Anyone seeing extend and pretend ending?
I saw the thread about Nitya. So many similar shops like RISE are essentially defunct but are being kept afloat with the assistance of their lenders. Quite frankly, these companies have negative equity across their entire portfolio. Given the robust data, the Fed has no incentive to reduce interest rates. We had this discussion last year, but we are now four months into 2024, and the situation remains unchanged. When will lenders be compelled to take action?
Lenders will take firmer action once it becomes crystal clear that for most of these semi-fraudulent syndicators, it is NOT the interest rate environment that is killing asset values but the horrible basis at which they were bought and the shitty opex and capex that's been carried out since.
Lets all call a spade a spade - none of these assets are worth enough to pay back the equity invested, and in most cases barely the debt. They were bought at the absolute height of a major bubble on assumptions so aggressive that I genuinely think they need to be considered a form of fraud.
All of these guys are sitting here and complaining about how interest rates are rendering these buildings/portfolios unsaleable, and I think a lot of lenders are "buying" that argument because the alternative is to stand up and admit that they and their credit committees didn't do their jobs when it came to diligence or stress testing any of the bullshit that was shoveled at them. The senior lenders probably can recoup their debt if rates come down, so I am sure that they're all waiting for even a slightly more favorable environment, or at the very least for the assurance that rates will stay this high for several more quarters so that they can cover their own asses.
And like every other time this shit happens, they'll pull in lending even for good operators because they got burned so badly with the Nityas and Tides' of the world, pretending as if the problem is with "the market" instead of their own shitty underwriting standards. And then in ten years they'll forget and start lending to the next generation of fraudsters and repeat the cycle.
The problem with finance in general is that the incentives aren't aligned properly, especially for lenders, so you're always going to have the same cycle whereby loan originators extend stupid credit without doing any real diligence so they can make huge bonuses or not lose business, and then when that goes south they'll disavow all personal responsibility and credit will dry up for a few years. Whereas if any of these greedy morons could be bothered to do more than just accept whatever shit financials they're given without a second glance, almost all of these problems could be forestalled.
This may be your coup de grace of posts on WSO.
The portion on lenders is case and point of every RE disaster. 08/09 was moron lenders just at the SFH level. Today it's with MF industry with moron, non-bank lenders.
It was MF borrowers back then, too. It's just that no one noticed it in 2007/8 because the SFH market is so much larger, and more importantly, impacts people whose net worth and financial stability is tied up in their homes and who also vote.
Look, when Swapnil Agarwal goes bust, no one cares, because he's a fraud. And no one cares about his investors, because they're investing with an obvious fraud and even if they're not they're still investors. For better or worse, home equity isn't considered to be an "investment" but a form of savings, so when the GFC blew up no one focused on the funds losing money because honestly... why should they? Markets don't always go up, but home values should (or that seems to be the common perception).
Now single family homes are fairly well insulated from any interest rate expansion, so no one really cares and there is no political pressure to do anything. Frankly, I think this is a good thing. Our assets are struggling, sure, but we're not below 1.00x DSCR on anything at the moment, because we're real estate operators and not gamblers or fraudsters. If you (generically) own a bunch of assets and more than an isolated case or two aren't paying back your debt service, the issue isn't the interest rate environment, but your cavalier attitude towards borrowing. Sorry, that was unrelated to the main question.
Lenders are already taking action and putting buildings up for sale. Extend and pretend worked in a declining interest rate environment where lower NOI was offset by declining cost of debt. This is the reverse with declining NOI (for office for example) or even stable/improved NOI being unable to cope with much higher debt service costs.
Once extend and pretend is over, market activity and subsequently hiring will pick up.
I think the timeline varies by how long a lender can accept the difference between the pretend value of the asset and the market value, and how wide that gap is.
There's still hope that IR will decline so that borrowers can refi. Once that's gone, it will be a lot more difficult to extend and pretend.
as long as lenders are paid, they don't want to rock the boat. lets wait til the workouts finish, then banks will start selling NPLs to make room on their BS for new loans.
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