Peter Pays Paul

The problems with commercial real estate do not appear to be over. See TARP Panel Says Smaller Banks May Need Fresh Capital Update1 – Bloomberg.com

Smaller U.S. banks may need $12 billion to $14 billion in additional capital to cope with troubled loans still on their books, the Congressional Oversight Panel said today in a monthly report.

The weakness of smaller banks is evident in the number of banks that have been closed by the FDIC. That’s not to say that only small banks are being affected. Corus Bank seems posed for an eminent FDIC takeover.

Mish details the woes of some of Georgia’s banks in Zombie Subdivisions and “Pig In The Python” Shadow Inventory.

The Atlanta Journal Constitution is reporting fire-sale prices on some lots have dipped to 20 to 30 cents on the dollar as the Volume of ’subdivision’ vacant lots overwhelms banks.

You think it’s hard selling a house these days? Try unloading a subdivision. And not just any subdivision, but one with few if any completed homes and a weedy patch where the swim-and-tennis center was planned.

That’s the reality many Georgia banks find themselves in amid a foreclosure crisis that has claimed not only individual homes but also entire failed developments.

Real estate investors are seeing their equity erode. This is causing some of them to threaten/warn of imminent default. And we may continue to see more of these defaults as time goes on.

Phoenix From the Ashes?

The Dirt Lawyer may have identified the silver lining in all of this where he writes:

While I agree we are waiting for some properties to “die,” in a sense, I take a more phoenix-like perspective to the whole thing. After all, the property is reborn by its transfer to a new owner. So I like to think of this as the bottom of an evolutionary cycle, after which a lender dumps the property to a new buyer on the cheap or holds it for a while. As I keep saying, however, the problem, at least for many prospective buyers, will be finding money, because traditional lenders are not lending much and the CMBS market — well, we’ll see when or if that phoenix arises.

The economic recession has put Pittsburg’s plans to annex neighboring Bay Point on hold and has delayed development of Bay Point’s 50-acre business park. “Currently, Bay Point annexation is extremely low priority for us given the other more important economic issues we are all facing,” said Pittsburg City Manager Marc Grisham.

Economy stalls Pittsburg plans for biz park – San Francisco Business Times:.

Reuters is reporting that GMAC’s mortgage unit, ResCap, has reported its 8th straight quarterly loss of $1.91 billion. GMAC, LLC, the financing arm of GM, reported its 5th straight quarterly loss.

The unit speculates that GMAC may convert to a bank holding company in order to receive funds from the TARP.

This as well as the previous post do not bode well for the residential real estate recovering soon. Fewer lenders equals less competition. Less competition means higher interest rates. Fewer borrowers will qualify for loans at higher rates and fewer houses will be sold.

Long-term this is a good sign because it is the removal of inefficient competitors from the marketplace. It will also be beneficial because it will help with the deleveraging of the economy and it will force those of us in the market for a house to save or build equity the old fashioned way.

GMAC has $2.52 bln loss; ResCap unit may fail | Reuters.

(HT: Agent Genius News)

Paul Kedrosky has an interesting graph from John Mauldin up in the link below that highlights the difference in the GDP if you were to subtract mortgage equity withdrawals.

Paul Kedrosky: Funny Money: U.S. GDP Growth Net of Mortgage Withdrawals.

What does this mean?

Much of the growth in the US economy from 2001 t0 2006 was fueled by money borrowed from our houses.

Now that home equity has disappeared for many homeowners, discretionary spending will decrease.

Companies that depend discretionary spending (retailers) will feel the pinch by the loss of this discretionary spending money.

(HT:Tom Vanderwell