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jyl jyl is online now
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Join Date: Jan 2002
Location: Nor California & Pac NW
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I do not have exact numbers. But I think the commercial real estate debt market is much smaller than the residential real estate debt market.

Oh, here: http://money.cnn.com/2009/03/04/news/economy/lockhart.reut/

So, on a whole economy basis, a downturn in CRE should be much less damaging than a downturn in housing. True, every additional downturn still hurts.

Another difference - I think banks tended to keep CRE loans on their books rather than securitize them. If you look at what's happened to residential loans, values of the mortage-backed securities have been crushed w/ subprime and near-subprime written down to 30 cents, while the whole loans have been written down to only 80-90 cents. This is a very rough/ballpark average, for those banks who are actually doing mark-to-market.

So if CRE follows the path of residential RE whole loans to date, I think the damage to financial institution balance sheets should be quite limited compared to what we've seen with securitized residential mortgages. Obviously it will vary by institution - some of the smaller banks may be relatively more exposed to CRE.

I'm not an expert on debt markets so don't take above as gospel, just my opinion.

Edit: One thing I have not considered is the need to roll over maturing CRE debt - if this could precipitate a crisis.

BTW, think about the 30 cent valuation mentioned above. Averaged over all tranches of the debt, that implies 70% of the houses go to foreclosure and the loss on foreclosure is 100%, or 100% go into foreclosure and the loss is 70%, or something in between. All of those scenarios seem very unlikely to me. That 30 cent valuation seems oversold.
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Last edited by jyl; 03-27-2009 at 09:54 AM..
Old 03-27-2009, 08:16 AM
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