Distressed Assets and the Commercial Mortgage Crisis A Conference Sponsored By NAIOP of Northern Vir

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Distressed Assets and the Commercial Mortgage
CrisisA Conference Sponsored By NAIOP of
Northern Virginia, the George Mason Center for
Real Estate Entrepreneurship and the Mason School
of ManagementHilton Alexandria Mark Center
October 27, 2009 Banks and Thrifts Exposure to
Commercial Real Estate and the Weight of
Distressed Assets Its déjà vu All Over Again
and It ain't over till it's over" (haunted by
the memory of the Thrift Crisis 20 years ago)

• Presented byGerald A. Hanweck, Sr.Professor of
  FinanceSchool of ManagementGeorge Mason
  University Fairfax, VAghanweck_at_gmu.edu
• Yogi Berra

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Banks and Thrifts Exposure to Commercial Real
Estate

• Outline
• Introduction A Commercial Mortgage Crisis
  Really?
• Why Focus on Banks and Thrifts?
• How did the US and global economy get into the
  commercial real estate mortgage crisis the
  excessive leverage and layering that took place
  and the extreme liquidity and credit crunch that
  resulted in severe recession and distressed
  commercial real estate assets?
• Summary and consequences of this crises and some
  possible directions for a commercial real estate
  recovery. Can it happen again?
• Questions?

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Banks and Thrifts Exposure to Commercial Real
Estate

• Introduction A Commercial Mortgage Crisis
  Really? Really! The haunting memory of the
  Thrift Crisis 20 years ago. Several very large
  commercial real estate developers and lenders
  have either filed for bankruptcy or are about
  to General Growth Properties, Inc. (Rouse
  and Summerlin, Las Vegas) Capmark
  Financial Group GMAC The commercial
  mortgage-backed securities market is frozen-up
  with little chance of a quick thaw Banks,
  Thrifts and Insurance Companies have almost
  stopped providing financing to commercial real
  estate projects of all sorts and are carrying a
  growing amount of distressed assets

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Banks and Thrifts Exposure to Commercial Real
Estate

• Why Focus on Banks and Thrifts?Banks and Thrifts
  are the largest commercial RE lenders, followed
  by GSE, Agency, Commercial ABS

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Banks and Thrifts Exposure to Commercial Real
Estate

• Why Focus on Banks and Thrifts?

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Banks and Thrifts Exposure to Commercial Real
Estate

• Why Focus on Banks and Thrifts?Banks and Thrifts
  have serious delinquent loan exposure in many
  loan types construction, residential mortgage,
  credit cards commercial mortgage (green)

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Banks and Thrifts Exposure to Commercial Real
Estate

• Why Focus on Banks and Thrifts?Another view from
  the financial statements filed with bank
  regulators Banks hold 1.8 trillion in
  Commercial RE Loans as of June 2009 Commercial
  RE Loans have grown to average 323 percent of
  Equity Capital The number of banks with
  Commercial RE credit to Equity gt 4 is 2000

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Banks and Thrifts Exposure to Distressed
Commercial Real Estate

• Distressed Commercial RE at Banks and
  ThriftsCommercial RE 30-days or more past due,
  Nonaccrual and REO Increased 63 since 2007
  and 39 in 6 months (December 2008 to June 2009
  Distressed Commercial RE is now 6.4 of total
  Commercial RE and 39 of Equity The growth
  of distressed Commercial RE is accelerating to
  66.3 annual rate

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Banks and Thrifts Exposure to Distressed
Commercial Real Estate

• Distressed Commercial RE at Banks and Thrifts
  Commercial RE Charge-offs growing at a 63 annual
  rate and accelerating Commercial RE
  Charge-offs now 11 of Equity at an annual rate
  Charge-offs have not yet kept pace with
  Delinquencies

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Banks and Thrifts Exposure to Distressed
Commercial Real Estate

• Distressed Commercial RE is a regional and
  community bank problem, not a Wall Street bank
  problemWere the policies undertaken by the Bush
  and Obama administrations contributors to the
  Commercial RE mortgage crisis?

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Exacerbating Causes of the Commercial RE Crisis
Policies Focused on Big Banking Company Survival

• Unlike other crises, Treasury Secretary
  Paulson and Fed Chairman Bernanke with Tim
  Geithner, President of the Federal Reserve Bank
  of New York, undertook to bailout the largest
  commercial banks, investment banks and insurance
  companies through the Troubled Asset Relief
  Program (TARP, October 3, 2008) and direct
  funding by the Fed by infusing capital into the
  banks, even though TARP was intended to take
  toxic assets off the books of banks (including
  Commercial RE)
• In no other crisis or in the failures of
  large banks such as Chicago-based Continental
  Illinois in 1984 or the Bank of New England Corp.
  in 1990-1991 was permanent capital infused into
  financial companies. Why this was done in
  this case is another story, but essentially it
  preserved every company of the top 5 including
  the biggest troubled mega-bank CitiGroup and
  mega-insurance company AIG turning them into
  zombie institutions dead, but still moving,
  consuming resources, including Freddie and
  Fannie. Note also that, with the exception of AIG
  and Freddie and Fannie, the senior management of
  each is still in place (BAC Lewis (retiring in
  December 2009 and Citis Pandit earning 1M).
  Most other banks were left without support and
  over 100 have failed so far in 2009.

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Conclusions and Consequences What Next?

• Where does the Commercial RE Mortgage Crisis go
  from here? What might be some resolutions?
  For banks and thrifts to lend again, their
  toxic/bad assets must be removed from their
• books. Does this imply that TARP funds be
  used to remove these toxic assets? Maybe.
  Another alternative is to encourage charge-offs
  of these assets and sales to willing
• investors such as equity funds and sovereign
  funds. On a historical note, the Resolution
  Trust Corporation helped develop the CMBS market.
  Maybe an institution such as this could create a
  secondary market of low-rated Commercial RE
  mortgages that would be attractive to investors
  rather than one-off sales of toxic assets?

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Banks and Thrifts Exposure to Commercial Real
Estate and the Weight of Distressed Assets Its
déjà vu All Over Again and It ain't over till
it's over"

• Thank you for listening.Questions?
• The End
• Gerald A. Hanweck, Sr.Professor of
  FinanceSchool of ManagementGeorge Mason
  University Fairfax, VAghanweck_at_gmu.edu