3 ms·

> 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 l

by 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 ago
These 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 ago
  It 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 ago
  Yes, 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 ago
  You'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.
  - danielmarkbruce 2y ago
    Then, just take the example and imagine they declare bankruptcy. That loan is going to be worth 0 in the vast majority of cases. Loans go to zero. It happens in real estate, it happens in oil and gas, it happens in other places I'm sure. It's not especially common, but it happens.
    - TuringNYC 2y ago
      >> Then, just take the example and imagine they declare bankruptcy. That loan is going to be worth 0 in the vast majority of cases. >> Loans go to zero. It happens in real estate, it happens in oil and gas, it happens in other places I'm sure. It's not especially common, but it happens. It is common, but at the end of a cycle. The chances of second lien loans being worth zero are higher and higher as leverage increases. This is for two reasons: 1. The greater the leverage, the smaller the required downturn to turn everything underwater. With 5% down mortgages, a 5% decrease in housing values makes you underwater (esp once you consider transaction fees.) 2. The greater the under-water, the less incentive owners have to continue paying, especially in non-recourse jurisdictions where no bankruptcy is required. Owners do "jingle-mail" where they mail the keys to the bank (figuratively) and walk away without having to declare bankruptcy. The bank is left with the mess. Freddie Mac is already pushing to do 2nd lien HELOCs (https://www.housingwire.com/articles/freddie-macs-proposed-home-equity-product-could-unlock-850b-in-originations/ https://www.housingwire.com/articles/freddie-macs-proposed-h...) and Fannie is considering it.
      - HeyLaughingBoy 2y ago

by creer 2y ago

toomuchtodo 2y ago

These 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 ago
It 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 ago
Yes, 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 ago
You'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.
- danielmarkbruce 2y ago
  Then, just take the example and imagine they declare bankruptcy. That loan is going to be worth 0 in the vast majority of cases. Loans go to zero. It happens in real estate, it happens in oil and gas, it happens in other places I'm sure. It's not especially common, but it happens.
  - TuringNYC 2y ago
    >> Then, just take the example and imagine they declare bankruptcy. That loan is going to be worth 0 in the vast majority of cases. >> Loans go to zero. It happens in real estate, it happens in oil and gas, it happens in other places I'm sure. It's not especially common, but it happens. It is common, but at the end of a cycle. The chances of second lien loans being worth zero are higher and higher as leverage increases. This is for two reasons: 1. The greater the leverage, the smaller the required downturn to turn everything underwater. With 5% down mortgages, a 5% decrease in housing values makes you underwater (esp once you consider transaction fees.) 2. The greater the under-water, the less incentive owners have to continue paying, especially in non-recourse jurisdictions where no bankruptcy is required. Owners do "jingle-mail" where they mail the keys to the bank (figuratively) and walk away without having to declare bankruptcy. The bank is left with the mess. Freddie Mac is already pushing to do 2nd lien HELOCs (https://www.housingwire.com/articles/freddie-macs-proposed-home-equity-product-could-unlock-850b-in-originations/ https://www.housingwire.com/articles/freddie-macs-proposed-h...) and Fannie is considering it.
    - HeyLaughingBoy 2y ago