another senior top-rated tranche of C-R debt is facing substantial losses the second one around the world in his many months. That likely explains why we keep hearing reports that large banks are selling their high-quality assets. Distress rates have jumped over the last month, adding even more pressure to the situation, and that's a big reason why the latest housing construction data in the U.S. was a big huge mess thus far. However, there have been substantial Tailwinds to keep this whole thing afloat. Debt workouts and modifications have soared, and some financing has flowed back to certain areas. Extending and pretending remains the dominant trend. Even so, sanguine investors who've been funding a mini-revival through alternative means of the structured credit markets and just keeping it from all falling apart. They're going to be facing some real tough discussions and decisions, and that's even before we get to the harsher macroeconomic climate as the U.S. slides further into recession. Now it may be that homebuilders are most aware of both of these factors. Apartment

construction figures the past few months have surpassed the pandemic lows, including more really ugly data just yesterday. They're seeing renters with no money and fewer financing options for themselves, so they're increasingly intent to just sit this one out, which is itself an important clue about how this may really go. Extend and pretend meets reach for yield, colliding with the reality of the actual economy and the climate. Now, you probably heard earlier this month when a senior official at PIMCO said, actually warned, that there's going to be a lot more bank failures up ahead because this CR thing is still in its earliest stages. The real wave of distress is just starting for lenders to everything from malls to offices, according to John Murray, PIMCO's Head of Global Private Commercial Real Estate. As he said in an interview, his division sits within Go's $173 billion Alternatives business. Contrary to some market expectations, larger banks have been disposing of some of their high-quality assets first to avoid deeper losses, at least according

to Murray and these are the very assets that we've been talking about talked about this in a previous video where we got we got word that a senior piece in from New York experienced huge losses and I I'll review that in just a minute these senior pieces are not supposed to experience any losses and the fact that they are leads to some very uncomfortable possibilities because big banks are seeing those possibilities and they're acting on it get head to the exits first before those losses get extended to you and likely taking some some little bit of a discount in order to liquidate these positions but they're not supposed to take any losses at all they're supposed to be sufficient collateralization as well as protection in the structure above it the junior tranches continue to get wiped out in the few transactions that we do have at least that we're privy to from these various media reports the latest one came from Bloomberg just a couple days ago and it said investors in what was the safest part of a loan backed by UK shopping

malls are facing losses possibly the first such impairment since the global financial crisis according to Bank of America analysts including mark nickel estimate that class a note holders of commercial mortgage back security Elizabeth Finance 2018 could suffer a shortfall based on the amount that is expected to be recouped from the sale of the underlying properties again that's not supposed to happen but it goes to show that when there is price Discovery the very few transactions that take place the prices that are being discovered are wholly insufficient to offer protection to even the senior parts of the securitization structur remember how securitization works if you're in the top level the senior level the triple a top rated part of it you have all of this all of these other tranches above you that are going to take losses first and there's supposed to be enough of these tranches above you enough protection against losses that you'll the chances of a senior piece actually experiencing a loss is supposed to be next to zero nothing is ever zero

as we know, in this world, but as close to as close to nil and trivial as we can possibly get. Instead, here we have the second example in as many months that show the senior pieces are taking substantial enough losses, which is going to have a chilling effect across the marketplace. Again, that likely explains these reports that we keep hearing big banks are selling their high-quality assets to get out before we get more price discovery that shows that more senior pieces are under threat than anyone has been anticipating. And that one that we had last month, as reported by Bloomberg in the middle of May, it said buyers of the AAA-rated portion of a $38 million note backed by the mortgage on 1740 Broadway in Midtown Manhattan got less than 3/4 of the original investment back earlier this month after the loan was sold at a steep discount. It's the first such loss of the post-crisis era, that's twice we've heard that according to Barclays. All five groups of lower-ranking creditors were wiped out. Market watchers say the fact

that pain is reaching all the way up to the top rank holders. Overwhelming safeguards put in place to ensure their full repayment is a testament to how deeply stress pockets of the US commercial real estate market have become. And that potential stress and strain and now losses, even up to senior pieces of some of the CR focused Clos, is one reason why interest rates continue to go lower. It's a factor, a fundamental factor in how interest rates are set. And that's something that we're going to talk about on Friday, June 28th. Next Friday, June 28th at 6:30 p.m. Eastern time, Euro dollar University is holding a webinar launching our anniversary sale. With rates moving again toward recent lows, it's important to understand where they are actually coming from. We've got economic concerns, financial concerns, global concerns, and the webinar is just a glimpse at what I write every day in our deep dive analysis, the daily updates I put in my daily briefing. And behind those, we have memberships with all the background material. And you can sign up.

