Ross D. Franklin/AP Photo
Unsanitized-051920
A mall in Chandler, Arizona, that reopened last weekend. Commercial real estate loans may have been overinflated.
First Response
We have been waiting and really expecting a real estate crisis as a result of the pandemic, but it’s important to note that this will happen in time-released fashion. Going further than they ever did in the financial crisis, Congress put a moratorium on foreclosures for federally-owned and backed loans, and set up forbearance options for those who cannot pay. Though mortgage servicers are trying to lie to customers about balloon payments at the end of that forbearance period, regulatory action has been taken that will hopefully prevent that. At the moment, nearly 1 in 12 mortgages in America (8.16 percent) are in forbearance.
For renters, we are starting to hear ugly stories about landlords seeking sexual favors from tenants so they can stay housed. And eviction moratoria in place at the federal level are being ignored in select cases. But enhanced unemployment has prevented a widespread crisis thus far; according to statistics from the National Multifamily Housing Council, as of May 13 87.7 percent of all tenants had paid rent, down only 2.1 percent from the same time a year earlier.
Of course, enhanced unemployment is on track to expire at the end of July. And forbearance has been in some cases only extended for three months, though under federal law it could go for up to a year. We cannot escape a housing crisis forever as long as unemployment is above 20 percent; well, we could, but we probably won’t. Ryan Cooper has more on that.
Read all of our Unsanitized reports
No two crises are the same, however. The financial crisis was a hardship for mortgage borrowers and later renters; in this crisis, the real carnage might occur in commercial real estate. Lots of storefronts simply aren’t going to come back, including anchor stores for malls, which will wither as a result. This will create extreme hardship on the tax base of cities and counties, magnifying the absolute horror in these communities.
And now we’re hearing about something that will devastate the commercial real estate sector even further: fraud. I want to thank the close to 25 readers who sent me this Pro Publica article about this situation (I did see it myself). A whistleblower named John Flynn alleges that Wells Fargo, Deutsche Bank and other trustees of commercial mortgage-backed securities (CMBS) inflated past profits of commercial properties and ignored lack of creditworthiness among borrowers. This information was not passed along to investors in the CMBS.
Obviously this creates more frequency of CMBS and more lucrative fees for the trustee banks that assemble the deals. But it means that borrowers took out more in loans than they can pay back, especially in a crisis. And if they can’t roll over the loans, they will abandon them, surging defaults. Missed payments are already spiking.
CMBS is one of the many flavors of asset-backed securities that the Federal Reserve is purchasing in their money cannon rescue of the investor class. That might allow the market to hold out for a little while. But what this shows is that the shenanigans we saw banks undertake during the financial crisis never really stopped. They just shifted markets and took new forms. Banks skirting the edges of the law while seeking outsized profits isn’t something you can stop with a warning. You have to be willing to enforce the law and punish offenders. If you don’t, fraud will crop up again, as would-be offenders have been taught that there’s no consequences for their actions. So here we are.
The Post-Corona World
Our cover story for our new issue, out today, tries to take stock of the post-coronavirus world, of what might happen to America once we emerge from the crisis.
It’s a very uncertain picture. Paul Starr lays out the multiple options: a rebirth of egalitarian spirit, or an accelerant of ugly nationalism and entrenchment. Harold Meyerson sees labor either battered by mass unemployment and impossible legal barriers, or uplifted by radical collective action and newfound “essential” status. Bob Kuttner forecasts either the rise of China as an economic hegemon, or a renewed domestic manufacturing sector and a green stimulus powering America back to a sustainable prosperity. And I look at concentrated corporate power, which will either become unbearably dominant after the crisis, or be felled by all the shortcomings the crisis has exposed.
We also decided to take a foray into podcasting, by having Paul, Harold, Bob, and myself discuss these possibilities. You can listen to the full podcast and view a transcript at prospect.org/post-corona-podcast.
As usual all of our coronavirus coverage is at prospect.org/coronavirus. And email me with tips, comments, and experiences.
Count von Count
Federal Reserve chair Jerome Powell and Treasury Secretary Steve Mnuchin are testifying before the Senate Banking Committee along today. Powell’s opening statement is here and Mnuchin’s here. To read Powell rattle off all of the facilities the Fed has created to support the economy during the crisis, you would think that fate of the nation was in the central bank’s hands, which is it. Powell is effectively the architect of a planned economy right now, and he knows it: “There’s really no limit to what we can do with these lending programs,” he told 60 Minutes on Sunday.
But central banks are not designed as crisis managers. They can defuse financial crises, they can unclog the flow of credit. They cannot stand in for lost revenue or deal effectively with insolvency. Congress has deferred to, well, everyone, for too long, preferring to question in hearings rather than take action. The result is that we have a rescue program that works well for Wall Street banks and large corporations lucky enough to have access to high-end credit, and not really for anyone else.
In a few days I’ll have more on this topic, but I was seething at this report in the Washington Post about how little of the corporate bailout program has been spent. Up until a week ago none of it had been spent actually, but that’s completely irrelevant to its effect. The announcement that the Fed had control of $4.5 trillion to disburse lifted every financial market known to man, tangibly, demonstrably. Any investor knows that they’ve been bailed out, thanks to the Fed’s commitment to do whatever it takes to protect them. Looking at the situation like an accountant and counting the dollars spent tells you nothing about reality.
The fact that the same day, the Post also reported that two esports companies got (use your Austin Powers Dr. Evil voice) 2.1 MILLION DOLLARS from small business loans just extends the innumeracy here. So government should be spending, or not? Which is it? The moralizing about the PPP molehill when the Fed is moving mountains (for context, even with this “little” spending, the Fed’s balance sheet has increased by $2.7 trillion since March 4, more than four times the PPP) is ridiculously misplaced and just false.
Today I Learned
- I was on the Left Anchor podcast with Ryan Cooper and Alexi the Greek. Listen here. (Podbean)
- Oh good, Lloyd Blankfein is telling the plebes they’ll just have to suffer and die for his economic well-being. (Bloomberg)
- That’s actually less offensive than Jamie Dimon dubiously telling the plebes we need to build a more “inclusive economy.” (CNBC)
- Roughly 30 percent of JCPenney stores will be closed down. (Wall Street Journal)
- Here’s an updated list of regulatory rollbacks blamed on the pandemic. (Coalition for Sensible Safeguards)
- It’s a miracle, Europe might actually share the pain instead of forcing austerity. (Bloomberg)
- Factory automation does seem like a probable accelerant from the crisis. (Financial Times)
- A viral outbreak that only kills rabbits. (New York Times)
- Pizza arbitrage. DoorDash richly deserves this. (Substack)
