The Tsunami Ripples of the Credit Crunch

Do not let these Ripples swamp your Portfolio

A fascinating study came out last week that gives us all a first glimpse into the street-level impact of the current Credit Crunch... the "Ripples" of lenders recent losses that will be the real impact on you and I.

Most press coverage of the Sub-Prime meltdown is focused on the losses the various lending institutions are facing.

Those losses are massive and have required some of our mainstream banking institutions - Merrill Lynch, AIG, Citigroup to name just a few - to accept bailouts from foreign funds.

However . . . those losses are not what will affect you and I when we try to get a loan.

The actual "Ripples" that will stop us are the Credit Contraction those losses will cause. It's like an old slapstick comedy where the guy looks one way and gets hit by a car coming from the other direction.

We are focusing on the Lenders Losses and the Credit Contraction is what will run us all over.

How bad is it?

The study is titled: "Leveraged Losses: Lessons from the Mortgage Market Meltdown,"

They argue that for every dollar in losses the lending institutions suffer they have to shrink their balance sheets by $10-$25.

That is right . . . for every dollar they lose there are $25 less in the kitty to lend you and me.

The research team predicts losses of up to $400 Billion for the lending industry . . . but watch out . . . here comes the bus from the other direction . . . Remember the losses are not near as important to you and me as the way they cause less money to be available for loans.

That's Trillion with a "T". Two Trillion Dollars that will NOT be there for home mortgages, loans for your next apartment purchase, business lines of credit to keep you in widgets. Those are ripples the size of Tsunami.

The study calculates a shrinkage of $2 TRILLION in assets that would otherwise be in the hands of borrowers like us.

This contraction has even spawned a rarely heard term . . . "De-Leveraging"

De-Leveraging is the opposite of Leveraging. It is when the easy money days that let anyone borrow (leverage) on even poor quality assets come to an end.

During a period of De-Leveraging - like we are seeing now - the lenders call in their chits. They call loans due, ask for additional cash from borrowers, drop their loan to value ratios, increase debt coverage rations, argue every point of your proforma several times . . . or even stop lending on whole classes of assets.

The fact is they do not want to give you a loan right now because they can not see an end to the losses at the moment. Most of the experts I read are talking about rolling losses throughout 2008 and recovery in 2009.

What does this all mean to you?

• Be ready for a much harder go of getting your commercial real estate purchases financed in the next 12 months.

• Hoard your cash. Cash will be King for the foreseeable future. Get to work building your private money investor network in this lull.

• Watch for victims of De-Leveraging. People who would like to refinance, but can not get a new loan and have to sell their property at a steep discount.

• Be on the lookout for quality multifamily. In selected markets this is the Real Estate Investors Niche of the moment. Cash flowing Multifamily is the equivalent of a "flight to quality" in this environment.

• Do not expect the Recession and Credit Crunch to clear any time soon. Hang on and remember you are in this for the long haul. The true bargains will become apparent as we go deeper into the dip.

22 Aug 2008 02:05:28

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