The Seattle Times reports today defaulted commercial loans are hitting local lender P&Ls. The commercial loan default wave is barley news worthy at this point. A number of local banks have been hit with cease and desist letters from the Feds in recent weeks. What’s interesting is that Seattle-Bellevue-Everett metro had the nation’s highest delinquency rate for construction and land loans in the second quarter of this year. I don’t think you can blame the developers, at least not all of them. Clearly lenders have been reckless in their evaluation of project viability and employment of funds held in their trust. When a lender approves a deal based on pro forma development costs and income with no basis in reality, backed by other projects from the same developer that are also based on blue sky pro forma income, at some point someone needs ask hard questions or put on the breaks. But no one did. Why is that? It’s way more fun to just make deals and get paid. No one wants to be accused of being a deal breaker. Plus, if your favorite developer is in obvious trouble, or is clearly cooking the books, that next loan may be all it takes to pull out of the tail spin. Right? Well, it sure doesn’t look like now.

The Mastro “friends and family” investor debacle grinds on. Does anyone have a clue how many other friends and family of other developers are in line for the big burn on limited liability company investments here in Washington State, regionally or nationally? Between your mom and pop developers, syndicators, 1031 exchange partnership members, and REITs, all of whom have heavily leveraged the savings of their investors, there is still a lot of blood being spilt with no tourniquet in sight. Some investors were well disclosed; most not creating a real liability issue for the sponsors. As a side question, why isn’t security law compliance part of the due diligence on a commercial loan application when it should be obvious based on a surface examination of the entity closing the loan that investor funds are at risk? I think a close examination would show that security law violations have been flagrant and widespread in the past decade locally and nationally. Which gets us back to the problem of today’s defaulted commercial loans – as long as the rising tide is lifting boats, no need to ask hard questions or disclose uncomfortable realities. A couple years ago everyone’s financial statements in these deals looked like rock stars. Now you have projects and partnerships in default and foreclosure with no end in sight. Lost are deferred salaries, retirement plans, college education funds, and saving. Despite the continuing reports that the economy is recovering, I think we have a very long, long way to go before all the trouble commercial assets shake out of the system. And the analysis didn’t take an economics degree to figure out in the first place. Assigning unrealistic cap rates to nonexistent income on marginalized deals based on beating the next guy to market never made much sense to me. I guess no one wants to be accused of being a deal killer or having a bad attitude. So scratch that. That’s all for now.