by Jack Lee
- IMF warns of more Euro bank defaults
- Citi Group nearing moment of truth
- FDIC is deep into the red – feds concerned
- REITs (commercial real estate) is in jepardy
The second real estate bubble is about to burst, beware of the fall of the REITs!
Real estate investment trusts (REITs) are leveraged-financed property investments that are abundant within the commercial real estate investment market. During the good times when the so-called “liar loans” regularly went to under qualified homebuyers and prices surged beyond all reason, the REITs made a bundle from surging revenues as property values soared. With the collapse of the housing bubble, property values are in free-fall, but unlike residential real estate, commercial real estate hasn’t witnessed mass defaults…. yet. And this would be the second shoe to drop!
Unlike residential real estate, the collateralized debt obligations (CDOs) pervasive in commercial real estate are isolated to a handful of REITs. Mall operators, retailers, and other commercial properties are developed and run by a select few investment trusts, differing from residential housing, which has millions of mortgage bundles across America, many of them already defaulting. This prevents immediate defaults but also centralizes the pain, because as one REIT faces defaults, the others soon follow.
As a reminder of the housing bubble collapse we are still attempting to extricate ourselves from, is Citi Group Inc and it’s future is no where near certain. CIT Group Inc. Dangling by a thread as of Tuesday as the large commercial lender readied a plan that would likely hand control of the company to its bondholders. If REITs begin to fall, Citi is done.
CIT is preparing a sweeping exchange offer that would eliminate 30% to 40% of its more than $30 billion in debt outstanding.
All this bank defaulting has our FDIC deep in the red. The government said the FDIC fund that insures your bank deposits has fallen deep into the red and will remain there into 2012, a pointed symbol of how the aftershocks of the financial crisis will reverberate for years as banks continue to fail at a high rate.
The negative balance is a headache for the Federal Deposit Insurance Corp., which runs the fund. On Tuesday, it proposed the unprecedented step of having the banking industry prepay $45 billion in fees by the end of the year to give the government more breathing room to handle future failures.
On the international scene rising global securities prices reduced the International Monetary Fund’s estimate of bank losses, but banks around the world — especially in Europe — still are likely to face additional write-downs of $1.5 trillion by the end of next year, according to the IMF.
Overall, the IMF calculates that the global financial crisis will produce $3.4 trillion in losses for financial institutions, between 2007 and 2010, a chunk of which already has been recognized.
So you see folks, we are a long way from getting up off our knees after the last financial beat down. And there’s a better than average chance that REITs will soon follow banks as the next meltdown area.