What Is All This I Hear about The Commercial Market Exploding?
Renta are down, vacancies are up and banks are calling loans due
even when payments are current. The whole mess in the
financial markets caused by highly leveraged CDOs. These are
packages of mortgages sold as investments, insured, re-sold as
investments, re-insured ad nauseum until the coverage on the
original package of mortgages might be at 2%.
The frenzy to create more mortgages to create more investable CDOs directly contributed to the creation of instruments like option ARMs, those 0%, no principle low cost mortgages that re-set after a period of time. When the loans started going bad because ARMs were resetting and people couldn't afford their mortgages anymore (mortgages which they should never have gotten in the first place), the insurance companies who were also investors couldn't pay out the premiums to cover the CDOs.
When the mortgages went bad and insurance companies couldn't cover the bad loans, banks needed to have more deposits on hand to cover their reserve requirements. And as there credit ratings got worse, their reserve requirements went up even higher. A reserve requirement is the amount that a bank has to have on deposit compared to the amount a bank may loan out. Like personal credit, the worse a risk the bank is perceived to be, the higher interest they have to pay and the more money they have to have in reserve. Don't go thinking that banks actually have to have the same amount in reserve as the amount they loan. They have to hold something like $5 to $15 for every $100 they loan.
And, you guessed it, as they required higher reserves, they no longer were able to make new loans, thus creating the tight credit markets. And, the government stepped in and created 387 different policies and procedures designed to "help" the markets. Naturally, all this did was confuse the markets so they ground to a complete halt.
Most commercial loans are created in such a way that they are amortized over a period of 20 to 30 years, but have a balloon payment due in a shorter period of time, say 3 to 10 years. When the balloons were coming due and it would have been time to renegotiate the mortgage in normal credit markets, the banks were actually unable to renegotiate and had to call the loans due. While it didn't make a lot of sense on the surface, the banks were trying to raise capital to cover their reserve requirements & weren't allowed to make any new loans.
Therefore, the banking mess created an unprecedented opportunity for well-capitalized buyers in the commercial markets. Because of these loans being called and owners not being able to find new loans, they were forced to either sell their properties in a great hurry, or had to give them up in foreclosure if the value of the property wouldn't support a sale or if a buyer could not be found in time.
I believe that this opportunity is fast reaching its end. Banks are starting to be able to renegotiate their loans, so if you want to take advantage of this buying opportunity, now is the time.
Christy Mellott
Millionaire in Training, MMMChallenge.com, www.realdealcolorado.com
The frenzy to create more mortgages to create more investable CDOs directly contributed to the creation of instruments like option ARMs, those 0%, no principle low cost mortgages that re-set after a period of time. When the loans started going bad because ARMs were resetting and people couldn't afford their mortgages anymore (mortgages which they should never have gotten in the first place), the insurance companies who were also investors couldn't pay out the premiums to cover the CDOs.
When the mortgages went bad and insurance companies couldn't cover the bad loans, banks needed to have more deposits on hand to cover their reserve requirements. And as there credit ratings got worse, their reserve requirements went up even higher. A reserve requirement is the amount that a bank has to have on deposit compared to the amount a bank may loan out. Like personal credit, the worse a risk the bank is perceived to be, the higher interest they have to pay and the more money they have to have in reserve. Don't go thinking that banks actually have to have the same amount in reserve as the amount they loan. They have to hold something like $5 to $15 for every $100 they loan.
And, you guessed it, as they required higher reserves, they no longer were able to make new loans, thus creating the tight credit markets. And, the government stepped in and created 387 different policies and procedures designed to "help" the markets. Naturally, all this did was confuse the markets so they ground to a complete halt.
Most commercial loans are created in such a way that they are amortized over a period of 20 to 30 years, but have a balloon payment due in a shorter period of time, say 3 to 10 years. When the balloons were coming due and it would have been time to renegotiate the mortgage in normal credit markets, the banks were actually unable to renegotiate and had to call the loans due. While it didn't make a lot of sense on the surface, the banks were trying to raise capital to cover their reserve requirements & weren't allowed to make any new loans.
Therefore, the banking mess created an unprecedented opportunity for well-capitalized buyers in the commercial markets. Because of these loans being called and owners not being able to find new loans, they were forced to either sell their properties in a great hurry, or had to give them up in foreclosure if the value of the property wouldn't support a sale or if a buyer could not be found in time.
I believe that this opportunity is fast reaching its end. Banks are starting to be able to renegotiate their loans, so if you want to take advantage of this buying opportunity, now is the time.
Christy Mellott
Millionaire in Training, MMMChallenge.com, www.realdealcolorado.com
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