Those who sat below the H.8 statement's surface,
The largest drop in bank loans and leasings for a given area was in, which saw the most drastic decline in March's last two weeks.
Another, possibly even more surprising surprise was discovered. We found another surprise, perhaps even more surprising, when we broke down the weekly changes in small bank loans and leases according to their subcomponents. While the initial week of the bank crisis ended March 15, the majority of the decline in bank loans was in C&I, which dropped to $6.9BN from $25BN last week.
real estate loans.
Although the $18.7BN decrease in real estate loans was the largest drop among small bank loan, it was still a continuation from the $19.2BN fall in the previous week. The combined effect of the two weeks results in a plunge in real estate loans of $37.8BN in the second half March. This is significant because it is the
The country's second-largest subprime lender collapsed, making it the largest since then
New Century Financial, March 2007.
This, as traders over 40 can recall, was the catalyst for the global financial crisis that led to the collapses of Bear Stearns, Lehman Brothers, and eventually Lehman.
For the month of December, however,
We have been warning
Real estate, especially Commercial Real Estate, is now the ticking time bomb for both small and large banks.
Multiple "small" banks were impacted by a liquidity crisis.
The Fed has injected nearly half a billion dollars in reserve injections to keep the Fed from allowing it to contain its debt. We have already discussed the multi-trillion dollar CRE maturity wall (see "
As $400 Billion CRE Debt Maturity Wall becomes the focus, a new "Big Short" hits a record low
More people are starting to notice this and, even more alarmingly, they are quietly selling their real estate loans exposure.
"This is how the firesale begins."
We are not the only ones focusing on CRE's potential to cause the next market crash. Bloomberg reported that nearly $1.5 trillion in US commercial realty debt will have to be repaid by 2025. Who will lend to these borrowers?
There is a bigger question, as the video above shows, but we'll get to it in a moment.
Bloomberg quotes Morgan Stanley's "Scaling maturity walls" note, which is a must-read.
Pro subs at the usual place
() where the bank's credit strategy writers write that "refinancing risk is front and center" for property owners, including those who own office buildings and stores. They also note that "the maturity wall" here is front-loaded. As are the associated risks.
The charts below show that Morgan Stanley's James Egan says that between $400-450bn and $600bn of CRE loans will mature in 2023. This is the same as 2022 and both years are the largest ever recorded ( Exhibit 12).
It doesn't get much easier from there, as maturities rise each year up to 2027, when they will reach over $550bn."
While maturity walls in other asset classes may not seem to be as front loaded, commercial real estate is.
Egan warns against these maturities, saying that he has many more questions than answers.
Who will be responsible for refinancing these loan as they mature?
This story is different depending on the property type. Over the years, multifamily has become increasingly dependent on GSEs. The GSEs currently guarantee 46% of maturities, from 2023 to 2027. Recall that borrowers in the GSE sector will ask lenders to lend them money. If the property meets the criteria for agency guarantee, the lender should feel confident that the agency will guarantee the loan when they quote a rate lock. While the inspection times of the agencies may vary depending on the program, the majority (of agency-guaranteed multifamily properties) are conducted by borrowers who have multiple properties. This gives them incentive to continue working with the agencies.
The real story is that, as these maturities increase, the largest lender in Commercial Real Estate is now the one most scrutinized.
We have warned about the dangers of regional banks for many months.
Morgan Stanley's next chart shows that origination volumes have varied over the years, and that the share has changed, but the trend since 2014 has been clearly away from CMBS, and towards regional banks.
As we have discussed, CMBS deals have been affected by rising rates and fears about defaults.
The first quarter sales of securities without government backing dropped by around 80% compared to a year ago.
According to Bloomberg calculations.
Analysts wrote that the role banks played in the ecosystem as both lenders and buyers will increase the likelihood of refinancing.
Unfortunately, the bank problems are even more severe when apartments blocks are excluded.
According to the Morgan Stanley report, banks hold up to 70% of all commercial real estate loans due in the next five year.
Analysts stated that commercial real estate must be re-priced and that there are other ways to refinance debt.
You can be certain that it is not all doom & gloom.
There are some good slivers. In the aftermath of the financial crisis, conservative lending standards provide some protection for borrowers and their lenders. Multifamily housing sentiment remains positive, with rents continuing to rise. This is why Blackstone Real Estate Income Trust saw a positive return in February, despite the fact that more investors are requesting withdrawals. When owners need to refinance, they will be able to access agency-backed loans.
Regional banks are currently in cardiac arrest and will not be able to restart lending activity so long as there is deposit flight - which has already occurred
Last week's discussion
Although the pace of the decline has been modest, it remains a significant risk for the regional banks. This is because the Fed refuses cut rates and removes depositors' preference to shift funds from banks to safer and more yielding money markets. (see "
JPM asks if the Fed will restrict reverse repo use to short circuit $1.5 Trillion bank run
.... It doesn't take rocket science for people to see that. Just like the March 2007 collapse of New Century, when everyone was shocked into an utter shock at the end of the party, it isn't hard to see that.
It's only going to get worse
What could be worse? According to Morgan Stanley, retail property values could plummet as much as 40% between peak and trough. This creates a loop of liquidations and bank failures, defaults, and even more liquidations.
US securitized Credit - CRE: $1.35-1.46 Trillion (30-32%) of US CRE debt will mature by YE 2025, and banks have 42-56%.
The recent attention paid to US CRE is understandable, as the asset class faces a trio of risks.
(1) Maturity walls can be front loaded.
Recognizing the variability in numbers reported by different sources we estimate that $566-615 billion (22-24%) will mature of $2.6 trillion in core CRE debt, non-multifamily, by 2024. Another $275-340 billion (11-13%) will be due in 2025.
(2) High bank dependence
They can be both direct lenders to the asset or buyers of non-agency CMBS. The banks hold between 36 and 64 percent of all debt maturing annually and are responsible for almost half of agency CMBS investors and about 10-15% of non-agency CMBS investors.
(3) In certain sectors, such as retail and office, valuation concerns have increased.
Our equity colleagues
Expect a 30--40% correction from peak to trough in both asset classes.
We are happy that
One month after calling CRE "BIg Short 3.0",
One of the most respected and largest banks in America agrees. We are
We are glad to be proven wrong with trillions of loan maturities.
Nobody wants to roll.
CRE is on the verge of becoming the next Subprime. The US financial system will experience another existential shock or, as some refer to it, "The Next Subprime."
Morgan Stanley's conclusion
Commercial real estate must be re-priced and other ways to refinance debt are required."
Morgan Stanley may not have intended it, but the yelling was.
A theater on fire can be worse than shouting fire. It's the green signal for everyone to sell...something that may have been started by the collapse of real estate loans.
You can find more information in the MS notes that you must read (
) available to pro subs.