Lookin' Like a Fool With Your Head In The Sand

Today's expression of the day is "pretend and extend". Retailtrafficmag.com goes on to explain: "'pretend and extend' describes an ongoing phenomenon in commercial real estate finance: as the level of distress mounts, lenders have been loath to seize properties from troubled borrowers. Instead, in many cases banks are generously granting extensions or other modifications even in situations where it appears unlikely that borrowers will be able to pay back the loans. lenders are attempting to avoid recognizing writedowns and losses on their commercial real estate loan books. Loans originated at the height of the market were done at near 100 percent loan-to-value ratios and underwritten with generous assumptions on increasing occupancies and rents. But in the past two years commercial real estate values have dropped considerably and fundamentals have weakened. Rents and occupancies are now dropping quickly, not rising. On top of everything, a major source of financing, the commercial mortgage-backed securities (CMBS) market, remains locked down."

This article is from July 2009. Even then, loan modifications outnumbered new loans 2-1. Fast forward today, and it looks like banks are not only putting their heads deeper into the sand, but trying to breath it in as air.

CNN Money reports on 02.14.10: "After 13 months of consecutive declines, overall commercial property values climbed 1%, according to the most recent monthly reading by Moody's/REAL Commercial Property Price Index. Even well-respected bankers have offered a glass half-full outlook on the state of the commercial real estate market. 'Commercial real estate is a train wreck, but it's already happened,' JPMorgan Chase (JPM, Fortune 500) chief executive officer Jamie Dimon said during a company-sponsored conference last month."

I call shenanigans! No one bank, no one market, no one industry can completely realize a loss UNLESS all lenders fully disclose their losses. Even though banks are reporting Non-Current Loans, I would be willing to wager a large amount of money that a significant percentage of current loans are being propped up artificially. Borrowers are playing a shell game, using other loans to pay other loans in a vicious cycle. Hell, Visa reported a 33% gain fiscal first quarter as more consumers used cards than cash. Anyone else see a small issue with this?



Your average community bank can't bear to call a loan on their golfing buddy's business. Multiply this scenario by a few hundred thousand. This is why you'll see more banks go under. With $1.4 trillion dollars of commercial loans coming due in the next three years, it will only get worse. No one is buying commercial paper. What will change that?