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Thursday, October 6, 2011

We Have Hit The Wall...Again

By Norm Arychuk, Debt Capital Markets Toronto

We were going along reasonably nicely – relatively speaking, here in Canada, in spite of European banking issues, in spite of U.S. jobless numbers and in spite of a lack of growth in our economy. Then, as we went barreling down the road, it became apparent that we could not see the light at the tunnel’s end. As a result, we have our foot on the brake, ready to stop to avoid a crash. We are in many respects, starting to feel the world economy hitting repeated speed bumps. Will we be able to speed up again soon?

It seems that then news is not new. Issues do not get solved and put away, they seem to simmer their way to the top, time and time again. When and how will the cycle be broken? A Euro bailout for Greece, led by Germany? A Resolution Trust Corp. like solution to the U.S. housing catastrophe? Or a significant infrastructure jobs initiative in the U.S.? What will it be?

The side effect of all of this if you will, has been a major falling out of in the sputtering CMBS market in the U.S. where refinancing risks could threaten to be another straw on the already weakened camel’s back. In Europe, roughly 7% of commercial real estate financing is handled by CMBS, where as in the U.S. it is over 20%. By 2014 there will be $1.4T worth of real estate loans maturing, many of which will have to find a new home.

To date, U.S. banks have been very reluctant to foreclose and have been involved a lengthy extend-and-pretend game. All of these underwater mortgages have to “go through the system” in order to reinstate market basics and return fundamentals to the real estate market. We need a transparent, reliable and understandable debt securitization market that can be counted on. It is an efficient vehicle for financing real estate that is very much needed to return.

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