Corner of Berkshire & Fairfax Message Board

General Category => General Discussion => Topic started by: BG2008 on March 24, 2020, 01:46:31 PM

Title: Read This If You Own Bank Stocks
Post by: BG2008 on March 24, 2020, 01:46:31 PM
I have mentioned a few times that my family and I own 2-4 unit NYC residential rental buildings.  In the last week, my relatives have been getting quite a few request from otherwise great tenants asking for rent deferral.  Their reasoning is very sound as they cannot go to work on the construction sites and restaurants etc.  Obviously, this impacts my relatives' ability to service their mortgage.  I think most of them are set up where if 50% of their tenant pays, they can pay that mortgage.  Governor Cuomo also signed an executive order forbidding foreclosures.  But I heard that the wait is literally 3 hours to get someone on the phone and the banks have no clue on how to handle this as they are slammed with request from homeowners for mortgage deferral.  I doubt the banks want to become equity owners in most homes and part of the stimulus bill is supposed to handle this.

This is likely very obvious, but I hope this anecdote provides a bit of insight into the seriousness of the situation. 
Title: Re: Read This If You Own Bank Stocks
Post by: Gregmal on March 24, 2020, 02:15:23 PM
From what I heard, the mortgage deferral also only refers to owner occupied units, not investors. I could be wrong through.
Title: Re: Read This If You Own Bank Stocks
Post by: rb on March 24, 2020, 02:41:43 PM
Well... we all pretty much expected this. If 25% of the US population cannot handle an $800 emergency. Then this was gonna happen with a shutdown.

I think that the banks learned from the last crisis that mass foreclosure is a dumb move so I don't think you'll see that at least from the big banks government orders or not. From the bucket shops who knows.

I think the size of the damage will be determined by how quickly things pick back up. Banks effectively lengthening mortgage terms by 3 months is a big nothing. It's just a liquidity event. But if you go to prolonged 10% unemployment then it stops being a liquidity event and it becomes a solvency event for bank customers. Then it becomes a problem.

I'm actually not so concerned about the restart. They seem ready to pump so much stimulus into this there will be more coke than in Scarface for the economy. It probably doesn't hurt that it's an election year. The Republicans are usually the ones that block these things but now their guy is in the White House so they'll be air dropping the 100% pure Colombian stuff. 2 trillion is not enough? Here's another 2 trillion! Remember in the wake of 2008 crisis the fed did 250 billion in QE between November and March. I think this time around they more than that last week.
Title: Re: Read This If You Own Bank Stocks
Post by: Spekulatius on March 24, 2020, 02:49:29 PM
Well... we all pretty much expected this. If 25% of the US population cannot handle an $800 emergency. Then this was gonna happen with a shutdown.

I know that a huge part of the population canít handle a $800 emergency, but I am surprised they so many real estate investors canít handle on or two skipped rent payments. I mean we are like 3 weeks into this.
Title: Re: Read This If You Own Bank Stocks
Post by: Orchard on March 24, 2020, 04:10:53 PM
I know that a huge part of the population canít handle a $800 emergency, but I am surprised they so many real estate investors canít handle on or two skipped rent payments. I mean we are like 3 weeks into this.

If you invest in an asset that unlevered returns less than 1% you have to make it up through leverage and eventually will believe that cash is trash.
Title: Re: Read This If You Own Bank Stocks
Post by: rb on March 24, 2020, 04:37:27 PM
Well... we all pretty much expected this. If 25% of the US population cannot handle an $800 emergency. Then this was gonna happen with a shutdown.

I know that a huge part of the population canít handle a $800 emergency, but I am surprised they so many real estate investors canít handle on or two skipped rent payments. I mean we are like 3 weeks into this.
It's really for some of the same reasons why some people can't handle an $800 emergency. They "REALLY" must have that investment property. Or probably more accurately those investment properties. You'll be surprised how many people I know in this space that talk like Goldman bankers but shouldn't even be allowed to hold a calculator.

From the banks' perspective they're probably pretty safe. Those type of properties are pretty well collateralized. The banks this time around will play like angels. If you're regular Joe they won't foreclose, let you skip payments, etc. In order to "help with the effort"  ::). But if you're a small commercial/residential real estate investor and you have the misfortune to come up for refinance now they'll rip your eyes out.
Title: Re: Read This If You Own Bank Stocks
Post by: Spekulatius on March 24, 2020, 05:46:52 PM
I know that a huge part of the population canít handle a $800 emergency, but I am surprised they so many real estate investors canít handle on or two skipped rent payments. I mean we are like 3 weeks into this.

