There was another article in todays WSJ about the CMBS market.  Some quick facts from this article:

• More than 11% of $536B of loans packaged into commercial mortgage backed securities are expected to be at least 60 days past due by year end.
• A $4.2B CMBS deal underwritten in 2006 by Goldman Sachs Group, Inc. and Greenwich Capital is expected to see an 11.7% loss, the highest of any 2006 CMBS issue analyzed by Fitch.
• The default rate now is 7%.  Before the real estate bubble burst, it was 1%.

Because of this, about $70B in loans are now in the hands of "special servicers", or companies that represent holders of commercial mortgage backed securities with underlying loans that are in default or imminent default.  Servicers have restructured about $13.7B of these loans which includes extending loan maturities ("extend and pretend") and reducing interest rates.  But some borrowers still end up defaulting.

This continues to loom over the industry and is probably where the next batch of distressed assets emerges from.  Then again, maybe not...

When the weather people are more accurate than the predictors of when and where the distressed assets will emerge from, you know it is a challenge.

I have been quiet on the blogging front lately because frankly, there haven’t been that many great things to write about.  However, one thing that has continued to bother me is whether our economy is able to be accurately assessed right now.  I say this because without the support of the recent government handouts, the economy doesn’t appear to be sustainable.  Here is what I mean.

I have followed the Small Business Administration and how it has assisted small businesses for many years and traditionally, it has been a great place for small business to go when a traditional lender might not want to extend a loan to that business.  It was a place that a business went when it wasn’t a great fit for a traditional loan and was accompanied by higher fees and a more complex process.   But it had a purpose - to fill a void/need in the market.  Well, every month now, it appears that another bailout is required for SBA to keep lending money to small businesses and now they removed the fees.   Businesses are getting the benefits of receiving money on a riskier loan wiithout any repercussions.  It almost seems like the SBA could become the “subprime” commercial loan marketplace if this trend continues…after all, who else guarantees at 90%?

As an entrepreneur, this is attractive.  However, as a citizen and taxpayer, it scares me. I don’t see anything else propping up the economy when the government doesn’t intervene.  In many ways, the Federal Government is “bailing out” small business with borrowed money of their own to try to increase employment.  Yet studies show that companies are not hiring until they are sure that the economy is fully recovered.  And many small business owners are now saying that the SBA should lend directly because the banks aren't lending the SBA allocated money to them.  My gut tells me that those businesses are not able to get loans due to traditional credit issues and are looking for a handout.

So my question is, where should money be used?  Should it be to sustain the things that we already traditionally allocate taxes for within existing budgets or should it be a pseudo "venture capital" fund to create new businesses that somehow aren’t qualified to get a traditional loan (using borrowed money)?  Either way, the money to pay for all of this will be coming from the remaining successful businesses and individuals via tax increases, as well as from a continued stream of loans to the government.  And many experts seem to think that China, the source of much of this borrowed money, is sitting on a significant financial bubble right now which might prompt them to look for a payout sooner than we expect.

So, my feeling is that if the U.S. Economy doesn't find a way to sustain itself, we will never really know where the economy truly stands.

In the middle of this month, my wife and I were lucky to have our second healthy baby delivered to us.  Brooke Marie was a very healthy and happy 7lbs and 6oz and we were so lucky to have her as our Christmas present this year.

Interestingly, the stay in the hospital made me think about some things.  What I kept thinking is how much of an impact that the medical profession has on people every day, especially the OB/GYN and pediatrics groups.  With all the political and economic discussions of Health Care Reform, the business aspects of medicine have totally overshadowed the people that do this for a living every day.

How many of us can say that we help bring a new person into the world or help a mom heal so she can take care of her child/children?  How many of us get a HUG from our clients after we have done our job?  Every nurse and doctor that helped us bring our daughter into the world played a special role for us.

It once again made me contemplate what I do for a living and how it can make a difference in someone’s life.  While working on real estate, environmental, or due diligence issues doesn’t seem nearly as important as the medical profession and what they do for us (for instance, whether it is to place an environmental insurance policy or help a loan officer close a loan, it never quite feels like a life changing issue), I realized that there is a common theme - making peoples’ lives easier and helping with the situations around them.  After all, helping others (or being helped by others) is what helps us all succeed in business (and life).  Without others assisting us, we cannot be successful.

This time of the season is one that I have always enjoyed because it has been one that you can recognize people by giving gifts, cards, or a heartfelt thank you.  This is ubiquitous for all of us regardless of what we do for a living.

