Sunday, April 12, 2009

Malls, Budget math and Jumbo mortgages....

I've tried to draw parallels between the US commercial real estate market and the local commercial real estate market in the past. Consider the following outlook for retail real estate....

"More than 400 of the 2,000 largest malls in the U.S. have closed in the past two years. The last new major mall in the U.S. opened in 2006, and only one big mall is scheduled to open this year—the troubled Xanadu mega-mall in Rutherford, N.J. With some 150,000 retail stores projected to fail in the U.S. this year, more mall closings are imminent."

I think that when you look at the volume of new, empty retail real estate available in Watertown it is apparent that anything short of a historic economic recovery is going to lead to substantial woes for the owners of these properties.

More commercial real estate issues may ultimately lead to lower tax revenue for the town and city. Wash, rinse, repeat....

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In a related tax story how long before we're charged "accident response fees"?

"After her sport utility vehicle sideswiped a van in early February, Shirley Kimel was amazed at how quickly a handful of police officers and firefighters in Winter Haven, Fla., showed up. But a real shock came a week later, when a letter arrived from the city billing her $316 for the cost of responding to the accident.

It used to be. But last July, Winter Haven became one of a few dozen cities in the country to start charging “accident response fees.” The idea is to shift the expense of tending to and cleaning up crashes directly to at-fault drivers. Either they, or their insurers, are expected to pay.

Such cash-per-crash ordinances tend to infuriate motorists, and they often generate bad press, but a lot of cities are finding them hard to resist. With the economy flailing and budgets strained, state and local governments are being creative about ways to raise money. And the go-to idea is to invent a fee — or simply raise one."

Given the propensity of some members of my family to call the Coast Guard to investigate every pile of reeds floating down the St. Lawrence, fees like this could bankrupt me :)

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I'm not sure how I didn't see this coming. Federal tax receipts are down and continue to fall sharply. This is a problem that I hadn't really fully appreciated until I read the 2 page pdf from the Congressional Budget Office.

Given the skyrocketing spending tied to TARP, other bailouts and the stimulus, I had focused on the expense side of the government's ledger. However, the weak economy has led to a sharp reduction in tax revenue from corporations and more refunds to corporations and individuals. I think if unemployment continues its march toward 10%+ we will continue to see the Federal government's budget be strained and it will be interesting to see how much appetite the world has for good ole fashioned Made in America debt.

"Receipts in March were about $125 billion, CBO estimates, $54 billion (or 30 percent) lower than receipts in the same month in 2008. Net corporate income tax receipts account for more than half of the decline, falling by about $29 billion (or 90 percent) from their level in March 2008."

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In another example of interesting timing there was an enormously important report that was released on Thursday night long after the markets had closed for the holiday weekend. The details aren't terribly important unless you are active in the mortgage market, but Moody's downgraded 4,988 tranches of jumbo mortgage backed securities with an outstanding value of $170 billion +.

Jumbo mortgages were typically issued for homes costing in excess of $500k and they typically were reserved for the best borrowers.

"The rating agency says that during the last six months, Jumbo mortgage loans backing 2005 to 2008 securitizations have shown substantial increases in serious delinquencies and decreases in prepayment rates — levels that are unprecedented for this asset class.

Borrowers who are 60 or more days delinquent on their payments, have had foreclosure proceedings started against them or properties that are held for sale comprise 1.6%, 2.9%, 3.6% and 3.75% for the 2005, 2006, 2007 and 2008 vintages respectively.

Moody’’s is estimating that eventual default rates for borrowers who become seriously delinquent by end of 2009 on jumbo pools from 2005, 2006, 2007 and 2008 vintages will be 2.3%, 3.9%, 5.0%, and 6.2% respectively."

Keep this in mind the next time you hear a big bank talk about how great their business is --- They've got a lot of mortgages getting worse not better. Commercial real estate is starting to crack. Stop me if you've heard this one before.

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