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Hotel bailouts at taxpayer expense are coming right away – Mish Talk

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Trepp’s research shows that CMBS delinquency rates are increasing for the Third month; Near the highest historical.

It was for June.

July Default Rate by Property Type

For July, Trepp reported CMBS default rate posts steepest drop in more than four years but even with the decline, delinquencies are close to record levels.

The noticeable change in the overall default rate was the result of having over $ 8 billion in loans “corrected” – meaning the loan was past due in June but reverted to “current” status or status. grace period / beyond the grace period in July.

As we reported in TreppWire in mid-July, some of the improvements came from loan modifications such as a maturity extension. An additional benefit came via reserve relief, whereby borrowers were allowed to use the reserves to keep the loan up to date.. (This was confirmed by comments from the special agent or watchlist in July.)

The above paragraphs show that it is not clear to what extent the claimed improvement is due to extension and simulation maneuvers compared to the actual improvement.

How long will the hotels remain empty?

This is the key question.

Trepp discussed this issue on June 18.

The report is now a bit outdated, but the observations are still worth a look.

At the start of this year, one of the hospitality industry’s headlines was meager growth in revenue per available room (RevPAR) in 2019. According to STR, the hospitality industry saw a 0.9% increase in revenue. RevPAR in 2019 – the lowest annual increase since 2009. At the time, STR predicted that in 2020 the overall RevPAR would only increase by 0.5%, as an increase in supply outweighed growth in the request.

We did not know that no forecast – no matter how cautious – would not be applicable in the coming months. With the sudden spread of the COVID-19 epidemic at a rapid rate, the hospitality and tourism industries around the world have faced a devastating shutdown.

STR’s US hotel performance data recently showed week-to-week occupancy increases. From more than 60% at the end of February, the occupancy rate fell sharply to only a third to 22% at the beginning of April. It has since increased slowly each week, reaching 41.7% for the week ending June 13. Going forward, CBRE expects the hotel demand will return to pre-crisis levels in the third quarter of 2022. In this context, approximately $ 16.9 billion and $ 14.7 billion of CMBS hotel loans would mature in 2020 and 2021 respectively, according to data from Trepp. More than half of the balance of these maturing loans is backed by full-service hotels.

Expect a few hiccups

The answer in June was the third quarter in 2022.

Trepp’s comments “Given the expected recovery schedule and significantly lower forecast demand, especially for high-end luxury hotels, the hospitality industry is expected to face challenges over the next two years.. “

What about the quality of the loans?

A report from the University of Austin by John M. Griffin and Alex Priest shows Property income is significantly overestimated.

The report is 74 pages long, but presents considerable problems.

Many borrowers are now struggling with the coronavirus, although study finds income was often less than the amount taken out before the pandemic

The WSJ discussed the configuration in The ability of commercial properties to repay mortgages was overestimated.

Actual net income is 5% or more less than taken out net income in 28% of loans, according to a study of nearly 40,000 loans by two finance academics at the University of Texas at Austin.

The study shows risks in the $ 1.4 trillion commercial mortgage-backed securities market, or CMBS, where loans on malls, apartment buildings, hotels and the like are bundled into bonds bought by investors, often with government guarantees. The results suggest that loans sold to investors before the pandemic frequently had overestimated income and may have a harder time staying up to date in a downturn.

The results corroborate a complaint received by the Securities and Exchange Commission last year that commercial mortgages frequently show inflated financial data. They also come at a sensitive time for the commercial mortgage-backed securities sector, which has been looking for a lifeline since the spring when the Federal Reserve left out parts of the market of its $ 2.3 trillion economic bailout program.

Income has been overstated by more than 5% in more than 40% of loans issued by UBS, Starwood Real Estate Trust and Goldman Sachs Inc., according to the study. Loans from these originators were among the most likely to be on a watch list, Griffin found.

“It’s a direct function of aggressive underwriting,” Griffin said. He revealed in his article that he owns a fraud advisory firm, Integra FEC LLC, which could benefit if the government or investors act against bond issuers.

Share of loans identified with inflated values

Share of loans identified with inflated values

Rescue coming?

Sure! You knew that, didn’t you?

A bill in Congress would create a financing vehicle to help CMBS borrowers with their mortgage payments.

Please consider New legislation would help cash-strapped commercial property owners

The bill would establish a government-backed financing vehicle that businesses could use to stay up to date on their mortgages. In particular, it aims to help those who have borrowed in the $ 550 billion market for bond-conditioned mortgages sold on Wall Street.

“The numbers are getting more dire and the projections are getting tougher,” said Rep. Van Taylor (R., Texas), who is sponsoring the bill alongside Rep. Al Lawson (D., Fla.).

Involve the Fed?

Hey why not?

No stone can be left behind when it comes to bailouts at taxpayer expense.

Representative Taylor led a bipartisan group of more than 100 lawmakers who signed a letter last month calling on the Federal Reserve and the Treasury Department to find a solution to CMBS problems.

Why?

Protect Goldman Sachs and the rest of the originators from fraudulent recoveries due to inflated valuations, as mentioned by John M. Griffin.

It has nothing to do with the jobs suggested by Rep. Van Taylor (R., Texas) and Rep. Al Lawson (D., Florida).

Supported by the government?

No!

Whenever you see this term, it’s important to understand its true meaning.

Government Supported = Taxpayer Supported.

work of god

The taxpayers, not the government, take the risk.

We must do this to protect “work of god“by Goldman Sachs et al.

Mish