Read it today in the Wall Street Journal- top paragraph left hand side… “IF THE ECONOMY RECOVERS AS ANTICIPATED AND BERNANKE MOVES TO RAISE THE INTEREST RATES…” If that happens then all the nightmares about floating rate hotel loans will come true. Hotel loan recovery is a race that will BEGIN when the economy turns around. Then it will be a contest between rising interest rates and rising hotel demand AND HOTEL DEMAND WILL LOSE. Hotel income (demand and rate) is projected to decrease (yes decrease) by 3-4% in 2010. However, if the current LIBOR of 0.27% goes up just 280 basis points, as it did in the 1994 recovery, then most floaters will go from their current 2.75% to over 5.5%- an increase of 100%. Or worse, during the 2004-2006 recovery, LIBOR went from 1.09 to 5.4, an increase of more than 430 basis points. A reoccurrence of that will sink most floaters.
A compounding problem is the last part of the Wall Street Journal sentence “…and tighten credit”. What credit? For now there are no hotel loans (will some reader let me know if there are any hotel loans), therefore no transactions. If credit tightens, it’s only worse for hotel values and hence recovery of loan principal.
Steve,
I agree your blog is on target. With the hotel transactions we are closing this year most have been creative at best… Owner carries back, AITD, Second Deed of Trust, Silent Second Deed of Trust and cross collateral lending. On the 10 million and below we have seen a lot of SBA loans in fact we closed the first enhanced SBA 504 on a hotel asset in California. The buyer was able to get an additional $2,000,000.00 due to an energy audit and reducing there energy consumption by 10%. The race will be on and we all know who will win.
Steve,
I just want to say first and foremost…your blog in fantastic! As far as the Wall Street Journal claiming “…and tighten credit”. They are clearly out of touch with Hotel financing and commercial financing in general. There are no banks doing hotel loans, or commercial lending in general.
We are starting to see some of these borrowers come through our door for bank workouts.
Great point on the reset in the floating rate. Never vieweed it in that context. Its going to make a very bad case even worse.
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I think Greenspan is getting senile, today he said that you can stop asset bubbles by increasing capital requirements. That just increases the cost of credit. The next time you have a real estate bubble, you’ll have the same problem, assuming that banks are still in the business of loaning against real estate. If you want to stop this problem, then eliminate the federal subsidies for real estate development and investment, then require people in that industry to put their own money at risk instead of someone elses. If Greenspan really wants to change the banking system, though, then simply ban 95% and 90% LTV loans. Require a bigger equity cushion. BTW, the “too big to fail” argument is a fallacious one. During the Great Depression, Canada had no bank failures. The reason was that their banks were very large. The banks closed branches, etc., but none of them failed. By contrast, the US was dominated by thousands of very small banks, and we had more than 10,000 of them fail. So there is nothing inherently unsafe about a banking system dominated by large banks. The real problem with large banks is that during good times, they don’t provide enough competition for each other.
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