no surprise to anyone in CRE that $1.2 trillion in commercial loans have been coming due since 2010.
But what is a surprise is that the banks that would've failed when these notes came due, haven't. The country hasn't been crushed by bank failures because the gov't and Wall Street have been trying to refinance the loans to buy the borrowers some time. But to do this, the gov't had to eliminate massive tax penalties for investors who refinanced these loans, which the Treasury Dept did in 2011 by changing the rules regarding REMICs.
Just like residential borrowers who are refinancing their homes, commercial lenders are doing the same with investors who own malls, office towers, warehouses, etc. At the insistence of the Federal Reserve, banks have been giving the borrowers more time to pay the loans while they hope and pray property values return to normal. And in addition, banks have been "asked" to do troubled debt restructuring. This basically means, let's find ways to make a bad loan not look like a bad loan. My friend, who didn't exactly give permission for me to quote her, says that as VP of her bank, it is good practice for a bank to have 100% in reserve for a non-performing loan. However, it is now difficult to tell just how much of a bad loan is actually bad.
Why? Well this is because if a borrower can't make monthly payments, the bank examines the property's cash flow. Under new Federal guidelines, a bank can now say, wow, 50% of the property is making money and 50% isn't. Therefore, only 50% of the note is distressed, so we only need to keep 50% of the bad note in reserve. At this point a bank would have two options: write down the note and take a loss or reconfigure the terms of the debt and keep a little more in reserves.
But back to reality; if a note isn't being paid because there is no cash flow, then it is over-leveraged. It doesn't matter what percentage of the investment is or isn't making money.
I would love educated comments on this opinion piece.
3/27/12 Also see $362 Billion In Commercial Real Estate Debt Maturing This Year
To state the obvious, in the real world you need cash to pay off debt.
In Washington, D.C. and Wall Street, you just need a bunch of suckers.
It is no surprise to anyone in CRE that $1.2 trillion in commercial loans have been coming due since 2010.
But what is a surprise is that the banks that would've failed when these notes came due, haven't. The country hasn't been crushed by bank failures because the gov't and Wall Street have been trying to refinance the loans to buy the borrowers some time. But to do this, the gov't had to eliminate massive tax penalties for investors who refinanced these loans, which the Treasury Dept did in 2011 by changing the rules regarding REMICs.
Just like residential borrowers who are refinancing their homes, commercial lenders are doing the same with investors who own malls, office towers, warehouses, etc. At the insistence of the Federal Reserve, banks have been giving the borrowers more time to pay the loans while they hope and pray property values return to normal. And in addition, banks have been "asked" to do troubled debt restructuring. This basically means, let's find ways to make a bad loan not look like a bad loan. My friend, who didn't exactly give permission for me to quote her, says that as VP of her bank, it is good practice for a bank to have 100% in reserve for a non-performing loan. However, it is now difficult to tell just how much of a bad loan is actually bad.
Why? Well this is because if a borrower can't make monthly payments, the bank examines the property's cash flow. Under new Federal guidelines, a bank can now say, wow, 50% of the property is making money and 50% isn't. Therefore, only 50% of the note is distressed, so we only need to keep 50% of the bad note in reserve. At this point a bank would have two options: write down the note and take a loss or reconfigure the terms of the debt and keep a little more in reserves.
But back to reality; if a note isn't being paid because there is no cash flow, then it is over-leveraged. It doesn't matter what percentage of the investment is or isn't making money.
I would love educated comments on this opinion piece.
3/27/12 Also see $362 Billion In Commercial Real Estate Debt Maturing This Year
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