Commercial Real Estate on the Mend?

Growing or Declining?: Defense Budgets, Baselines, and the Art of Spin – It is definitely spin season for the budget, especially the defense budget. Bloomberg’s Tony Capaccio (…) reports today that the DOD base budget (excluding war costs) request for FY 2012, due in February (but leaking already, for the sake of spin) will be $554 billion, which he calls "modest growth" over this year.   Tony has been spun, but ya have ta follow the bouncing baseline ball to see how.  A DOD base budget of $554 billion would only be growth over FY 2011’s budget if the defense budget for FY 2011 were frozen at the FY 2010 level of $531 billion.  But this would be a significant cut of more than 3% this year from the $549 billion the Pentagon asked for and zero growth over FY 2010.  Figure there will be inflation; that’s a budget cut.  Of course, the problem is that the FY 2011 budget level has not been set and, as I noted yesterday (, the new Republican House leadership has put defense on the table, along with everything else.  So the baseline for FY 2011 from which anyone would measure the FY 2012 request is unknown.  But it is almost certain to be a cut of some kind.
Recovery May See Producers Pass On Commodity-Price Inflation – Commodities logged some of 2010’s strongest gains as strong demand for crops and materials in developing countries — coupled with a flood of monetary liquidity into the global economy from the Federal Reserve and other developed country central banks — prompted investors to buy everything from soy beans to copper futures. This anticipatory buying helped palladium, which is used in car parts, to gain 96.5% while cotton broke its Civil War record with a 91.5% price increase. These higher prices manifested in rampant inflation in many parts of the developing world, where robust economic growth is helping a new class of consumers discover the material comforts that developed country consumers are accustomed to. New coffee drinkers in Brazil and China, for instance, helped augment existing demand to lift bean prices 77% last year. Global food prices rose to a record in December, with the Food and Agriculture Organization of the United Nations’s food price index reporting its sixth straight monthly increase to 214.7. The index tracks monthly changes in international prices of a basket of commodities including meat, dairy, cereals, oils and sugar.

Irish Bailout Begins as Europe Sells Billions in Bonds – The European Union began issuing bonds on Wednesday to finance its rescue fund for Ireland, even as Portugal was required to pay more to sell short-term debt. At the same time, Europe got a vote of support from China when Li Keqiang, the deputy prime minister, reaffirmed Beijing’s commitment to continue buying Spanish bonds. As a step toward mastering the crisis, one of Europe’s new bailout agencies took its first foray into the market Wednesday to help pay for the 85 billion-euro ($112 billion) Irish rescue.  The European Financial Stabilization Mechanism, an agency set up to finance rescues of embattled governments, issued five billion euros in five-year bonds, carrying an interest rate of 2.59 percent. That was well above the 1.85 percent on comparable bonds of Germany, the largest euro zone economy.


 Spanish Bank Stocks Drop on Funding Cost, Led by BBVA – BBVA, which yesterday issued 1.5 billion euros ($2 billion) of three-year covered bonds at a spread of 225 basis points over swaps, fell 1.3 percent to 7.50 euros in Madrid after declining as much as 4.5 percent during the session. Banco Santander SA, which sold five-year covered bonds today, fell 0.7 percent to 7.94 euros, paring an earlier drop of as much as 4.5 percent.  Raising money is getting more costly for banks in indebted euro nations as investors demand a higher return for taking the risk of holding their debt. Ireland in November followed Greece by seeking a bailout, while investors remain concerned about the growing debt burden in Portugal, Spain and Italy.  “The signals from the bond market are not very encouraging,”

Texas and New York, different – THERE is an ongoing and irksome debate within the American blogosphere concerning whether and why the state of Texas is different or special or something, economically speaking. Many of the pro-Texas arguments take the exasperating form of: look at the amazing growth in Texas’s so-and-so (population, employment, etc) which is due to so-and-so (policy I like). This is generally greeted with a response the form of which is: no it isn’t, because so-and-so (unemployment rate) is the same in Texas as it is in so-and-so (state with policies I prefer). We saw the first argument emerge in December when new Census figures were released. Texas’ population increased substantially over the past decade, which some writers were all too ready to attribute to low taxes and regulation. In fact, the dynamics involved are far more complicated, and revolve in part around Texas’ decision to allow rapid growth in its housing supply. Paul Krugman offers up an example of the second argument today in a post aiming to undermine the case for a "Texas miracle" through this chart:
Think again: America decline –The Chinese challenge to the United States is more serious for both economic and demographic reasons. The Soviet Union collapsed because its economic system was highly inefficient, a fatal flaw that was disguised for a long time because the USSR never attempted to compete on world markets. China, by contrast, has proved its economic prowess on the global stage. Its economy has been growing at 9 to 10 percent a year, on average, for roughly three decades. It is now the world’s leading exporter and its biggest manufacturer, and it is sitting on more than $2.5 trillion of foreign reserves. Chinese goods compete all over the world. This is no Soviet-style economic basket case.
Fed Plans to End Tough Sanction Against Predatory Lending– Yves Smith – Not only has the gutting of regulation made it hard to win criminal prosecutions for financial fraud, but the Fed plans to eviscerate a key sanction against predatory lending. If you somehow still had any doubts as to whose interests are really being served by banking regulators, look no further than this latest largely under the radar move. From Zach Carter at Huffington Post: The regulation would severely limit a practice called “rescission,” used to strike down demonstrably-illegal or fraudulent loan contracts and void a bank’s ill-gotten gains from such predatory lending practices. When a mortgage borrower wins a rescission case in court, the bank loses the right to foreclose, and has to give up all profits from interest and fees on the loan. The borrower still has to repay the principal — What gets interesting is how recission plays into the securitization model. The borrower is still on the hook for the principal, but with no ability to foreclose, it’s hard to compel the borrower to repay. And remember from our previous discussions of securitization, that “banks”, meaning servicers, are keen to foreclose because they get to repay themselves for fees (including junk fees and foreclosure-related charges) and principal and interest advances (remember they keep advancing principal and interest even when the borrower has quit paying, in theory they could stop once the loan is severely impaired, in practice pretty much no one does).