If you invest in an asset that unlevered returns less than 1% you have to make it up through leverage and eventually will believe that cash is trash.

I have entertained investing in real estate directly, but the cash returns really needed a lot of leverage to make them work. I actually think that the deals you get with public Reits are way better than most single property deals or syndicate deals that I have seen.
Title: Re: Read This If You Own Bank Stocks
Post by: Enrico Pallazzo on March 24, 2020, 05:49:29 PM
From what I heard, the mortgage deferral also only refers to owner occupied units, not investors. I could be wrong through.

This changed as of this morning:

https://mf.freddiemac.com/COVID-19/
https://www.fanniemae.com/portal/media/corporate-news/2020/renters-covid-19-multifamily-7002.html

Basically, multifamily owners will be allowed to defer mortgage payments if they agree to pause evictions due to non-payment of rent.  My day job is to own/operate multifamily investments, so I pay a lot of attention to this :-)
Title: Re: Read This If You Own Bank Stocks
Post by: BG2008 on March 24, 2020, 06:33:49 PM
Btw, I am not saying that my relatives can't pay their mortgages if their tenants skip rent for a month.  They have quite a bit of liquidity.  Their simple and naive way of buying NYC residential rentals will make 95% of public market investors look like chumps with regards to their 10-20 year track records. 
Title: Re: Read This If You Own Bank Stocks
Post by: matts on March 25, 2020, 01:17:56 AM
From what I heard, the mortgage deferral also only refers to owner occupied units, not investors. I could be wrong through.

This changed as of this morning:

https://mf.freddiemac.com/COVID-19/
https://www.fanniemae.com/portal/media/corporate-news/2020/renters-covid-19-multifamily-7002.html

Basically, multifamily owners will be allowed to defer mortgage payments if they agree to pause evictions due to non-payment of rent.  My day job is to own/operate multifamily investments, so I pay a lot of attention to this :-)

Only about 50% of all multi-family mortgages are Fannie/Freddie insured.

This a big help for the other half, but the way I see it, almost all tenants will choose to not pay rent, even if they can. It will just be too easy to say they were negatively affected by the virus: "I have to help my parents/sister" etc. I see the word spreading on social media that you can just skip rent for a while. there is no incentive for anyone to keep paying. You can't kick them out and it won't affect their credit rating.

So you have multi-family managers that get minimal rents coming in, but still have to maintain the building, pay for utilities (if they are not individually billed to renters directly from the utility)

If you can defer mortgage payments, you will still be cash squeezed because of costs, and if you can't defer, then you are at the mercy of the lender.

I can see the pressure on landlords to limit evictions continuing for months, not weeks. Even once people are allowed to go look for work, many of them will not find one right away.

What are you seeing in your business?


Title: Re: Read This If You Own Bank Stocks
Post by: shhughes1116 on March 25, 2020, 01:31:42 PM
From what I heard, the mortgage deferral also only refers to owner occupied units, not investors. I could be wrong through.

This changed as of this morning:

https://mf.freddiemac.com/COVID-19/
https://www.fanniemae.com/portal/media/corporate-news/2020/renters-covid-19-multifamily-7002.html

Basically, multifamily owners will be allowed to defer mortgage payments if they agree to pause evictions due to non-payment of rent.  My day job is to own/operate multifamily investments, so I pay a lot of attention to this :-)

Only about 50% of all multi-family mortgages are Fannie/Freddie insured.

This a big help for the other half, but the way I see it, almost all tenants will choose to not pay rent, even if they can. It will just be too easy to say they were negatively affected by the virus: "I have to help my parents/sister" etc. I see the word spreading on social media that you can just skip rent for a while. there is no incentive for anyone to keep paying. You can't kick them out and it won't affect their credit rating.

So you have multi-family managers that get minimal rents coming in, but still have to maintain the building, pay for utilities (if they are not individually billed to renters directly from the utility)

If you can defer mortgage payments, you will still be cash squeezed because of costs, and if you can't defer, then you are at the mercy of the lender.

I can see the pressure on landlords to limit evictions continuing for months, not weeks. Even once people are allowed to go look for work, many of them will not find one right away.

What are you seeing in your business?




This thread highlights for me why the UK took the right approach with fiscal stimulus.  Cover 80% of the salary of those that are unable to work as long as they remain on the company's payroll. This enables the rest of the financial system to continue working in a relatively normal fashion (e.g. people can continue to pay rent and utilities, landlords can continue to make mortgage payments, and so on).

