Maverick Real Estate Partners reposted this
"Extend and Pretend" has become "Delay and Pray". Loan extensions are far more difficult to accomplish today because declining property cash flows can no longer cover rising debt service. Banks need borrowers to make meaningful pay downs to right-size their loans, yet few borrowers have the will or ability to do so. To prevent further erosion of their balance sheets, regional banks have tried to sell these sub-performing loans. Yet after receiving bids of 30% to 70% of unpaid principal balances when they were expecting to sell near par (100%), they've pulled their sales from the market. Their actions are logical. If they sell assets today at big discounts, it completely wipes out what little loan-loss reserves they had, and would likely lead to a stock price plunge or worse... a run on the bank. I mean, virtually their entire loan books are held at par, while they couldn't even sell their low risk loans at that level (they've tried that too)! Yet if they #delay, they can at least #pray for better days ahead. The problem is that the more time that passes, the more bad loans will pile up - even if rates drop over the next year as expected. In a true Catch-22, many regional banks are damned with either path they take. The tipping point will come... for some banks sooner than others. Their regulator will take over, or they'll get gobbled up by their larger competitors. That we can bank on... Until then, keep your fingers crossed and say your prayers! #delayandpray #regionalbanks #loansales #banking
Which bank do you think will hit the tipping point next?
If a firm suspects they have some exposure, what's one thing they can do to minimize risk?
But of course, the big question is: When does this music stop? In late Q3, early Q4 last year everyone was predicting first two quarters of '24 for the market to rationalize but still, almost Q3, and little movement yet...
Just like Rod Dubitsky's comment, I almost entirely agree here. If regulators enforced the loan loss provisions on Expected Shortfall of existing CRE loan portfolios, it would likely lead to a liquidity crisis nationwide on the community and regional banking level and impact up the chain to CMBS holders and larger banks that have exposure in those same assets to mark-to-market those losses on their trading books. There is little incentive from any party to reflect losses of the actual market value of these loan pools, as this alternative scenario may be far worse for confidence in the capital markets. This all may very well result in an even greater centralization of the banking system than in GFC period. At that point, De Novo banks would almost certainly be a thing of the past, leading to a virtually permanent fixed to shrinking supply of banking providers in the US, further to the detriment of local/regional consumer and business customers as competition is eliminated. At the end of the day, whatever happens to the banking sector is probably going to involve the US Gov/Fed stepping in assist in backstopping these CRE-related losses, facilitiating M&A activity, and ultimately liquidation of banks too far gone to save.
Delay & Pray!! We were just trying to coin a new one too.... This was our best shot: Pretend, Amend, Extend, Transcend and Godsend for this Misspend
Another aspect is that so many high flyers in the world of commercial property have absurd fantasy lifestyles and spend $20, 40 or $80,000 a month trying to look like big shots. I know guys right now still spending their last dimes to try and fool the people around them into thinking that they're still rich.
Excellent post.
Well said .
Founder @ The People's Economist | MBA, Top Ranked Wall Street Analyst, Personal Finance, journalist
3moGreat post. I think what is happening is far more insidious than extend and pretend. I think it's systemic manipulation pure and simple. Banks and CMBS holders want to avoid recognizing certain losses. Banks who received bids for loans at 70 cents on the dollar should feed that back into CECL (ie life of loan) loss reserves. Banks aren't doing it, auditors are ignoring it and regulators are wishing the new loss reserve rules didn't exist. On CMBS, extending dead money loans enables servicers to clip more coupon, rating agencies to avoid revealing their horrific rating blunders, CMBS investment fund investors get to mark to pretend prices, bank and insurance CMBS investors get to continue to use inflated ratings in their capital calculations.