Marketplace Scratch Pad

Cue the JAWS music

Scott Jagow Jun 2, 2009

Here’s why it’s not safe to dive back into the economic waters just yet, despite all the talk about bottoms and recoveries. Daily Kos, in full color charts and graphs, looks at the coming implosion of mortgages outside of subprime — commercial loans, Alt-A, jumbos, etc. It makes you think the banks could have their limbs ripped off.

The post begins this way:

So much has been made of the subprime mortgage implosion that you would think it was almost totally responsible for the economic collapse, and that once the subprime problem was fixed then the worst would be over.

Unfortunately nothing could be further from the truth, despite hitting new highs in foreclosure listing. Instead it was the first round of a three part collapse, and we are on the edge of the second round.

Round two includes Alt-A mortgages, a step up from subprime. But the key difference is that the teaser rates for Alt-A mortgages were generally 5-7 years, not 2-3 years like subprime. That’s why subprime imploded first. Look at the timeline at the bottom of this chart:

Phase three is commercial real estate. In this graph of potential loan losses, look at how small the numbers are for collateralized debt obligations, cars, credit cards and other assets compared to commercial real estate.

Time had an article last week on Congressional hearings about commercial real estate:

What is clear from the hearing is that commercial real estate could turn out to be a much bigger problem for banks and the economy than the Treasury Department, the Federal Reserve and other bank regulators seem to believe. “The question is, What percentage of commercial real estate loans will have trouble refinancing?” Parkus said at the COP hearing. “It is likely to be a big problem.”

The bank stress tests only looked two years out, when again, many commercial loans were written to reset in the 5-7 year window. Time sums it up like this:

Commercial real estate may soon bulldoze the green shoots.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.