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| Elon Musk Warns of Impending Crisis in Commercial Real Estate and Mortgages |
Serial entrepreneur and billionaire Elon Musk has warned of an impending crisis in the financial system and economy due to commercial real estate debt and mortgages. Musk's warning follows the recent banking crisis caused by the sudden collapse of Silicon Valley Bank (SVB) in early March. Unlike the 2008 financial crisis, the current crisis is not related to the quality of banks' assets, but the risk associated with interest rates. Banks like SVB bought Treasury bonds and mortgage-backed securities when interest rates were near zero, and the risk of interest rates rising was high. As a result, the value of SVB's portfolio of assets declined, causing a loss of $1.8 billion and a run on the bank.
Musk's warning comes as data reveals that over the next five years, more than $2.5 trillion in commercial real estate debt will mature. Rates have more than doubled, and commercial real estate is only 60-70% occupied. Refinancing these loans will be incredibly expensive and likely lead to the next major crisis. The worst part is that 70% of commercial real estate loans are owned by small banks. In addition, residential mortgages must be added to this, making the situation even more critical.
Rising interest rates have made payments on almost all loans more expensive. In commercial real estate, many borrowers with variable interest rates have already seen their monthly payments soar. To continue to make their loan payments, they must tap into their cash flows. As for the borrowers whose rates are fixed, the bill will soar when they have to refinance. Most loans in commercial real estate have been made by banks with less than $250 billion in assets, and many experts fear that many borrowers will default, leading to a huge problem for smaller banks.
Experts suggest that the U.S. banking system's market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all banks, with the bottom 5th percentile experiencing a decline of 20%. Musk believes that commercial real estate debt and mortgages pose the most serious looming issue, and the regulators must take steps to prevent a collapse of the financial system.
