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Wells Fargo Commercial Mortgage Update

Published By Wells Fargo 2009-04-21

 

After a six week stock market rally investors received more news that the most severe economic decline since the Great Depression may be leveling out or more aptly put by Federal Reserve Chairman Ben Bernanke, "tentative signs that the sharp decline in economic activity may be slowing." Nobody but the most extremely optimistic economist called for an economic recovery by the end of the first quarter of 2009, although a number did target the end of the Second Quarter, although many of those predictions tended to drift into late 2009 and beyond.

 

Bernanke cutely said a few weeks ago that he saw " green shoots" growing in the market. One area that he saw improvement was banking and after very positive and surprising record quarterly profits announcement by Wells Fargo last week, the good news continued to take root. Goldman started the week reporting $1.81 billion in first quarter net profits, up 20% from a year ago, but more importantly a sharp reversal from a $2.1 billion loss from the fourth quarter of 2008.

 

Despite the good news, Goldman's principal investments generated a net loss of $1.41 billion for the quarter, evidence of the continuing decline in real estate assets. Goldman indicated that it is planning to raise $5 billion to pay back its $10 billion in government TARP funds. J.P. Morgan Chase & Co. followed saying first quarter profit fell 10% as reserves for consumer loan losses continued to "grow alarmingly" per Marketwatch, but the largest bank by assets still reported results that topped analyst estimates. The bank earned $2.1 billion compared with $2.4 billion for the same quarter a year earlier, with markdowns of $711 million on leveraged lending funded and unfunded commitments, as well as $214 million of net markdowns on mortgage-related exposures.

 

Regarding its $25 billion in borrowed TARP funds from the U.S. Treasury, Chief Executive Jamie Dimon boldly told reporters, "We could pay it back tomorrow -- we have the money." Despite reporting a 35% decline in profits from continuing operations to $2.83 billion for the first quarter 2009 from a year earlier, General Electric Co.'s profit fell less than analysts estimates. The company cited losses from real estate losses and rising consumer-credit defaults.

 

Of course, all of the banking news was good, last week American Sterling Bank of Sugar Creek, Missouri became the 24th bank failure this year. We will also know a lot more about the health of the banking sector as Bank of America reports on Monday.

 

Turning to the closely related residential market, housing starts plunged to the second-lowest level on record in March (due primarily to a pull back in multi-family construction) and long-term jobless claims hit a record (demonstrating the difficulties in the job search market) builders and consumers turned slightly optimistic. Building on some positive housing news last week, Reuters reported that the U.S. homebuilder sentiment rose in April to its highest level since last October according to the National Association of Home Builders; and the University of Michigan's preliminary index of consumer sentiment rose for the second month in a row to the highest level since September, having reached a three-decade low in November.

 

It does seem strange to see such positive news on banking and residential real estate. However, considering the fact that this recession started as a financial crisis led by the banks and a collapse in residential mortgages and housing values combined with the amount of stimulus targeted at both industries, it should not be surprising that banking and housing would lead us out of this economic downturn. Housing will be key to returning the U.S. economy to health. However, a survey by the American Institute of Certified Public Accountants indicates that 79% of Americans have no intention of buying or selling a home anytime soon. This despite the fact that price declines and low mortgage rates have resulted in the cost of homeownership to fall 43% from the peak of the housing cycle, putting housing affordability to the best level in 38 years according to John Burns Real Estate Consulting. "The darkest phase of the recession is behind us, according to consumers," said Jonathan Basile, an economist at Credit Suisse Holdings Inc. He was also quick to point out that the current level of consumer sentiment is "very consistent with a sluggish consumer profile" and that a full economic recovery is "not under foot right now."

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