The Snowball at the Top

Anybody remember what got this whole, economic avalanche going? Remember resets? You know, when adjustable-rate mortgages make their adjustments, and borrowers suddenly find they have to make real payments instead of the Monopoly money payments they've been making? It's why people blame this malaise on "sub-prime" borrowers (as opposed to blaming, say, the folks who convinced people to lend the money in the first place by telling them the borrowers were prime; but I digress).

We had a big pile of resets in 2007, and the wheels promptly fell off the wagon. Nobody's mentioning that Round 2 is coming up, though. Starting in April, there will be large numbers of resets that will run to the end of 2011. First the Prime ARMs take off, then the Agency and Option ARMs. Unlike Round 1, there are effectively no Sub-Primes in these resets. Some people think that makes it better. I think it makes things worse.

First, the chief problem Round 1 uncovered was that everything seemed to have been misclassified. Sub-Prime was everywhere, packaged as Prime, and nothing was worth what everyone had thought it was worth. Now we shall have the supposed "really good loans" resetting, and the question everyone should be asking is, "How many of them will prove to be garbage?" And when more gold turns to garbage, how much more confidence will drain out of the markets?

Second, when Round 1 happened, it was just the US. This time the rest of the world has already has already been sucked in. There's no way to get out and ship your investments to a safe haven.

Third, counter-measures have already been exhausted. With Round 1, we still had room to maneuver. Since then, capital markets have collapsed, rates have been slashed, debt has ballooned, and the US alone is hemorrhaging a half-million jobs per month.

Fasten your seatbelts, it's going to be a bumpy ride. And yes, I know she said "bumpy night" in the movie.

Learn from your Mistakes or Repeat Them

I often find myself wondering if there's anyone driving this bus.  First, in spite of completely failing to get Craig Mecham off the dime with his Sugar House pit, Salt Lake City has greenlighted Red Mountain Retail Group's mixed use redevelopment of the rest of that block and the one adjacent.  I'm no fan of the Granite Furniture Warehouse, but we don't exactly need another chain-linked hole in the ground on that block.  The City says this one is different because Red Mountain has all its financing in place.  Yeah, right.  Mecham said the same thing.  So did General Growth Properties with the Cottonwood Mall.  Show me the money.

Meanwhile, on the South End Sand Pile, R&B SunCrest has walked out of negotiations to take over the SunCrest development, claiming Draper is not acting in good faith.  What that really means is that Draper, to the shock of everyone, is not rolling over, taking R&B and Zions Bank off the hook, and agreeing to stick the already thoroughly ripped off citizens of Draper with the entire bill to fix that mess.  Bully for Draper.  Unfortunately, Draper has done little if anything to change the ordinances and procedures that made SunCrest possible in the first place, so it continues to permit time bombs and will be crisis hopping for awhile.

As an aside, I have to wonder about Zions Bank.  As a result of the SunCrest collapse, Zions ordered Draper to close its accounts and find another bank.  That's the sort of "take your ball and go home" behavior one expects on a playground, not from a major financial player.  It could be a blessing in disguise for Draper, though.  Zions has taken some serious hits in the last year, from having to pull off-book garbage back onto its books to having to take over busted banks at the FDIC's "request" to seizing crap collateral like SunCrest.  There's only so much that any business can absorb.  Maybe it's good that Draper moves on.

It Isn't Just a Residential Crisis

There's been a lot of noise about the housing market, bad mortgages, and banks failing as a result. People haven't been paying as much attention to the next real estate tsunami: commercial loans. The retail failures and dark spaces have been chipping away at commercial, though, and now it can't be ignored. The state seized commercial development lender MagnetBank Friday. If that isn't bad enough, the FDIC is having to eat this one because it can't find a buyer. What does that mean? Game over. In spite of the bailout money, no other bank could be convinced to buy in. The commerical picture is that grim. And what does that say about the effect the downtown mall and office buildings will have on the market? Or the odds of completing Cottonwood, Valley Fair, Sugarhouse, or the downtown Ogden projects? Or of filling the growing collection empty, faux-Tuscan commercial buildings that have sprouted up everywhere? There will be blood.