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Fearing losses, banks are quietly dumping real estate loans

nytimes.com

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Re: Fearing losses, banks are quietly dumping real estate loans

#101

Post by TuringNYC »

timr wrote: post #16
TuringNYC wrote: post #11

Earlier quoted context omitted.

>> 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 tha…

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.

>> You're describing a situation where the second lien is underwater. This is not itself the value of the loan.

Correct, but once underwater, an default renders the loan worthless.

Underwater+Default --Usually--> Worthless 2nd lien

>> 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.

Totally agree, but not everyone has a choice (divorce, lost job, floating rate rises, wages fall, etc.)

>> In the US, even loans in default tend to have some value, because speculators are willing to buy the debt and attempt collection.

Yes, for recourse states, not for non-recourse states because the later only offers the liquidation of the home as collateral and nothing else. https://www.quickenloans.com/learn/the-difference-between-re...

Re: Fearing losses, banks are quietly dumping real estate loans

#102

Post by scwoodal »

babyshake wrote: post #57
Kon-Peki wrote: post #38

Earlier quoted context omitted.

> 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.

A 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).

Isn't what you describe using your own capital to use as an investment instead of paying down the mortgage?

How do you use the leverage (debt) from the mortgage to put in a 5% investment?

Re: Fearing losses, banks are quietly dumping real estate loans

#103

Post by sirspacey »

theandrewbailey wrote: post #22

> 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…

Having spoken with over 100 CXOs and founders on this, this is never the issue. If you invest in corporate real estate you do it through a liquid vehicle, not owning the actual contracts.

The push to RTO boils down to:

- leaders want the over-committed. Remote doesn’t feel like that.

- they miss working in person as a team and the fuel it provides for getting things done. Remote doesn’t feel like that.

It is almost universally a gut-sense that has driven the effort.

I think it does make sense for the leadership team and their close team members to work in person most of the time.

But there’s a funny flip side to this - almost all of them are on the road most of the time. Coming back to an empty office sucks.

I’ve been building remote-first companies my whole career. I prefer frequent onsites to offices.

But in the end, the prestige of the office, social cohesion of organizing life around it, and personal sense of power from having a team around you are unlikely to be replaced by any alternative for most leaders.

Re: Fearing losses, banks are quietly dumping real estate loans

#104

Post by yowzadave »

nordsieck wrote: post #86
yowzadave wrote: post #64

Earlier quoted context omitted.

You probably mean we need to double the number of bedrooms available for sale/rent

> You probably mean we need to double the number of bedrooms available for sale/rent No. I mean double the total number of bedrooms. It is absolutely necessary public policy to completely gut the price of real estate across the country. I am aware that it'll be painful.

I'm not objecting to causing pain for property owners, I'm saying that doubling the number of bedrooms in a city is nonsensical (if you double the amount of residential area in a city, where will it go?), and also that you're underestimating the impact on the market of a relatively small increase in supply.

Re: Fearing losses, banks are quietly dumping real estate loans

#105

Post by marssaxman »

yowzadave wrote: post #104
nordsieck wrote: post #86

Earlier quoted context omitted.

> You probably mean we need to double the number of bedrooms available for sale/rent No. I mean double the total number of bedrooms. It is absolutely necessary public policy to completely gut the price of real estate across the country. I am aware that it'll be painful.

I'm not objecting to causing pain for property owners, I'm saying that doubling the number of bedrooms in a city is nonsensical (if you double the amount of residential area in a city, where will it go?), and also that you're underestimating the impact on the market of a relatively small increase in supply.

> if you double the amount of residential area in a city, where will it go?

You don't need to double the area, you just need to double the density, which is easily done by eliminating exclusionary zoning. The scarcity is artificial.

Re: Fearing losses, banks are quietly dumping real estate loans

#106

Post by yowzadave »

marssaxman wrote: post #105
yowzadave wrote: post #104

Earlier quoted context omitted.

I'm not objecting to causing pain for property owners, I'm saying that doubling the number of bedrooms in a city is nonsensical (if you double the amount of residential area in a city, where will it go?), and also that you're underestimating the impact on the market of a relatively small increase in supply.

> if you double the amount of residential area in a city, where will it go? You don't need to double the area , you just need to double the density , which is easily done by eliminating exclusionary zoning. The scarcity is artificial.

> you just need to double the density, which is easily done by eliminating exclusionary zoning

I think you should double-check the numbers on this before you assert something is easily done. I live in NYC--are you saying we should live in half the space that we currently live in? A 400sf 1BR apartment should now be a 2BR apartment? Please draw a functional layout for this apartment.