right now for our webinar on interest rate fundamentals there's a link in the description of this video, and I'll let you know about the details about eural University's Ann gry sale next week as we get closer to it. So Link in the description for the webinar next Friday 6:30 p.m. eastern time. I hope I hope to see you there. So on top of these reports of sales and losses that were that are going on in not just the United States but around the rest of the world. Here we have an example in the UK because this is a global problem. Commercial real estate is not just in the US these distortions and imbalances that that are left over the last couple years were widespread all over the place. So in addition to the threat to even the senior pieces the top-rated pieces of the securitization structures, we now got more data that shows delinquencies on commercial real estate loans are actually Rising. They had dipped a little bit according to certain sources in March and April which suggested that

maybe we'd seen the worst of it, but the latest data that we got from some other sources like CredIQ suggest that delinquency soared again in the month of May. Here's what they reported just a week ago: The CredIQ research team continued examination of the CLO ecosystem as the distress rate reached 99.74%, an increase of 114 basis points since our May 3rd print. This includes any loan reported 30 days delinquent past their maturity, specially serviced, or a combination of all of these. Even so, as delinquencies rise, we still see credit spreads across the CLO landscape, including CNBs, as I'll go over in just a moment. They continue to tighten. CLOs in general continue to tighten, thanks in large part to our friends over in Japan, as I talked about with Norinchukin Bank and what they're actually up to with their carry trade. So, there is still funding available from quite a lot of sources and still a lot of appetite for even more of these.

troubled areas like commercial real estate or just corporate credit in general. Despite the concerns, despite the rise in delinquency, there has been a Revival or a mini Revival in funding in the space in 2024, and a lot of it was predicated on interest rates going lower first with the bound rally last year that did bring Market interest rates lower, and then the perceptions that the Federal Reserve is going to cut rates and therefore cut financing costs for a lot of people over the months or at some point this year. We look at clo CDO issuance from Syma, for example, what you see is that funding had dried up in the middle of 2022 as the economy fell off prices sh all of that stuff. It came back somewhat in the first quarter of 2023, but then fell off for obvious reasons with the regional banking crisis in the US and credit s can't forget about that. The second quarter and third quarter of last year, it got restarted a bit in the fourth quarter again as rates went down.

and then after the bond rally, and then the thoughts about how rates are going to continue to go lower. Fundamentals, uh, there's been a real uptick in CLO issuance in the first quarter of this year according to C data. 175 billion was issued in the first 3 months. That's the highest since the second quarter of 2022 and about 10 billion more than got issued in the fourth quarter of last year. Again, a lot of that has to do with appetite from Japan. The Japanese investors are desperate to reach for yield and maybe like a lot of investors, they're thinking, well, let's just roll the dice here. Let's hope that JP's right about the US economy, that everything holds up really well. We need to reach for yield. We don't really have any choice. So even though we might not necessarily be all that optimistic, let's just ride with J Powell, reach for that yield just so that we can stay in business and turn turn a positive carry profit. And that's really the dangerous

dangerous period and dangerous times for all of this because when you forced into doing something maybe you don't really want to you have to reach for yield because the numbers don't otherwise work you tend to overlook some of the downs side and some of the potential that in normal times you would I don't want to do that because this is definitely not looking like something I really want to be involved in but when you're forced to make these decisions you override your own common sense and prudent approach and I think that's what we're seeing here is that there's a lot of lot of assumptions that the US economy is going to work out just fine because not just the FED but some of the mainstream statistics like payrolls look really good and we're going to set aside all of the concerning data that Su suggest that the economy isn't great because we don't really have any other choice but the banking system most of all is heavily exposed as Mr Murray from Pimco was pointing out I mean us

Regional Banks really don't have much alternative at this point. They can either hand the financing off to somebody else and hope that financing continues to be robust or starts to become more robust, or they can work with their borrowers and work out some kind of workarounds, modifications, whatever the case may be. Going back to Cred IQ, that's what they found: an enormous increase in loan modifications. Most of them were just modifying the date of maturity, so literally extending and pretending. Here's what Cred IQ wrote just today: The Cred IQ research team has been fielding requests for deeper analysis on loan modifications during this period of elevated interest rates and levels of delinquency. Loan modifications have surged as borrowers worked with lenders to achieve loan extensions and other alterations to their loan covenants. Approximately 22 billion loans have been modified in the past 12 months ending May 31st. Over 9 billion in loans have already been modified this year through May, placing 2024 squarely on a path to a record.

setting year of loan modifications. This compares to a total of 16.8 billion that was modified in 2023. As they continue, the notion of extend and pretend is totally understandable as loans reach maturity in this challenging environment. Now, normally when you look at commercial real estate, there are four primary sources of funding. There are life insurance who are huge funding huge buyers of all of this stuff. There's commercial Banks as we've been talking about all along. Regional banks in particular over the last four years, they were heavily involved in financing this CR bubble. There are debt funds and there is cmbs. Now we know banks are closing up shop and what we're seeing is not just a little bit of a Revival in Clos in general but also cmbs as a sort of Last Resort alternative to take up some of the slack from the commercial Banks. Troubled borrowers who have been unable to work out an extension with their Bank have been increasingly turning to cmbs even though the general Marketplace as a whole in the aftermath of 2008 and

