Displaying items by tag: Mortgages
An event happened this week in the commercial real estate space that feels as though it might be seen as a canary in the coal mine for the forthcoming real estate crisis. The largest (and probably most famous) mall in the US—Mall of America—just fell behind on its $1.4 bn mortgage payments. The owner of the mall, which features over 500 stores and a theme park, missed its mortgage payments in both April and May, reports the Financial Times via Wells Fargo documentation. The owner, called TripleFive Group, has reported to Wells Fargo that it has suffered hardship because of COVID. Presently, nationwide about 1 in 5 loans bundled in CMBS are now on “watch lists”.
FINSUM: For context here, Macerich, which is one of the biggest mall owners in the country, disclosed that is has only collected 18% of rent it is owed in May.
There have been all kinds of predictions for how COVID will affect real estate. The virus’ implications for commercial real estate are clearly bearish, at least in the short-term, but residential is a different story. While viewings are done, supply of housing is so tight that prices in April actually rose from last year despite the huge disruption to the economy. Home owners don’t want to move right now, so either aren’t putting their homes on the market, or are taking them off.
FINSUM: The other key thing to bear in mind is that home equity/leverage was in a very healthy place as this crisis unfolded, so homeowners are not underwater like they were in the last big crisis. Thus, there is a lot less pressure to fire sale.
Hotels are increasingly in trouble. About a quarter of all hotels in the US are now behind on their loan payments. COVID has obviously had a huge effect on hotel occupancy rates, which is now causing financial difficulties for the hotels and their lenders. The situation echoes other data from across the commercial real estate sector. For instance, Vornado Realty Trust yesterday said that it had only collected 53% of retail rents in April, and 90% of office rents.
FINSUM: We think it is critical to remember that re-opening is not a sign that all is clear in commercial real estate. Even once they re-open, restaurants and retail stores are still very likely to be doing MUCH less business than before they closed, and since a lot of cash reserves have probably been used up, their financial situation and thus the sector are just going to grow more precarious.
The epicenter of the financial crisis accompanying the Coronavirus pandemic has undoubtedly become the commercial real estate space. With so many physical businesses bringing in zero revenue, the huge suspension of cash payments is going to flow through to property owners and then to the lenders that financed those building purchases. Multiple parts of that value chain are going to targeted by markets, but Wells Fargo, in particular, looks exposed. The bank has almost 13% of mortgage market share (residential), around double the exposure of JPMorgan Chase and triple that of Bank of America.
FINSUM: The government’s stimulus package offers some good assistance to help support cash flow (via Ginnie Mae), which could soften the blow. But still, it is going to be a painful period.
In what comes as a very important sign for the wider US economy, lower rates and yields are apparently not flowing through to mortgages in the way that many expected. One of the bright economic spots in the big market volatility recently has been the hope that much lower rates would stimulate more housing demand. Mortgages rates have actually risen by 20 bp since March 5th despite the huge fall in Treasury yields. Even since mid-February (when the market was peaking), mortgage rates have only dropped 15 bp to 3.35% for a 30-year fixed.
FINSUM: This is very important because it takes a 75 bp fall for a typical homeowner to save money on a refinancing. We are not even close to that yet, so hard to see any economic boost coming.