“If you wish to be a success in the world, promise everything, deliver nothing.”
~ Napoleon Bonaparte
Written by Bryan Lutz, Editor at Dollarcollapse.com:
If you’ve seen the movie, ‘The Big Short,’ you know that it wasn’t long ago when the mortgage industry was used and abused.
Well, the same truth is about to hitting the fan for Commercial Real Estate.
Back in the mid 2000’s it was like this…
Mortgages and debt were handed out with little to no supervision on the value of the actual properties.
Loans were given out to developers who promised twelve homes, but then built two to three homes.
Defaults were ignored, and then downgraded into lower value debt categories…and shoved into mutual funds hidden from much of the public eye.
Then you could go to those homes in their half-finished development and ask why the loans weren’t being paid.
Except there would be no owner…
Just a naive renter paying their landlord who never paid the bank.
And the mortgage brokers…
They were the ones who got rich off these schemes multiple times over, but no worries…
They were the “little fish” in the grand scheme of things.
All they had to do was authorize loans to anyone and everyone, regardless if they had the means to pay.
The “big fish” were the ones selling off the mutual funds, and bad debt to unsuspecting buyers.
That’s what happened during the boom cycle.
Then there was the bust…
The Great Financial Crisis – when the fraudsters rug was pulled out from underneath them.
Now, a similar revealing bust cycle seems to be starting in Commercial Real Estate(CRE).
The Wall Street Journal reports:
Property Fraud Allegations Snowball as Commercial Real-Estate Values Fall
“Regulators and federal prosecutors say that property loans based on doctored building financials and valuations have been rising. This type of fraud became more widespread between the mid-2010s and 2021, federal investigators and real-estate brokers say, when commercial property prices surged to new highs and landlords had much to gain from such maneuvers.
Now, the drop in property values caused by higher interest rates and a rise in defaults is exposing more of these schemes, dealing another blow to a commercial real-estate market suffering through its worst stretch since the 2008-9 financial crisis.”
In real estate boom cycles, evaluators simply base the value of a property on what other properties similar to theirs is valued.
The pricing system works that way, but things CAN and DO go awry.
If everyone is overvaluing the properties then a bubble forms, along with a few outliers.
The trend is obvious. Prices go up, and faster than they should.
For the few outliers in the industry, it is tempting to participate a little too much.
In other words, make false claims for a profit.
So when it comes to the empty office spaces of commercial real estate, the losses are piling up.
Here’s what the losses look like for banks and other FDIC-insured institutions(which includes bonds, treasury bills, and mortgage loans)…
The losses are piling up.
And that means, it’s time to sort out the fraud from the folly…
When CRE truth hits the fan.