And to what end? The population of NYC is ~8 million. You think the population should double? Where are all of the new people moving from, and what should we do with the houses they are currently living in? You don't need to double the total supply of housing to dramatically affect the housing cost--you just need to increase the supply of housing for the people who are looking right now, which is a much smaller number than the total number who live in the city.

Re: Fearing losses, banks are quietly dumping real estate loans

#107

Post by timr »

TuringNYC wrote: post #101
timr wrote: post #16

Earlier quoted context omitted.

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.

>> You're describing a situation where the second lien is underwater. This is not itself the value of the loan. Correct, but once underwater, an default renders the loan worthless. Underwater+Default --Usually--> Worthless 2nd lien >> 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. Totally…

> Correct, but once underwater, an default renders the loan worthless.

Incorrect. A loan in default can usually be pulled out of default, or otherwise re-structured to keep the borrower current. They are not worthless. In fact, there's a whole sub-industry devoted to this called "special servicing". Even for underwater loans, people tend to want to repay their loans.

You are directionally correct that as a loan gets further into default, it loses value, but this is not a step function, and it certainly doesn't happen instantly on default. You're over-indexing on an exceptional outcome from an exceptional time -- even in 2008, the vast majority of distressed borrowers weren't walking away from their loans.

Re: Fearing losses, banks are quietly dumping real estate loans

#108

Post by marssaxman »

yowzadave wrote: post #106
marssaxman wrote: post #105

Earlier quoted context omitted.

> if you double the amount of residential area in a city, where will it go? You don't need to double the area , you just need to double the density , which is easily done by eliminating exclusionary zoning. The scarcity is artificial.

> you just need to double the density, which is easily done by eliminating exclusionary zoning I think you should double-check the numbers on this before you assert something is easily done. I live in NYC--are you saying we should live in half the space that we currently live in? A 400sf 1BR apartment should now be a 2BR apartment? Please draw a functional layout for this apartment. And to what end? The population of…

New York is a real outlier among American cities and I'm sure its needs are different. Here in Seattle, three quarters of the land available for residential use within the city limits is zoned exclusively for single-family housing. This is absurd. Yes, the population of the city should double: the alternative is that all those people will be pushed out into ever-further reaches of suburban sprawl.

Re: Fearing losses, banks are quietly dumping real estate loans

#109

Post by anon291 »

brailsafe wrote: post #80
anon291 wrote: post #78

Earlier quoted context omitted.

What I don't think people realize is that, in general, the people that stand the most to lose from these kinds of things are not banks. Banks typically hold assets for others, not in their own right. By far, the biggest investor in real estate is government pension funds. Government has every vested interest to enforce RTO, because without it, if companies stop leasing space, then government pension funds will be una…

Isn't a lot of that tied up in residential real estate investment trusts though, which offer the much more perverse incentive of pushing rents as high as they'll go, to the point of increasing homelessness?

It's tied up in both. Pension funds were severely underfunded, and unlike a 401k, they're defined benefit. Money was promised decades ago and now it's time to pay up, but they're not at where they need to be to make payments.

Thus... there's no other option. Government has had to seek out incredibly dangerous investments. The largest purchaser of hedge funds, venture cap, etc... is pension funds. People claim evil capitalists are driving greed in expected return. To the contrary. The government is demanding high rates of return, and enterpreneurs and capitalists are providing a supply.

Then, when things go wrong as they inevitably will, because you can't beat the market's valuations, everyone points fingers. But the demand for the high rate of return is primarily driven by government pension funds. Without them, a more modest rate of return would be demanded, and companies like BlackRock, Vanguard, etc, wouldn't be incentivized to purchase commercial or residential real estate in those amounts.

Re: Fearing losses, banks are quietly dumping real estate loans

#110

Post by lwansbrough »

yowzadave wrote: post #106
marssaxman wrote: post #105

Earlier quoted context omitted.

> if you double the amount of residential area in a city, where will it go? You don't need to double the area , you just need to double the density , which is easily done by eliminating exclusionary zoning. The scarcity is artificial.

> you just need to double the density, which is easily done by eliminating exclusionary zoning I think you should double-check the numbers on this before you assert something is easily done. I live in NYC--are you saying we should live in half the space that we currently live in? A 400sf 1BR apartment should now be a 2BR apartment? Please draw a functional layout for this apartment. And to what end? The population of…

Density doesn't mean making spaces smaller, it just means making more of them. Usually this is accomplished with more floors. If you look at NYC, a huge portion of it is buildings are Instead what we see today in NYC is the same as what we're seeing around North America. NIMBYism, heritage protections, gatekeeping, lawsuits, FUD, political grandstanding, etc.
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