Landmark Links March 25th – Chain Reaction

Lead Story: Widespread rent and mortgage abatement has been in the news lately for good reason.  The economy is in a deep freeze and layoffs are accelerating, meaning that less people have the ability to make rent and mortgage payments.  However, the way that this is being dealt with risks creating a domino effect if the problem isn’t dealt with in a holistic – rather than piecemeal manner.  For example, let’s say that a city, state or entire country announces that rents cannot be collected for 90 days due to the economic shutdown.  This helps out renters greatly but creates a larger problem down the road because it will lead to mass defaults from apartment landlords who are now responsible for the full expense of operating a building and paying its mortgage while income drops to zero.  At the same time, if mortgage payments are abated for the same landlords who now can’t collect rent, the lender (typically bond investors who are pension funds, etc) is now short of the income that they need to pay their obligations to their beneficiaries or investors.  The exact same scenario applies to home owners if mortgage payments are abated for a period of time, albeit with one less layer of complexity.

The modern financial world is at strange and complicated place.  The days of a bank taking deposits and lending at a higher rate than they pay their depositors are long gone.  Its been replaced with layers upon layers of financial complexity and additional counterparties.  This is why any solution to cover rent/mortgage payments for a period of time has to deal with the entire borrowing and lending chain clearly – to do otherwise makes even more of a mess of an already confusing system.  Someone always pays the ultimate bill, whether its landlords, lenders, or pension funds (eventually tax payers).  Of course, the easiest way to do this is to still mandate rent and mortgage abatements and include provisions that extend loan terms out by the same amount of time as that being abated so not to short lenders on interest (loans guaranteed by Freddie and Fannie and the FHA – who insure the majority of residential mortgages – can do this – otherwise it gets difficult) .  This requires a fair amount of agency coordination but is well worth it to ensure that no one gets stuck in the middle between warring interests.

What I’m Reading: 

Out on an Island: Noted contrarian Chris Thornberg of Beacon Economics isn’t forecasting a recession just yet, even as most of his contemporaries argue that we are already in one.  I’m posting this because Thornberg has been right far more often than not over the past 20 years or so and alternative viewpoints from credible sources are always valuable at a juncture such as this. (h/t Steve Sims)

Grave Dancer: Billionaire real estate contrarian Sam Zell has been sitting on the sidelines and hoarding dry powder for years.  This could be the moment he’s been waiting for to put it to work.

Eye of the Storm: Apartment landlords are preparing themselves for unpaid rent.

Grounded: US domestic passenger flights could be shut down in short order – either voluntarily, or by government order as airlines struggle to attract any passengers.

Coming Home To Roost: Financial engineering via collateralized loan obligations or CLOs made a diversified set of risky loans seem safe.  Then everything crashed at exactly the same time.

Chart of the Day

The dollar is having a hell of a run.

Source: The Daily Shot

WTF Link of the Day

Bending Over Backwards: New York City’s Department of Health issued a warning telling people not to lick each other’s buttholes in order to avoid getting the coronavirus.

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