I have not been able to reach out to as many people this year but hopefully for those that read this blog, I can say thank you to you all…whether you are clients, friends or former colleagues, I wish you and yours Happy Holidays and a wonderful 2010. 

In the current state of the economy, it is easy to fall victim to think the entire financial system is in ruins.  With players like Bank of America, Bear Stearns, Bernie Madoff, bank failures, etc. constantly on the front page (until the Swine Flu took control of the media), it is easy to think that all financial institutions are struggling.  However, we have been consistently meeting with lenders of various sizes to help educate them on the benefits of environmental policies and environmental due diligence and we have learned that not all banks are doing so bad.  In fact, many of the community banks in the country are actually thriving in the current economy due to their focus and commitment to their customers. 

I read an article today that states that "their silver lining around the dark cloud...is their ability to present themselves as a sober and secure alternative to struggling banks."  This is not exactly what you would want your marketing tagline to be but it is somewhat optimistic.  The general theme that you hear from both the bankers and their state and national trade organizations is that community banks have consistently done the right thing throughout this turmoil (with some exceptions that you probably hear about every Friday when the FDIC closes them down).  This is great news because what it states is that with the property underwriting guidelines, you don't need to get in trouble.  In fact, even though many of the community banks have weathered through this storm relatively well, they are still increasing their risk management guidelines internally, including their environmental policies which I think is great for our clients and for EDR.

Just within the past two months, several organizations that focus on the smaller banks (Independent Community Banker Association, NAGGL, NADCO) are all having conferences and are further promoting the smaller banks and loans helping to pull us out of the current situation.  The bigger players are still trying to clean up the problems in many cases.  The interesting thing about the smaller banks as well is that they want to do the right thing but historically have lacked the guidance to do so.  Now there is more regulatory pressure but specifically to environmental issues, there is more guidance and assistance for them than ever before via Small Business Administration, more knowledgeable examiners, and by more educated lenders.  All this bodes very well for lenders, borrowers, and property due diligence professionals as we emerge out of this recession.

I have been thinking about this topic for some time now and just returning from an annual Florida golf trip (where business was way down) with my dad and yet another development that occurred today has prompted me to speak up a bit.  While I completely understand that the government has to monitor how the companies that have been “bailed out” (i.e. AIG) spend their money, they are clearly going overboard with their scrutiny.  A couple of examples over the past few weeks that disturb me are:

§          Northern Trust being criticized for spending money on a PGA golf tournament and their clients after receiving TARP money.  Northern Trust never asked for the money, was actually well capitalized and the government has made it difficult to pay it back, but John Kerry decided to make it an issue last month.  In addition, apparently Rep. Barney Frank wrote a letter to Northern Trust in February, cosigned by 17 others, demanding that it return to the federal government all the money it “frittered away on these lavish events” at the golf tournament.  So by punishing this type of spending, they are basically punishing the golf and hospitality industry also.  How is NOT spending stimulating the economy?  Who ultimately should have the right to decide who has the authority to spend money on their business?  There was also the point made that the executives that are not allowed to spend the money on their clients will find other events to do, but the valet parkers, service folks, dishwashers, etc. will not have any work to do.

§          Just today, the Feds are claiming that any bonus given to employees of banks that received government funding will be spotentially disallowed.  How will companies keep on their talent if they can’t compensate them fairly (or at least what was considered fair until recently)?  How does Chris Dodd or Barney Frank know how much a reasonable compensation package should be?  Many companies use bonuses to keep their employees on board by reducing their salaries so their overall compensation includes their "bonus".

Most of the lenders in the country did NOT have issues with subprime mortgages and did not need the monies from TARP but were forced to take it.  It is also very difficult to pay it back.  And as a result, they are being monitored as closely as ever and criticized on how they spend their money.  It is eerily similar to money that you borrow from a family member.  While it is typically given with good intentions, where it is spent is always looked at with a very critical eye (I have been on both sides of this situation).  Unfortunately, in this case, the “family” is emerging as the entire US population.  I am sure that this is a major topic at the annual Independent Community Bankers Association (ICBA) meeting this week, which I unfortunately was unable to attend.

I think David Israel, a TV producer who is involved in the sports economy via the California Horse Racing Commission (I know what you are thinking...), said it best:  “It seems to me that if the goal is to get the financial system working normally again, you’ve got to let businesses do what they know how to do best to make money.”