Friday, November 16, 2007

I want to believe...

Is there a commercial real estate bubble about to burst? I don't know. Maybe, maybe not.

But there's little question in my mind that some people are looking for one.

Take this article from Seeking Alpha about the Blackstone Group.

The author focuses his attention on this pull quote:
During the periods presented, weakness in the sub-prime residential lending area spread to general commercial real estate lending. Although there was no evidence that these credit problems have significantly affected the underlying operating fundamentals of the investment portfolio, valuation multiples have declined modestly.

From this paragraph, the author concludes that Blackstone was issuing loans with subprime-like sloppiness in underwriting, that assets are declining because of systemic flaw in their approach, and that from here on out Blackstone will be able to say "I told you so" to investors when the shoe finally drops.

Maybe. I have to say that seems like an alarmist interpretation of what looks to me like fairly standard CYA language.

In that same vein "the underwriting shoe is finally going to drop", there's this little quote from a Financial Times story posted to MSNBC:

Industry insiders insist that underwriting standards for commercial loans are better than those for subprime residential mortgages.

This is at the end of a story that's about how investors are fleeing the securitized debt world.

Now maybe it's my turn to over interpret, but I don't think you need to be the Amazing Kreskin to find the disbelief in that last paragraph. In the alternative commercial loans I do, for instance, there's always a counterweight to what's unusual. If there's a very high LTV, there's very good income and/or credit. If there's bad credit, there's a great cash flow or great value for the lender. Also, since the lender engages the appraiser, not the loan officer, there's very little way to game the system, as happened in subprime.

The reporter was no doubt told all of this and more. But instead we get a mental picture of someone leaning across the table and shaking their fingers.

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