Meltdown not over, new US mortgage crisis looms

By Associated Press
Thursday, November 27, 2008 - Added 5h ago

The full scope of the U.S. housing meltdown isn’t clear and already there are ominous signs of a new crisis — one that could turn out the lights on malls, hotels and storefronts across the country. Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls around the United States are entering foreclosure.
Hotels in Tucson, Arizona, and Hilton Head, South Carolina, also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies’ credit.

"We’re probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That’s bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.
But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

"It’s a toxic drug and nobody knows how bad it’s going to be," said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.

Unlike home mortgages, businesses don’t pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.
The retail outlook is particularly bad. Circuit City and Linens ’n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.

Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year — 2010 and 2011 totals are projected to be even higher — many property owners won’t have the money.

Some will survive, but those property owners whose loans required little money up front will have less incentive to weather the storm.
Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.

California, New York, Texas and Florida — states with a high concentration of mortgages in the securities market, according to Fitch — are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.

The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won’t write mortgages as long as investors won’t purchase them.

"Credit markets have seized up," corporate securities lawyer Michael Gambro said. "People are not willing to take risks. They’re not buying anything."

That drives down investments already on the books. Insurance companies are seeing their stock prices fall on fears they are too invested in commercial mortgages.

"The system has never been tested for a deep recession," said Ken Rosen, a real estate hedge fund manager and University of California at Berkeley professor of real estate economics.

One hope was that the U.S. would use some of the $700 billion financial bailout to buy shaky investments from banks and insurance companies. That was the original plan. But Treasury Secretary Henry Paulson has issued a stunning turnabout, saying the U.S. no longer planned to buy troubled securities. For those watching the wave of commercial defaults about to crest, the announcement was poorly received.

"He’s created havoc in the marketplace by changing the rules," Rosen said. "It was the stupidest statement on Earth."

The Securities and Exchange Commission is considering another option that might ease the crisis, one that would change accounting rules so banks don’t have to declare huge losses whenever the market declines.

But the only surefire remedy is for the economy to stabilize, for businesses to start expanding and for investors to trust the market again. Until then, Tross said, "There’s going to be a lot of pain going forward."

Japan output slump heralds deep, long recession


By Tomasz Janowski
SINGAPORE (Reuters) - Japan's industrial output and household spending tumbled in October, evoking memories of the decade-long stagnation of the 1990s and highlighting how rapidly the global financial crisis was derailing major economies.

The speed at which companies were slashing production and consumers scaling back their spending, surprised economists and suggested the world's second-biggest economy was in for a deeper and longer recession than earlier thought.

"Production is falling much faster than we had expected. Companies are adjusting their production very quickly," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research. "The auto makers are the worst hit, but their turmoil is starting to spill over to other sectors, such as steel makers."

The bleak Japanese data followed China's warnings on Thursday that the world's fastest-growing major economy was in a sharp slowdown that threatened its stability, while euro zone business sentiment hit a 15-year low, provoking calls for a hefty cut in the region's interest rates.

Canada on Thursday joined the growing number of nations officially in recession, with Japan, Germany, Italy and the euro zone as a whole already on the list and the United States and Britain expected to join soon.
The Canadian government said it expected the world's ninth largest economy would contract in the current and next quarter. But unlike many of its peers, IT offered scant immediate relief to the economy, drawing ire from opposition parties and raising the prospect of an early election.

In further evidence that even the new economic powers were not spared the pain, India is expected to report third-quarter growth hit a four-year low.

EMERGING JITTERS

India on Friday still battled militants who killed at least 119 people in Mumbai, with the violence there and a state of emergency in Thailand underscoring political unrest as another potential threat to emerging markets battered by the crisis.

With the U.S. holiday shopping season kicking off on Friday, the day after the Thanksgiving holiday, businesses and investors are bracing for more grim news. The concern is that even deep discounts offered by struggling U.S. retailers will fail to lure shoppers, fearing for their jobs and squeezed by rising debt.
Authorities have responded, spurred by mounting evidence that the financial industry upheaval triggered by heavy losses in the U.S. housing market is pushing the world economy into its worst downturn in decades.
Central banks slashed interest rates to get credit flowing again and governments have pledged trillions of dollars in bank bailouts, extra spending and tax cuts to kick-start stalled economies and prevent massive job losses.
China's hefty 108 basis point rate cut earlier this week, the U.S. Federal Reserves plan to commit extra $800 billion to rescue battered credit markets and hopes for a government bailout of U.S. carmakers, helped lift world stocks to two-week highs this week.

In Asia, markets crept up cautiously higher on Friday in trade subdued by the lack of cues from the Wall Street, aiming for the sixth straight daily gain.

But the Japanese data challenged the view of some investors
that markets have already fully discounted the economic downturn scenario and it was time to pick up some bargains. Japanese government bond futures rose after the bleak numbers.

The yen, which tends to rise when investors scale back riskier investments, also held firm, adding to the woes to Japanese exporters such as Toyota, stung by a sharp slump in demand from key U.S. and European markets.
Japan's industrial output fell 3.1 percent in October, more than expected, with a drop more than twice as big predicted for November, while household spending fell 3.8 percent from a year earlier, also more than expected.