October 27, (haunted by the memory of the Thrift Crisis 20 years ago)

Transcription

1 Distressed Assets and the Mortgage Crisis A Conference Sponsored By NAIOP of Northern Virginia, the George Mason Center for Real Estate Entrepreneurship and the Mason School of Management Hilton Alexandria Mark Center October 27, 2009 Banks and Thrifts Exposure to Real Estate and the Weight of Distressed Assets: It s 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 by Gerald A. Hanweck, Sr. Professor of Finance School of Management George Mason University Fairfax, VA ghanweck@gmu.edu * Yogi Berra

2 Banks and Thrifts Exposure to Real Estate Outline Introduction: A 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? 2

3 Banks and Thrifts Exposure to Real Estate Introduction: A 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 3

4 Banks and Thrifts Exposure to Real Estate Why Focus on Banks and Thrifts? Banks and Thrifts are the largest commercial RE lenders, followed by GSE, Agency, Mortgage ABS $billion and Multifamily Mortgages by Major Lenders and Investor Institutions (1970 Q1 to 2009 Q2, $billion) Mortgages Banks and Thrifts Life Insurance Companies GSE, Agency MBS, ABS Poly. ( Mortgages) Source: Flow of Funds Accounts, Federal Reserve Board Date (Year quarter)

5 Banks and Thrifts Exposure to Real Estate Why Focus on Banks and Thrifts? ($billion) and Multifamily Mortgages Net Change in Assets by Major Lender and Investor Institutions (1970 Q1 to 2009 Q2, $billion) *The Market Soared in 2007 only to collapse in 2008 and 2009 * Banks and Thrifts started contracting lending in 2008 * GSEs, Agency and MBS started their investing decline in 2007 and Multifamily Mortgage Net Asset Changes Banks and Thrifts Life Insurance Companies GSE, Agency MBS, ABS Source: Flow of Funds Accounts, Federal Reserve Dates (Year quarter)

6 Banks and Thrifts Exposure to Real Estate Why Focus on Banks and Thrifts? Banks and Thrifts have serious delinquent loan exposure in many loan types: construction, 16.0% 14.0% residential mortgage, credit cards commercial mortgage (green) Percent of loans that are 90-days or more past due or nonaccrual 12.0% 10.0% 8.0% & Industrial Construction Home Equity Loans Other 1-4 Family Residential Nonfarm Nonresidential Real Estate Credit Cards 6.0% 4.0% 2.0% 0.0% 6

7 Banks and Thrifts Exposure to Real Estate Why Focus on Banks and Thrifts? Another view from the financial statements filed with bank regulators: Banks hold $1.8 trillion in RE Loans as of June 2009 RE Loans have grown to average 323 percent of Equity Capital The number of banks with RE credit to Equity > 4 is 2000 Bank and Thrift Real Estate Exposure and Growth Call Report Period RE Loans ($billion) RE Loans to Assets (%) RE Loans to Equity (%) Number of Banks with RE to Equity Exposure 4 Times or Greater Annual Growth Rate of RE Loans (%) 12/31/2003 1, NA 12/31/2007 1, /31/2008 1, /30/2009 1, Source: Reports of Condition, FDIC and FFIEC 7

8 Banks and Thrifts Exposure to Distressed Real Estate Distressed RE at Banks and Thrifts 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 RE is now 6.4% of total RE and 39% of Equity The growth of distressed RE is accelerating to 66.3% annual rate Bank and Thrift Real Estate Past Due, Nonaccrual and REO Call Report Period RE Past Due, Nonaccrual and REO ($billion) Past Due, Nonaccrual and REO to Loans and CMBS (%) Past Due, Nonaccrual and REO to Equity (%) Annual Growth Rate of RE Past Due, Nonaccrual and REO (%) 12/31/ NA 12/31/ /31/ /30/ Source: Reports of Condition, FDIC and FFIEC 8

9 Banks and Thrifts Exposure to Distressed Real Estate Distressed RE at Banks and Thrifts RE Charge-offs growing at a 63% annual rate and accelerating RE Charge-offs now 11% of Equity at an annual rate Charge-offs have not yet kept pace with Delinquencies Bank and Thrift Real Estate Charge offs (annual rates) Call Report Period RE Chargeoffs ($billion) RE Chargeoffs to RE Loans RE Charge offs to Equity Annual Growth Rate of RE Chargeoffs (%) RE Chargeoffs to Past Due, Nonaccrual and REO RE Loans 12/31/ NA /31/ /31/ /30/ Source: Reports of Condition, FDIC and FFIEC 9

10 Banks and Thrifts Exposure to Distressed Real Estate Distressed RE is a regional and community bank problem, not a Wall Street bank problem Were the policies undertaken by the Bush and Obama administrations contributors to the RE mortgage crisis? 10

11 Exacerbating Causes of the 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 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 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 Citi s Pandit earning $1M+). Most other banks were left without support and over 100 have failed so far in

12 Conclusions and Consequences: What Next? Where does the 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 RE mortgages that would be attractive to investors rather than one-off sales of toxic assets? 12

13 Banks and Thrifts Exposure to Real Estate and the Weight of Distressed Assets: It s 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 Finance School of Management George Mason University Fairfax, VA ghanweck@gmu.edu 13