HuffPo: Fed Reverses Position, Prepared to Rein in Mortgage Abuses – Yves Smith – I don’t want to jinx it, but the age of miracles may not be past. Huffington Post has been reporting on the split between the FDIC and other regulators on getting tough with mortgage, more specifically, securitization, abuses. The FDIC has been serious about putting serious securitization reforms in place; it launched a well-thought-out proposal early last year. By contrast, other banking regulators, the Fed in particular, have been taking up the sell side industry’s point of view, which is that any meaningful change would be detrimental. But of course, this is yet another case where what is good for the banking industry is not so hot for a lot of other constituencies, such as investors, homeowners, and communities.  Huffington Post has learned the Fed is in the process of reversing its position on this issue. As Zach Carter writes: The Federal Reserve has reversed its opposition to new rules reining in foreclosure abuses, and will support stronger regulations on the nation’s largest banks… The FDIC has been pushing hard to ensure that new regulations on the mortgage bond market include clear instructions for how banks handle mortgages– and under what circumstances they can evict delinquent borrowers…

Humans Have Intentionally Modified Weather for Military Purposes and Climate Control for Decades – Weather modification is a well-known endeavor. For example, governments have been seeding clouds for decades to create more rain. And during warfare to create mud to slow the enemy’s ability to use roads. As the Guardian reported in 2001: During the Vietnam war, the Americans launched Project Popeye, a secret mission to seed the tops of monsoon clouds and trigger phenomenal downpours that would wash away the Ho Chi Minh Trail used for ferrying supplies.  Interestingly, U.S. weather modification efforts during the Vietnam war were revealed as part of the Pentagon Papers. As the Washington Post reported
Why California’s Budget Gap Isn’t as Bad as Low-Tax Arizona’s – California — which has a well-known spending problem — has a smaller relative budget gap than lower tax Arizona, according to a paper released today by the Brookings Institution. Both states have the same obvious imbalance — they spend more money than they take in — but for different reasons. While California spends too much money, Arizona doesn’t raise enough taxes. The paper is a reminder that when it comes to budget deficits, opposite politics often produce the same result. The Brookings paper examines four western states — Arizona, California Colorado and Nevada — and attempts to break out their cyclical versus structural budget gaps. The cyclical budget gap can be defined as all the temporary problems brought on by a down economy (weaker sales tax receipts, for instance). The structural deficit is the longer-term problems brought on by spending promises that can’t possibly be solved with the current tax burden (things like retiree health care and pension obligations). The results: In fiscal year 2011, California’s 21% projected budget deficit was 12% cyclical and 9% structural. Arizona’s 33% projected deficit was 21% structural.

The Income Distribution –This piece by Mark Thoma is a strange one, but it at least got me thinking. Mark starts with: There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. We also know that a society where one person has almost everything while everyone else struggles to survive – the most unequal distribution of income imaginable – will not grow at the fastest possible rate either. The "Laffer curve for inequality" is new to me, so I was hoping for a little more in terms of theory, but I guess the rest of the paragraph will have to do. Here’s what Mark might have in mind here, though it’s hard to tell.

Commercial Real Estate on the Mend? – The easiest way to determine if things are getting better would be to look at delinquencies. Here are some measures:

Let’s look at each of these lines. First, the green one shows commercial mortgage-backed securities (CMBS) portfolios and includes the earliest-term delinquencies. Although they continue to rise, they’re doing so consistently more slowly, as the distances between each point have been decreasing for about a year. The red line is the most severe delinquencies, as 90 days or more delinquent means that the properties are essentially defaulted. Its story is similar, as delinquencies have continued to grow, but not as quickly as they had in prior quarters. Finally, delinquencies on 60 or more day multi-family portfolios owned by Fannie Mae actually declined during the quarter. This data hardly indicates that all problems are behind the commercial mortgage market, but it does suggest that a recovery probably isn’t far off. 

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