Various bearish funds who are lining their pockets with falling real estate bonds.
These funds had been shorted since March 2017 in real estate bonds, but they did not opt for subprime mortgages, as the investor Michael Burry did in 2005, but for loans granted to shopping centers. His expectation was that the growth of e-commerce would cause a wave of defaults by retail. Finally, with the coronavirus pandemic, its profits have soared ahead of schedule.
It is necessary to point out that, in the United States, it is normal for banks not to keep loans on their balance sheets, but rather to sell them and quote them in the market in the form of bonds. On Wall Street there are specialized indices that collect the trading of these bonds, on which investors can bet upward or downward. An example is CMBX 6, a derivatives index to bet on the future of retail in the country.
CMBX 6 is linked to debt issued in 2012 by shopping malls that are now having difficulty repaying money. Some of them are managed by JC Penney, a chain of stores that has filed for bankruptcy. In the face of events such as this, expectations of default in the payment of mortgage loans increase, causing falls in the index of more than 30% since the beginning of 2020 and thus feeding the accounts of bearish funds.
But not only will shopping center bonds lose much of their value, but Covid is shaking the entire US real estate sector. Especially to hotels, which have been closed throughout the pandemic and have received practically no income, increasing the risk of default on their debt. Also in the offices, where the change in the trend towards teleworking is causing a flight from investment and a sharp drop in billing in coworking spaces.
Morgan Stanley warns that a quarter of all commercial mortgage-backed securities in the US could be on the verge of default. In fact, delinquencies rose markedly in April, with 66 loans totaling $ 1 billion, putting enormous downward pressure on almost all asset classes tied to the US ‘real estate’.
In total, 324 loans with a total balance of 4.8 billion are currently in arrears in the North American country, a historical fact. And the forecast is that in May it will increase another 5%. It should be noted that we are talking about bad credit when it cannot be paid for two consecutive months. In the event that it is only one month, it is classified as “late but within the grace period.”
From Fitch they consider that this complicated situation is going to get even worse. Based on his own data, he states that 26% of the outstanding mortgage debt has asked about the suspension of payments in recent weeks, which would mean an unprecedented increase. Similar figures were not reached even in the 2008 financial crisis, when delinquencies and debt foreclosures peaked at 9% in July 2011.