Tuesday, February 19, 2008

Still Here Subprime Fall Out And Credit Crunch

Recently, I went over some past Marginal Revolution posts that I had thought could advance my fletching understanding of economics. One of the clusters of issues of interest that was revisited was banks, subprime fallout and the credit crunch. This is an area that happens to cross over to my real life/day job persona.

I have though spoken with a commercial real estate appraiser who tells me that housing builder sentiment has bottomed out and is seeing an upturn. So even if banks are not lending as freely, there is the expectation that people (arguably people who can afford them) will be buying homes again in the not too distant future. If the negativity in the economy has been over-inflated and Tyler Cowen's point about the real impact of the subprime mortages compared to the overall economy was right, then we might see a turn around by the fall according to this view.

This isn't a prediction just passing along somebody else's perhaps optimistic take on the world.

However, for the most part the question as to whether or not the credit crunch is basically over or still here, the answer is:

Still here

The credit crunch isn't going anywhere

Feb 17th 2008
From Economist.com

THE credit crunch is simply not going away. Every week another arcane area of the bond market seems to be dragged into the crisis. Late last month, it was tender option bonds, short-term securities backed by municipal bond assets; this week, it was auction-rate notes. These are bits of short-term debt issued by municipalities; the problem is that no one wants to take part in the auctions, so the yields being paid are skyrocketing.
Finance & Economics Get article background Market.view

From a more on-the-streets view of getting commercial projects built and sold

Economic worries predate subprime mess
Americans were expressing a declining confidence in the economy even before the subprime-mortgage mess exploded last summer. That lack of confidence could linger even if the economy improves. "I do think there is an increasing level of angst that is more fundamental and is not going to go away even when the economy improves," said Mark Zandi, chief economist of forecaster Moody's Economy.com. MSNBC/Associated Press (2/17)


Subprime crisis capsizes relationships

The subprime mortgage crisis has pressed banks to lay off employees in their commercial and residential mortgage divisions, and this is upending relationships that retail real estate developers, especially REITs, have cultivated with their underwriters, sources say. "Anecdotally, we've heard that many of the banks got rid of a lot of the people that were underwriting both residential and commercial real estate," said Phillip Martin, a REIT analyst at Cantor Fitzgerald, on an earnings call. It was a cold January on Wall Street, with Morgan Stanley cutting 600 mortgage-related jobs and Lehman Bros. axing about 3,000 from its mortgage business. Private companies with more-personal connections to local and regional banks may have an advantage in this environment, observers say. Kite Realty is relying on a network of contacts formed during roughly 20 years as a private company before becoming a public REIT. "We have an advantage here in that we were a private company doing business for a long time, depending on commercial banking relationships," said CEO John Kite on a fourth-quarter earnings call. "Because of that, we didn't focus on one relationship manager, but we knew the president of the bank, the chief lending officer, the chief credit officer. One of our greatest strengths is having had to be a user of capital when we weren't a public company. Those are deep, long relationships." In fact, Kite Realty's list of potential lenders has expanded since the mortgage crisis set in. "We've actually had some growth in relationships," CFO Daniel Sink said on the call, "because there has been some turnover in some of the larger banks, and some of the people that we have had strong relationships with have branched off into new ventures with new banks."

Finally this from the CoStar Group: The Waiting Game: Lenders, Borrowers Grapple With Uncertainty Over Property Values, Cap Rates

Lenders Opt To Be Tightfisted as Markets Reprice Risks, Assets

While the credit crunch is bona fide and has helped topple through-the-roof commercial real estate prices in the last six months, the unexplored reality is that there is still abundant money out there. It's just that lenders are reluctant to give it out as freely as they did this time last year.

The distinction is more than semantics because it suggests that lenders are willfully holding back until such time as …

And that's where it stops, because no one seems to know when that time is. The uncertainty about where property prices and cap rates are is "the elephant in the room, sometimes discussed, sometimes not, but impossible to ignore," as one banker put it.

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