Today, Reuters reported that MIT's real estate index declined 18.1% on increased transaction volume in the 2nd quarter of 2009. The index is down 39% from its mid-2007 peak - and has matched the value decline realized in the 1989-93 real estate recession....This follows last week's GlobeSt. report on the statistics published by RCA in which the headline read "Trillions in Assets on the Hook." As with all cyclical asset purchases, those made at the peak of the market suffer the greatest - and with the leverage used to acquire these assets, that adds significantly to the financial risk.

With this dramatic price decline - and we are not even close to the bottom yet - the wave of commercial mortgage defaults is only a matter of time; however, this time is going to be different from the RTC days. First of all, the securitized loans were predominantly non-recourse loans made to special-purpose, single asset entities - with a "bad boy" recourse carveout that makes the loan recourse to the principals if the borrower voluntarily files bankruptcy. With cash management agreements, it is more difficult for borrowers to accumulate a stash of funds to fight foreclosure. Further, the changes with the bankruptcy law make it a less friendly and more expensive place for borrowers. Consequently, we are going to be in a scenario where lenders will either extend the loan if there is any daylight (equity) at the end of the tunnel or take the property in a friendly foreclosure if there is not....Special servicers are overloaded now, but the tsunami is coming...The only way to minimize it is to re-establish a source for inexpensive refinance capital - and soon. In other words, we need to have investors, special servicers, rating agencies, the Treasury Department, the SEC and other Federal regulators, the Administration and real estate professionals and others work together to create a stucture that works and allows the securitization of commercial mortgages to come alive again....

Please email me at pjones@pyramidrealty.com for a pdf version of the articles mentioned herein.