February 10, 2009
Unlike when subprime first caught the market off-guard, Youngblood sees Fed and Treasury policy together holding down interest rates and lenders slowing default rates by restructuring loans. But many analysts, including Tilson, believe restructuring will not help much, especially when house values are underwater, well below the size of their mortgages.
And Youngblood cautions that if job losses continue to accrue at their current staggering rate, unemployment could trump all efforts to keep people in their homes, sending defaults rising anyway.
Eric Pellicciaro, managing director and lead mortgage investor at BlackRock, agrees that the second wave of defaults could be just as vicious as the one that just hit. But he believes that the Alt-A and Option ARM default rates projected for 2009 through 2011 will be less significant because the equity and debt markets have already significantly discounted this crisis. “Investors are aware of the severity of the problems,” says Pellicciaro, “while government is actively intervening by lowering interest rates and infusing liquidity into the markets to help offset financial pressures.”
He surmises that we could be nearing the bottom for the debt market. But that’s conditional on government intervention containing the fallout and stabilizing mortgage markets and housing prices.
Commercial real estate: the next domino?
Even if the market has largely priced in the meltdown of the housing market, Dan Schwartz, senior economist at Argonaut Capital Management, which runs a $460 million global macro hedge fund, is very concerned about the pending fallout from commercial mortgage defaults. “This is just starting to register on analysts’ radar screens,” he says. “Looking at the schedule of interest rate resets, commercial defaults are likely to get much worse as the economy slides further into recession.” Over the past year, commercial loans that are currently resetting have increased by 50 percent to $300 billion. By 2013, the cumulative volume of loans subject to reset will have reached $1.5 trillion, according to Schwartz.
Like subprime home loans, most commercial property debt has been securitized. If government intervention doesn’t gain much traction, and if refinancing doesn’t come back on line over the next several years, Schwartz is fearful the economy will be smacked from a collapsing commercial property market as well.
Based on the way the crisis has been reported, T2’s Tilson believes there’s a popular perception that as the impact of subprime winds down, the US may soon get back to business. But he sees not only another large residential mortgage shoe ready to drop but a significant rise in commercial mortgage defaults, along with the souring of auto loans, credit card debt, personal and business loans. All told, Tilson thinks “we are only about one-third through the bursting of the asset bubble.”
Eric Uhlfelder, author of Investing in the New Europe [Bloomberg Press, 2001], covers global capital markets from New York. He can be reached at Uhlfelder@hotmail.com
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