I fear that with the US approach to fiscal stimulus, we have created incentives for tenants to not pay their rent, as noted very well in the preceding comment.  If this actually happens on a large-scale, there will be significant knock-on effects through the rest of the economy.  For example, if you aren't paying rent, and the landlord can't evict you, does that mean you are still entitled to have things repaired in your apartment when they break?  I would think not - if the tenant is not paying, why should the landlord pay for the cost of the repair? 
Title: Re: Read This If You Own Bank Stocks
Post by: BG2008 on March 25, 2020, 01:58:51 PM
From what I heard, the mortgage deferral also only refers to owner occupied units, not investors. I could be wrong through.

This changed as of this morning:

https://mf.freddiemac.com/COVID-19/
https://www.fanniemae.com/portal/media/corporate-news/2020/renters-covid-19-multifamily-7002.html

Basically, multifamily owners will be allowed to defer mortgage payments if they agree to pause evictions due to non-payment of rent.  My day job is to own/operate multifamily investments, so I pay a lot of attention to this :-)

Only about 50% of all multi-family mortgages are Fannie/Freddie insured.

This a big help for the other half, but the way I see it, almost all tenants will choose to not pay rent, even if they can. It will just be too easy to say they were negatively affected by the virus: "I have to help my parents/sister" etc. I see the word spreading on social media that you can just skip rent for a while. there is no incentive for anyone to keep paying. You can't kick them out and it won't affect their credit rating.

So you have multi-family managers that get minimal rents coming in, but still have to maintain the building, pay for utilities (if they are not individually billed to renters directly from the utility)

If you can defer mortgage payments, you will still be cash squeezed because of costs, and if you can't defer, then you are at the mercy of the lender.

I can see the pressure on landlords to limit evictions continuing for months, not weeks. Even once people are allowed to go look for work, many of them will not find one right away.

What are you seeing in your business?




This thread highlights for me why the UK took the right approach with fiscal stimulus.  Cover 80% of the salary of those that are unable to work as long as they remain on the company's payroll. This enables the rest of the financial system to continue working in a relatively normal fashion (e.g. people can continue to pay rent and utilities, landlords can continue to make mortgage payments, and so on).

I fear that with the US approach to fiscal stimulus, we have created incentives for tenants to not pay their rent, as noted very well in the preceding comment.  If this actually happens on a large-scale, there will be significant knock-on effects through the rest of the economy.  For example, if you aren't paying rent, and the landlord can't evict you, does that mean you are still entitled to have things repaired in your apartment when they break?  I would think not - if the tenant is not paying, why should the landlord pay for the cost of the repair?

Hahahaha, I guess depends on where you are.  If you live in the state of New York, you bet that the landlord will be repairing broken stuff.  There was a NYT article on a guy facing eviction from a development in the Bronx.  They really portrayed him as a victim.  The guy lived in a rent regulated apartment for 40-50 years and the developers wanted him out.  The video really portrayed gentrification as bad and the developers greedy.  Turns out the developer went broken and the guy got $1-2mm to vacate his space.  So he paid below market rent his whole life and got paid $1-2mm to move out.  Talk about winning the lottery!! 
Title: Re: Read This If You Own Bank Stocks
Post by: Spekulatius on March 25, 2020, 03:13:57 PM
Btw, I am not saying that my relatives can't pay their mortgages if their tenants skip rent for a month.  They have quite a bit of liquidity.  Their simple and naive way of buying NYC residential rentals will make 95% of public market investors look like chumps with regards to their 10-20 year track records.

I am pretty sure you are correct. The first victims seems to be Airbnb entrepreneurs that use the Wework model - lease apartments long term then rent them out short term as AirBnB properties and earn the spread. Now with AirBnB basically down for the time being and those apartment empty, they hurts quite a bit. Kind of new to me that this model exists. Some Fintwit folks talk about it on twitter. These things always become wider known after they blow up.
Title: Re: Read This If You Own Bank Stocks
Post by: sundin on March 25, 2020, 04:18:18 PM
https://www.bloomberg.com/opinion/articles/2020-03-25/coronavirus-a-rent-wipeout-could-ignite-a-mortgage-crisis

"As the days go by in an unprecedented shutdown of the U.S. economy to slow the coronavirus outbreak, any amount of rent looks increasingly difficult to cover for a wide swath of Americans, from recently fired service workers to local small-business owners. Unfortunately for those most affected, these payments canít simply be wiped out ó at least, not without dire repercussions. My Bloomberg Opinion colleague Noah Smith wrote a column this week arguing that people need a break on all sorts of debts. But when it comes to rent, thereís pretty much no way around people eventually paying what they owe, ideally with the help of the U.S. government, or else risk ďturning a health crisis into a banking crisis.Ē

This, more or less, is the catastrophic ďdomino effectĒ that real-estate investor Tom Barrack, chief executive officer of Colony Capital Inc., warned about this week. Simply put, if commercial tenants donít pay rent because of a lack of cash, then property owners might be squeezed and default on their mortgage payments. The same goes for homeowners. That could bring the problem squarely onto the balance sheets of large U.S. banks, which will suffer steep losses on their loans."

