Looming Banking Crisis

 by Mark Fernwood

The next banking & financial crisis is likely to be based on commercial property lenders. The greatest exposure will be smaller, regional banks with large commercial property portfolios.  Commercial property has long been considered a very stable investment.  A commercial property should be looked upon as a business. Its valuation is determined by its net earnings.  All costs of operation (except for debt service) are subtracted from total income (rents.)  The property valuation is determined by a market driven “return on investment percentage,” called a “cap rate.” 

A change in a properties income tremendously affects valuation as the costs of operation will remain the same.  In recent times, commercial occupancy has sharply declined.  Office has been particularly hard hit.  Crime has also had a disastrous effect on both office and retail. 

Large downtown city centers have been especially hard hit. Large cities are largely Democrat run and are very soft on crime. In CA, the voters were deceived into voting for two ballot measures: Prop 47 & Prop 57.  The CA Attorney General has the power to name a ballot measure and write the ballot description. Prop 47 was labeled the “Safe Neighborhoods and Schools Act.” This lowered the penalty to a misdemeanor for theft of less than $950. There is now no enhancement for multiple offences.  Prop 57 gave early release to felons in prison. This allowed them to return to their prior “careers.”  Swarms of looters have ravaged retail stores from jewelry to drug stores.  Cities have become increasingly dangerous with looters, felons and bums. 

The unconstitutional lockdowns greatly amplified office vacancy as companies were forced to allow employees to work remotely.  The increasing danger of cities and the employees’ objections to return to commuting, has led to high office vacancies. 

Commercial building loans are far shorter in term than residential.  Often only 3 to 5 years.  Each refinance requires the building to requalify for the loan.  This will result in thousands of loans being called.  As the buildings will be mostly worth less than the loan, they cannot be sold, unless the bank agrees to a short sale.  Billions will be lost by banks and investors.

This disaster is due to the Fed’s manipulation of interest rates to “save the economy,” from the disastrous COVID “Lockdowns.” (Google “Johns Hopkins Lockdown Study”) Also due to the inflation that resulted from the money printing caused by the vast deficits.

The previous banking crisis was also caused by regulators.  At that time, there was a lot of concern about "red lining."  It was alleged that there were theoretical "red lines" around certain communities where banks were not making home loans.

As these happened to be largely minority, it was assumed that this was due to discrimination.  The Clinton administration created the "Community Reinvestment Act." This required banks to make loans into these areas even if they could not meet normal lending standards.  The banks did not care as they would just sell the loans off to government agencies like Fanny Mae, Freddie Mac or to large insurance companies. 

The borrowers knew they could not afford the loan but assumed; what is the worst that could happen?  They would just sell the house and make a ton of money!  While these communities were largely minority, the other thing they had in common was what they were also poor and unable to repay.  

Mark Fernwood

(485) 🚨IMPORTANT: US Banking Crisis Will Start Soon As 50%+ Commercial Property Fire Sale Begins - YouTube       9 min   Speaker is a CPA and former bank auditor

Can San Francisco Be Saved? (youtube.com)     11 min   SF wasteland

Community Reinvestment Act - Wikipedia   Article