by Calculated Risk on 11/27/2009 01:00:00 PM

Click on graph for larger image in new window.

First, since the markets closed early ...

This graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

Krugman suggests there are three views on the Dubai situation: 1) the beginning of a wave of sovereign defaults, 2) an extension of the CRE bust, and 3) Dubai as sui generis. Krugman believes it is some combination of two and three.

I agree. Dubai seems like an extreme example of the CRE bust. "Vegas on steroids" as Nanoo-Nanoo wrote in the comments to an earlier post.

It is the state-controlled Dubai World that might delay payments - and both Moody's and Standard & Poor’s have said they may consider delaying payments a default - and it is unclear if oil rich Abu Dhabi will help out Dubai. So the situation is confusing ... but it does seem that Dubai is the most overbuilt city in the world.

Here is a repeat of a video on the Dubai real estate crash I posted in February:

Some photos of Dubai from the Boston Globe last year.

Also from February, an article on "skips" - expatriates fleeing home rather than risk jail for defaulting on loans: Driven down by debt, Dubai expats give new meaning to long-stay car park

And from the NY Times in February: Laid-Off Foreigners Flee as Dubai Spirals Down

by Calculated Risk on 11/27/2009 10:53:00 AM

From Donna St. George at the WaPo: The $698,000 mistake

[A]ll of this began in the heady days of the mortgage boom ... [Ms. White] only knew that there seemed to be possibilities, even to those with little means such as herself, which is how a woman who had never paid more than $700 a month in rent and who had relied in recent years on Section 8 housing vouchers suddenly owned a house.

A four-bedroom house.

With 3 1/2 bathrooms. And walk-in closets, black granite countertops and a fireplace.

You can already tell how this story will end.

On settlement day, reality bore down.
...
Papers were read and presented, most of which White did not try to decipher. ... White's papers cited income of $163,320 a year, even though she says her 2005 income-tax earnings were less than $15,000 and she relied at times on food stamps.
...
White signed papers while waiting for the one she cared most about: her monthly payment. ... "Please let this be something I can afford," she said to herself. She was pretty sure she could afford $2,000. She told herself that if her day-care business did well, perhaps she could afford $2,500. If it was $2,800, she would struggle. Here, now, came reality: $5,635 a month.

To get White to sign, the sellers - who were real estate agents - agreed to make the first two mortgage payments for Ms. White. According to the article, White received $40,000 in cash out at closing - and the seller made over $200,000 on the house. Naturally it went into foreclosure and Ms. White is back living in an apartment.

by Calculated Risk on 11/27/2009 08:33:00 AM

A little more Dubai news ...

From Bloomberg: Dubai Debt May Be Higher Than $80 Billion, UBS Analysts Say

Dubai... may owe more than the $80 billion to $90 billion in liabilities assumed by investors, UBS AG analysts said in a note.

“Perhaps Dubai’s debt includes sizeable off-balance sheet liabilities that imply a total debt burden well above the $80 billion to $90 billion markets have estimated so far,” real estate analyst Saud Masud wrote in a note yesterday. “This could imply that the debt issued by Dubai in recent weeks is insufficient to meet upcoming redemptions.”

And more: RBS Led Dubai World Lenders, HSBC May Have Most at Stake in UAE

RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in a report today .... HSBC, Europe’s biggest bank, has the “largest absolute exposure” in the U.A.E. with $17 billion of loans in 2008, JPMorgan said ...

by Calculated Risk on 11/26/2009 09:39:00 PM

Some Turkey Night reports and futures ...

From The Times: Dubai in deep water as ripples from debt crisis spread

Fears of a dangerous new phase in the economic crisis swept around the globe yesterday ... Shares plunged, weak currencies were battered and more than £14 billion was wiped from the value of British banks on fears that they would be left nursing new losses.
...
Although the scale of Dubai’s debts is comparatively modest at $80 billion (£48 billion), the uncertainty spooked the markets ... The FTSE 100 plunged by 171 points to 5,194 — its biggest one-day fall in eight months ...

The French CAC-40 was down 3.4% and the German DAX index was down 3.3%.

In Asia, the Hang Seng is off about 3%, and Nikkei is off 1.8%.

In the U.S, the S&P futures are off about 25 points (Dow futures off 200). Some sources:

Bloomberg Futures.

CNBC Futures

Best to all.

by Calculated Risk on 11/26/2009 05:55:00 PM

From Jon Lansner at the O.C. Register: How banks may lose $430 billion more

Banks are projected to lose $430 billion on commercial real estate loans in the next two to three years [said] Stan Mullin, an associate with California Real Estate Receiverships in Newport Beach
...
Highlight’s of Mullin’s talk:

•$1.4 trillion in commercial loans are coming due in the next five years.
•That’s equal to the same amount that came due in the last 15 years.
•Lenders could take massive losses on their real estate portfolios from 2010-2013.

This is similar to the recent presentation by Dr. Randall Zisler, CEO of Zisler Capital Partners:

A crisis of unprecedented proportions is approaching. Of the $3 trillion of outstanding mortgage debt, $1.4 trillion is scheduled to mature in four years. We estimate another $500 billion to $750 billion of unscheduled maturities (i.e., defaults).

And from the WSJ in October:

Commercial real-estate loans are the second-largest loan type after home mortgages. More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks.

The Fed presentation states that the most "toxic" loans on bank books are so-called interest-only loans, which require borrowers to repay interest but no principal. Those loans "get no benefit from amortization," the report states.

"Today, most of the borrowers are paying because interest rates are so low, but the question is whether the loans will get paid off when they come due," said Michael Straneva, global head of Ernst & Young's transaction real-estate practice.

And of course this is why the FDIC released the recent Policy Statement on Prudent Commercial Real Estate Loan Workouts

This policy statement stresses that performing loans, including those that have been renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral declined.

And the "value of the underlying collateral" had definitely declined - by 43% on average according to Moody's.

In the end, the size and timing of the losses really depends on the success of the workouts, and I expect the terms on many of these loans will be extended for a number of years - taking advantage of the very low interest rates and hoping property values eventually rebound.