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Fearing losses, banks are quietly dumping real estate loans
- qwertyuiop_ 2y agoThese articles don’t provide the complete picture. Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans.
- toomuchtodo 2y agoThey may not be future underwater loans. Buyers are speculating on a distressed asset someone is willing to let go at a discount. Might be worth nothing, but also might be worth something. Banks have more stringent regulatory requirements with regards to these loans than speculators. From the piece: > For investors, the attraction of snapping up discounted commercial real estate loans is that the loans could be worth a lot more if the industry recovers in the next few years. And in the worst-case scenario, the buyers get to take possession of a building at a discounted price after a foreclosure. “Buy when there is blood in the streets” — Baron Rothschild
- jaggederest 2y agoAs I've learned sometimes businesses are unable to properly value something that, intuitively, has a clear nonzero value. Classic example would be selling something with an ongoing royalty of e.g. 10% of future profit.
- TheOtherHobbes 2y agoThe UK has huge swathes of empty commercial property. The book value of the property is related to prospective rental income. It is - bizarrely - sometimes more profitable for owners and investors to maintain the fiction of high rental value without any income than to drop the rental value to something realistic and take a realised loss. Even if that's generating real income. I would guess it's the same in the US. This leans suspiciously towards subprime-all-over-again, where the nominal value and security of investments is being wildly overstated. At some point it's going to have be unwound, which will create some interesting readjustments.
- jaggederest 2y agoYeah I think the world collectively needs mark-to-market rules for real estate quite urgently. This "we will give you 6 months free rent but never lower the rent rate" scam is pretty toxic.
- kryptiskt 2y agoTaking possession of the real estate might not even be the worst case scenario for the buyer of the loans, it might be their plan A all along.
- creer 2y ago> Might be worth nothing In the US it's more or less impossible for the loans to be worth "nothing". They are usually secured by the property itself. But the loan itself is worth less if it's in default, rather than not quite yet in default. So it can be a better deal for a bank to sell it away now rather than later.
- toomuchtodo 2y agoThese investments should have immediate positive value at the right price, but there are potential edge cases that are catastrophic to such a speculative play (maybe have to tear the building down, future dispute wrt claim, etc). Unlikely, but possible.
- crznp 2y agoIt doesn't seem wildly unlikely: there is a fundamental shift in how office spaces work. But the other side is possible too: even if the loans had a guaranteed long term value (like SVB's bonds), they could be an issue in the short term. More so if getting the value out of the loan requires both time and effort (eg: legal costs).
- creer 2y agoYes, and we do hear sometimes of a massive pile of taxes due, coming with the building.
- TuringNYC 2y ago>> In the US it's more or less impossible for the loans to be worth "nothing". Totally disagree. A loan can absolutely be worth nothing, especially if it is a 2nd/subordinated lien. Imagine you buy a house for $1000 with $800 borrowed ($700 first lien, $100 second lien.) If the home goes down in value 30%, the second lien is worthless. The administrative and legal cost of recovering the second lien may be greater than the recoverable value of the second lien, which in this case is $0.
- timr 2y agoYou're describing a situation where the second lien is underwater. This is not itself the value of the loan. Just in the obvious case, if the borrower continues to pay, the lien is worth the future value of its cashflows. Not everyone who goes underwater on a loan simply stops paying. In the US, even loans in default tend to have some value, because speculators are willing to buy the debt and attempt collection.
- fnordpiglet 2y agoYea this is a crucial point. The capital reserve requirements since the financial crisis on these assets is crazy high for a systemically important institution. Offloading to a less regulated entity would significantly improve the value of the position.
- shermantanktop 2y agoThe eternal dream that a fool will suddenly appear holding their money? And to be fair, there are almost always some of them around.
- TuringNYC 2y ago>> Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans. Banks dont want to be in the business of landlording properties which have gone into foreclosure or bankruptcy. However, there are players out there who are happy to take on the job of landlording or renegotiating debt in bankruptcy -- if they can enter the investment at a favorable price. Those are the buyers.
- renewiltord 2y agoOther real estate firms. Example: back in the day Veritas bought a bunch of distressed properties including many rent-controlled homes; they recently defaulted on $1 b of loans on them; the buildings are sold to Prado Group.
- vineyardmike 2y agoThey won’t all end up underwater, and they’re not necessarily being sold at full price. Banks have additional duties to maintain their portfolio for additional regulatory reasons that don’t apply to other institutions. We saw this play out for First Republic last year. Other investors clearly think that the loans have some value. Some loans may not go into default, but banks down want depreciated assets on their books, other lenders may prefer to restructure the loans at higher interest etc. A lot of commercial loans require certain rental rates, which is why you’ll sometimes see large vacancy instead of price reductions. This could be one tool that allows that to change. Maybe with a price cut the tenants will be viable, but the bank would rather offload that risk to someone willing to restructure the loan.
- jojobas 2y agoYeah, how about someone would buy these loans, combine them into pools based on risk and sell on as a great investment tool suitable for every risk/profit profile?
- nine_zeros 2y ago> Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans. There are many investors who would like to buy the loan for cheap due to their risk tolerance and/or recouping time horizon and/or non-obvious benefits. Firstly, it is clear that publicly listed banks have to remove loss makers from their loan portfolio because it affects their quarterly earnings. This is the reason why they'd take a small loss now than a large loss later. Among the buyers, there could be someone who wants to own the land and the building for future generations - and buying the loan for cheap and foreclosing it might get them an amazing real estate. They could potentially keep this valuable thing in a trust for future generations - aka their time horizon may be over 50 years to recoup it. Other investors might already be a roster of clients who want cheap office space but might not be able to buy the undervalued building. Buying the loan for cheap lets them get some cash flow and later foreclose on the building so that the roster of clients can be filled in for future use. Others have funds of corrupt money from foreign lands they want to put to taxable use. The real value seems to be that there are buyers who want the building but don't want to meet the buyers at the price, so they'd rather buy the loan and hope the current owners foreclose.