2009 said they would never ever go back to CNBC so the fact that they are shows already that they have few other options. So just to extend and pretend a little more, they're turning to a part of the marketplace that they all said they would never ever participate in after their experience last time because CNBC is a difficult difficult space to work in especially in less than desirable conditions where you get into defaults and losses. And it just it it can be a it can be end up being a real nightmare. But we're seeing that Goldman Sachs and Bank of America maybe JP Morgan Chase City basically the large US Banks they've been using their own balance sheets to originate and Warehouse some CNBC loans and then selling off the bonds into the bond market because of this appetite for reach for yield. So they've been able to package offer some alternative financing and package it to the bond market. It started even before last year's banking crisis and it has only gotten worse at least from the banking channel in the

year since then. But all this time, effort, and even new resources and new funding sources are just rearranging the deck chairs. We're not doing anything new or very little new was getting done. It's just financing to try to work around the distortions of the past couple years to wind down the bubble period from 2020 and 2021. That's why we continue to see really ugly statistics in the housing market, particularly multifamily or apartment construction, which is a huge part of this CR distress. According to the Census Bureau's latest estimates through the month of May, permits to build new multifamily units fell all the way to 382,000. That's a seasonally adjusted annual rate, down from 407,000 revised in April, and it had been 479,000 as late as February. So, a big drop in the amount of permits filed, which is the rate in May is about half of what it was in July of 2022. And since May of 2017, the only month lower than that was April.

of 2020. So, as far as permits being filed, Builders are not looking all that optimistically at the multifamily apartment construction. Again, they're thinking they see from all the information they get on prospective renters that renters don't have any money. The jobs Market is increasingly difficult. They're pressured by prices and things are getting worse not better, which is why Builders are saying we're not looking to build a whole lot more of inventory. But the real big one is in starts. The number of multifamily projects that have actually been started, according to the latest numbers, just 278,000 against seasonally adjusted an rate in the month of May. That followed 310,000 in April and just 251,000 back in March. These are three of the worst months consecutively but three of the worst months that we've seen since the housing bust over a decade ago. The average amount of starts in multifam was just 280,000, which is lower than the worst 3-month period in 2020. You have to go

all the way back to 2013, just in the initial phase out of the housing bust, to find a similar low number. So again, Builders know that their prospective renters have no money, so they see no reason why they should go through the hassle of trying to arrange financing when they can't get it from Banks. They may have to turn to some alternative sources like cnbs. It's not worth the trouble because prospects in the real economy are colliding with prospects in multifamily, which is a huge part of the CR space. And Builders are telling us they'd rather just sit on the sidelines and see how all of this shakes out in the economy, as well as in the funding markets. So the few transactions that we have information on are showing extreme levels of losses, one in New York and one in London, also demonstrating the global nature of this CR problem. That's likely why large banks have been reported to sell their high-quality assets because they're heading for the exits, largely in anticipation of price Discovery.

continuing in the wrong direction. Better to get out now, maybe take a small discount on some of these safe, top-rated instruments, then to see if it gets worse and losses continue to create liquidity problems, making price discovery even more problematic. Huge increase in delinquencies, obviously modifications, using CMBS as an alternate form of financing, even though nobody really wants to. It shows that pressures are indeed building, even though we can't necessarily see them really coming out on the surface, not just yet. Investors, however, have been somewhat sanguine about the risks because they view the economy favorably, though more so as I said. I think they're just setting aside their own reservations because they don't really have a whole lot of choice. They are reaching for yield and so kind of holding their noses and just funding the space as much as they can, or as much as they're willing to, just so that they can acquire a little bit of additional return, given where funding costs are actually now. The thing is that group of

sanguine investors do not include US home builders. They are increasingly content to sit this one out to see where the macroeconomy goes, as well as all of this stuff in commercial real estate: debt leverage, funding, financing, rollovers, all of that, delinquencies. Because at the end of the day, we're talking about cleaning up after a bubble. And historically speaking, the track record of each cleanup is not necessarily a good one. And so far as we've gone into this one, the initial returns are not returning much to even the top-rated structures of these financing arrangements. It's not just that interest rates are going down; the US Dollar exchange value is also going higher as other central banks around the world, at least, are cutting interest rates. Talked about that in the video link below. As always, thank you very much for joining me. Check out Yal University's webinar next Friday. Link in the description. Thank you to all Yal University's members and subscribers. And until next time, take care.

Oh Sh*t, AAA Debt Is Starting to Fail Again...

Monetary science reborn. Rediscovering the principles of currency. Putting central banks where they belong. Welcome to Eurodollar University, your place for all things modern money and monetary science. The YouTube channel for Jeff Snider, from here you can begin to investigate all the ways in which the global monetary system impacts you: economy, politics, investments and more.

Oh Sh*t, AAA Debt Is Starting to Fail Again...

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