Headlines – Week of February 5, 2012

February 13, 2012

CMBS Delinquencies in the “Calm Before the Storm”

According to recent reports in both Trepp and Morningstar, CMBS delinquencies dropped sharply in November after rising the previous two months.  However, it may be the “calm before the storm” in this market as researchers expect that as 2007-vintage loans mature further delinquencies rise.

Through October, Trepp reported the CMBS delinquency rate at 9.77%, the second highest point on record trailing only July’s figure of 9.88%.  Morningstar, meanwhile, said the delinquency rate had hit 8.35% in October. Both firms measured rates rising in September and October after having fallen in August. In addition, Trepp’s latest report showed that the delinquency rate dropped 26 basis points to 9.51% in November.

Going forward, however, Trepp sees trouble.

According to their report, CMBS loans that were made at the height of the commercial real estate bubble will become distressed as they begin to mature. The 2007 vintage was the weakest in terms of underwriting standards and it is widely expected that many of these loans will have trouble paying off at their balloon date. In total, about $15.5 billion of these loans will come due in 2012, with the majority reaching their balloon dates over the next six months.

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More Than 750 Banks at Risk of Failure over Next Two Years

According to an analysis by Invictus Consulting Group, despite last year’s dip in U.S. bank failures, at least 758 lending institutions are at risk of failure over the next two years.  Invictus conducts stress and sustainability tests on all FDIC-insured banks for regulators, banks and investors.

Based on all publicly available data on banks for the third quarter ended Sept. 30, 2011, absent corrective action to raise capital or merge, the 758 banks it identified are unlikely to remain viable primarily due to the weak recovery, which could trigger a new wave of loan defaults. Approximately 200 of these banks are subsidiaries of publicly traded bank holding companies.

After stress-testing all FDIC-insured banks using its own proprietary model, Invictus found 758 banks with total assets of around $440 billion, or roughly $580 million on average, at risk.

That number of banks is nearly double the total number of banks that failed in past three years. Over the past three years, 389 banks and thrifts failed, including 90 in 2011, according to FDIC figures.

What makes this situation even more dire is that the demise of any of these banks would adversely affect local communities, especially smaller business people and those seeking to buy or improve their homes.

The state of Florida has the largest number (72) and highest share (31%) of vulnerable banks among its institutions. Those banks have average assets of $539 million each and represent almost 25% of Florida’s total bank assets of $158 billion.

Other states with the largest number of most vulnerable banks include Illinois (69), Georgia (66), Minnesota (37) Missouri (33) and Tennessee (31). The only states with no banks rated at risk by Invictus are Alaska, Hawaii, New Hampshire and South Dakota.

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Four U.S. Cities Classified as Having ‘World Class’ Recoveries

According to The Brookings Institution in its Global MetroMonitor, the world’s 200 largest metro economies continued to drive global growth.  The study reveals that emerging-market metro areas in Asia, Latin America and Eastern Europe were the fastest growing last year, while most American and Western European metros struggled to rebound from the Great Recession.

The analysis of per capita GDP (income) and employment changes in the 2010 to 2011 period for 200 of the world’s largest metropolitan economies, which account for nearly one-half (48%) of global output but contain only 14% of world population and employment, reveals the following:

  • 90% of the fastest-growing metropolitan economies among the 200 largest worldwide were outside North America and Western Europe. By contrast, 95% of the slowest-growing metro economies were in the U.S., Western Europe, and earthquake-damaged Japan.
  • The U.S. and United Kingdom collectively accounted for one-half of the bottom 40 metro performers, which registered either lackluster growth or small losses in income and employment.
  • Only two metro areas in the U.S. – Houston and Dallas – ranked among the 40 strongest economies in 2010-2011. The World Bank rated these developed metro economies highly for their recent strong performances relative to regional peers, including expansion in high value commodities, manufacturing, and business and financial services sectors.
  • The report also noted, however, that income and employment grew much faster in 2011 than the year before in Seattle and Milwaukee. Both markets benefited from resurgence in manufacturing, according to the report.

Less than one-half of the 200 metro areas surpassed their pre-recession levels of employment and/ or income by 2011. While nearly all developing Asia-Pacific and Latin American metro areas achieved new highs in both income and employment in 2011, Houston was the only North American metro area did so.

Developing countries should prepare for further downside risks, as Euro Area debt problems and weakening growth in several big emerging economies are dimming global growth prospects, says the World Bank in its newly released Global Economic Prospects 2012.

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Posted by Scott R. Lodde

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