- danielmarkbruce 2y agoMotivation = make money. Method = pay less than face value.
- aslgbb 2y agoJust have the Fed take it. They've already printed enough money to buy $2.4T in 'mortgage-backed securities', what's a few more $T on the pile? https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB
- someguydave 2y agoBecause that would be stealing from everyone who holds dollars by increasing the supply
- cowsandmilk 2y agoThe article literally lists many examples of buyers of the loans, one in the first few sentences. I find it hard to believe you even opened the article.
- toomuchtodo 2y agohttps://archive.today/tddt1 https://archive.today/tddt1
- doodaddy 2y agoJust moments ago I read that regulators are raising flags about banks' plans for unwinding their derivatives portfolios. Then I come here to read this. Likely happenstance. Maybe no connection. But a little jarring. Then again, they say there are no coincidences! https://www.reuters.com/business/finance/us-bank-regulators-find-flaws-four-big-bank-living-wills-2024-06-21/ https://www.reuters.com/business/finance/us-bank-regulators-...
- fnordpiglet 2y agoTo be clear, I owned a big bank risk platform for about 10 years and this is an ever reoccurring story and nothing I read in the article you linked feels concerning or abnormal. Particularly on the living wills, stress testing, and capital reserves it’s a bit of a game of chicken between regulators and the regulated. The reality is things are considerably better than they were in 2007.
- hardwaresofton 2y ago> I owned a big bank risk platform for about 10 years Have you written about this anywhere? I can’t decide if it was mindnumbingly boring or the ride of a lifetime (leaning towards the latter).
- fnordpiglet 2y agoThe ride of a life time :-) maybe some day. I still have substantial equity LOL
- hardwaresofton 2y agoHahah well once that equity pays out, post the stories to HN please!
- davidw 2y agoTo be clear, it looks like we're talking about commercial real estate here.
- deleted 2y ago[deleted]
- zer00eyz 2y agoAnd commercial loans look nothing like what you would use to buy a home with. Most of them are 5 year (there are others), interest only and a massive balloon payment at the end. They are written based on the income of the property & its value. We're seeing these markets unwind, and it isn't going to be pretty. Commercial property across the board (not just offices) has been in a strange place for a long time, and it isn't getting better.
- hi-v-rocknroll 2y agoCommercial real estate was a minor meme at one point. https://youtu.be/FbTR3lDuYqk https://youtu.be/FbTR3lDuYqk https://youtu.be/-eh_iNGY1wY https://youtu.be/-eh_iNGY1wY https://youtu.be/7Tzz7-aOKHU https://youtu.be/7Tzz7-aOKHU
- andrewstuart 2y agoThis triggers sub prime deja vu.
- theandrewbailey 2y ago> It’s an early but telling sign of the broader distress brewing in the commercial real estate market, which is hurting from the twin punches of high interest rates, which make it harder to refinance loans, and low occupancy rates for office buildings — an outcome of the pandemic. And that's what I think is behind much of the push for RTO. While a lot (if not most) office space is rented, corporate executives are the kind of people who could have a lot of money invested in commercial real estate. They see this large threat to their portfolios, so they're trying to keep their assets from depreciating.
- api 2y agoReal estate infuriates me to the point that I find myself hoping it burns to the ground and that the whole industry suffers. “Real estate always goes up” is treated like a damn entitlement to the point that the financial well being of everyone under 40 today has been sacrificed to it. In 2008 it felt like the entire real economy was put on the chopping block to bail it out. I’d love for a real estate market that looks like Japan. That way the real economy built around people actually doing things could flourish free from endless real estate idle rent extraction.
- lwansbrough 2y agoAgreed. The de-risking of the housing market has been disastrous for <= millennials. The de-risking has come in the form of artificial scarcity caused by zoning gatekeeping and outdated fire code, amongst other things. It’s time North America took a hard look at the root causes and fixes them before there is a crisis of confidence in leadership (which is already happened to me - I’m moving out instead of buying in to the insanity.)
- nordsieck 2y agoNone of that would be a problem if people could just build. We need to double the number of bedrooms in most major cities.
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- dotBen 2y agoI live in perpetual wonder that here in the US I have locked in a 30 year 2.3% mortgage, which I use for leverage, whereas back home in the UK people have to refinance every 2-5 years and so their mortgages trend roughly over the prevailing base rate for the term of the mortgage. Yes this article is about commercial real estate but it shows something is actually very broken from a credit market perspective - my loan is probably going to be underwater for the financier (JPMC assumed from FRB) for the rest of the term (just on the fed rate, but then I'm also making a margin on the leveraged capital. And tax deductions on the interest.).
- Kon-Peki 2y ago> I have locked in a 30 year 2.3% mortgage, which I use for leverage > but then I'm also making a margin on the leveraged capital. Do you mind expanding on this? I’d like to understand what you are doing, as a fellow ridiculous mortgage holder.
- demondemidi 2y agoIt's called a humblebrag. Person responded offtopic to demonstrate how savvy they are investing, then steered back on topic with a brief anecdote.
- babyshake 2y agoA not very degen version of this is taking money that you might spend on your mortgage at a rate under 3%, and putting it somewhere safe that earns more than 5% (not hard to find).
- CyberDildonics 2y agoThey're doing it so quietly it ends up in the new york times.
- majormajor 2y agoEvery six months or so since 2021.