Title: Re: Read This If You Own Bank Stocks
Post by: Enrico Pallazzo on March 25, 2020, 06:58:15 PM
Only about 50% of all multi-family mortgages are Fannie/Freddie insured.

This a big help for the other half, but the way I see it, almost all tenants will choose to not pay rent, even if they can. It will just be too easy to say they were negatively affected by the virus: "I have to help my parents/sister" etc. I see the word spreading on social media that you can just skip rent for a while. there is no incentive for anyone to keep paying. You can't kick them out and it won't affect their credit rating.

So you have multi-family managers that get minimal rents coming in, but still have to maintain the building, pay for utilities (if they are not individually billed to renters directly from the utility)

If you can defer mortgage payments, you will still be cash squeezed because of costs, and if you can't defer, then you are at the mercy of the lender.

I can see the pressure on landlords to limit evictions continuing for months, not weeks. Even once people are allowed to go look for work, many of them will not find one right away.

What are you seeing in your business?

A few updates.

1) I reached out to the institutions that gave us the Freddie / Fannie loans, and the news is pretty muddled, which isn't great news.  Basically, this is very much "at the discretion" of the lender, which makes this vastly less useful.  Lenders are scrambling to figure out their response.  Basically, this seems to be closer to a "suggestion" from the FHFA than I had first realized.

2) As for impact on my operations--too early to say.  I expect it to be horrible but I won't have good data until early April when rent is due.

3) As for impact on acquisitions / sales in multifamily--from everybody I've spoken to (both real estate brokers and loan brokers), the market is pretty much frozen.

4) Good point on the 50% thing.

Title: Re: Read This If You Own Bank Stocks
Post by: Spekulatius on March 25, 2020, 07:19:34 PM

This thread highlights for me why the UK took the right approach with fiscal stimulus.  Cover 80% of the salary of those that are unable to work as long as they remain on the company's payroll. This enables the rest of the financial system to continue working in a relatively normal fashion (e.g. people can continue to pay rent and utilities, landlords can continue to make mortgage payments, and so on).

I fear that with the US approach to fiscal stimulus, we have created incentives for tenants to not pay their rent, as noted very well in the preceding comment.  If this actually happens on a large-scale, there will be significant knock-on effects through the rest of the economy.  For example, if you aren't paying rent, and the landlord can't evict you, does that mean you are still entitled to have things repaired in your apartment when they break?  I would think not - if the tenant is not paying, why should the landlord pay for the cost of the repair?

I think that’s correct. If you are concerned about the economic domino effect, prevent the demons from starting to fall rather than go at the end of the domino line and prevent the last big ones form falling.
I think that was the issue with the GFC.  Of course the central banker was from GS so he would let the big banks fail, but millions of individuals and small business weren’t so lucky.
Title: Re: Read This If You Own Bank Stocks
Post by: BG2008 on March 25, 2020, 07:22:12 PM
https://www.bloomberg.com/opinion/articles/2020-03-25/coronavirus-a-rent-wipeout-could-ignite-a-mortgage-crisis

"As the days go by in an unprecedented shutdown of the U.S. economy to slow the coronavirus outbreak, any amount of rent looks increasingly difficult to cover for a wide swath of Americans, from recently fired service workers to local small-business owners. Unfortunately for those most affected, these payments canít simply be wiped out ó at least, not without dire repercussions. My Bloomberg Opinion colleague Noah Smith wrote a column this week arguing that people need a break on all sorts of debts. But when it comes to rent, thereís pretty much no way around people eventually paying what they owe, ideally with the help of the U.S. government, or else risk ďturning a health crisis into a banking crisis.Ē

This, more or less, is the catastrophic ďdomino effectĒ that real-estate investor Tom Barrack, chief executive officer of Colony Capital Inc., warned about this week. Simply put, if commercial tenants donít pay rent because of a lack of cash, then property owners might be squeezed and default on their mortgage payments. The same goes for homeowners. That could bring the problem squarely onto the balance sheets of large U.S. banks, which will suffer steep losses on their loans."

I just want to point out that Tom Barrack is a terrible investor who supposedly made 0% returns in his career.  So I would calibrate what he says a bit.