The COP Agrees with my 2006 Real Estate Predictions

8/14/2019 The COP Agrees with my 2006 Real Estate Predictions

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Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com.ValuEngine is a fundamentally-based quant research firm in Princeton, NJ. ValuEngine

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Februar y 12, 2010 The COP Agrees with my 2006 Real Estate Predictions

The COP on the beat of TARP and more, The Bad Loan Score Card, Comments from the

Congressional Oversight Panel, and Reiterating my Ten Predictions for 2010.Elizabeth Warren the Top Cop of the Congressional Oversight Panel tells it like it is. Sheexplained in a detailed report what I have been warning about since April 2006. How long have I beensaying that nearly 3,000 banks have heavy concentrations in commercial real estate loans?Itwas more than 3,000 when I first talked about the domino failure scenario in April 2006, but its now2988 troubled banks after 181 bank failures since the beginning of 2008.

Heres the Score Card I have been revising and presenting in recent ValuEngine FDIC Reports;

Excluding the 4th quarter of 2009, Total Assets in the banking system are down nearly $600billion.


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There are six types of categories of bad loans that total $5.8 trillion. When the Q4 FDIC QuarterlyBanking Profile is released later this month these loans will continue to be deteriorating.

Since the end of 2007 when The Great Credit Crunch began 1 to 4 Family Residential Mortgageson the books of our nations banks is down $317 billion with more defaults on the way. Here is the latestgraph of Serious Delinquencies. These are the mortgage loans that were not securitized.

Nonfarm and Non-Residential real estate loans have not yet began to decline, but they will, and thisreal estate loan category totals $1.09 trillion. These are typically owner-occupied properties.

Construction and Development loans were the first to falter and are down $137 billion since the endof 2007. The first phase of these loans were Dirt Loans that paid for those cleared developments thatnow lay dormant with street outlines and vacant home sites that are utility ready. The shovels are stillin the ground, but no digging is going on.

Commercial Loans are commercial and industrial commitments that are down $163 billion since 2007.

Home Equity Loans and Credit Card debt continue to deteriorate as well.


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As banks foreclose the underlying collateral of land, buildings and homes, etc, they become OtherReal Estate Loans and this category is up 206% since the end of 2007.

On Thursday, Elizabeth Warren told Fox Business that Commercial Real Estate losses indicate risksof financial stability, and thus in my opinion she extended The Great Credit Crunch through 2014. Iagree with her completely, but believe that the problems are deeper than she thinks.

According to the COP, Commercial real estate loans made over the last decade - including retailproperties, office space, industrial facilities, hotels and apartments - totaling $1.4 trillion will requirerefinancing in 2011 through 2014. Nearly half are at present "underwater," meaning the borrowerowes more on the loan than the underlying property is worth. While these problems have no singlecause, the loans most likely to fail are those made at the height of the real estate bubble.The causeis the fact that the US Treasury, Federal Reserve and the FDIC floated regulatory guidelines forC&D and CRE loans in 2005 and formalized regulatory guidelines in December 2006, but neverenforced them.

The Panel found that "a significant wave of commercial mortgage defaults would trigger economicdamage that could touch the lives of nearly every American." When commercial properties fail, itcreates a downward spiral of economic contraction: job losses; deteriorating store fronts, officebuildings and apartments; and the failure of the banks serving those communities. Becausecommunity banks play a critical role in financing the small businesses that could help the Americaneconomy create new jobs, their widespread failure could disrupt local communities, undermine theeconomic recovery and extend an already painful recession.Its a case of ignoring the foundationof the problems on Main Street while bailing out the Fat Cats on Wall Street.

I am not alone. I guess I should send Elizabeth Warren a Valentines Day Card?

Richard Sut t m eier s Ten Predic t ions for 2010

1. Fannie Mae and Freddie Mac will continue to drain taxpayer money as the Treasury providesunlimited lines of credit through 2012. The line of credit to the two GSEs will be $400 billion plusall losses over the next thirteen quarters. Banks are not out of the woods with regardsrecognizing some Fannie and Freddie losses, as the GSE plans to push losses back tothe originating banks.

2. The FDIC will close 150 to 200 banks in 2010 on the way to 500 to 800 by the end of 2012 into2013. Banks in receipt of TARP will join the failed bank list. The double-blizzards that hitWashington have temporarily slowed Bank Failure Friday.

3. The FDIC will tap its $500 billion line of credit in 2010, as the three year Deposit InsuranceFund prepaid fees of $45 billion will run dry.

4. Loan Defaults and Foreclosures will continue to rise due to waves of Alt-A mortgage resetsand as unemployment pulls prime mortgages into default.

5. The FDIC List of Problem Banks will exceed 700, as the FDIC attempts to keep up with thenearly 3,000 community banks overexposed to C&D and / or CRE loans. I have been warningabout the extent of this problem since April 2006.


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6. House Prices will resume a decline as the $8,000 and $6,500 tax credit programs sunset forcontracts at the end of April and for closings at the end of June. Home prices are still 50% abovethe levels at the beginning of the 21st century, so there is room for another wave down.

7. Emerging Markets and China will fail to provide sufficient economic strength to pull the US andglobal economies out of Recession. China will cut purchases of US Treasuries, as Americansreduce purchases of Chinese goods.

8. US Economic Growth will be muted by drags in Housing and Financials, and by the lack of jobcreation. Banks must gradually raise capital to eventually bring back toxic off balance sheetassets and liabilities to their balance sheets, but the FDIC is allowing this to drag into 2012.There are many time bombs ticking in $206 trillion in notional amount of derivative contracts inthe US without any regulations to control them.

9. The FDIC Quarterly Banking Profile is the balance sheet for the US economy and its

deterioration is a leading indicator that economic growth will muted to negative in 2010. In thefirst three quarters of 2009 total assets declined $596 billion to $13.25 trillion. I see bad loansrising throughout 2010 and beyond. Commercial real estate will be the subprime of 2010.

10. The Multi-Year Bear Market for Stocks is over, but a new bull market is not in the cards. As2010 began I said that there cannot be a bull market for stocks with ten of eleven sectorsovervalued according to ValuEngine. The Dow could trade to 11,250 to 11,500, but a weeklyclose below 10,379 signals at least 20% of downside risk. Now there are eight of elevensectors undervalued, but not by the 32% to 42% of March 2009. The weekly technicals forthe stock market are negative, once the positive daily charts run their course.

Chart Courtesy of Thomson / Reuters


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Richard SuttmeierChief Market Strategistwww.ValuEngine.com(800) 381-5576

As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. Ihave daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters aswell as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as theValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sampleissues of my research.

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The COP Agrees with my 2006 Real Estate Predictions