Real estate billionaire Barrack says commercial mortgages on brink of collapse

[NEW YORK] Real estate billionaire Tom Barrack said the US commercial-mortgage market is on the brink of collapse and predicted a "domino effect" of catastrophic economic consequences if banks and government don't take prompt action to keep borrowers from defaulting.

Mr Barrack, chairman and chief executive officer of Colony Capital Inc, warns in a white paper of a chain reaction of margin calls, mass foreclosures, evictions and, potentially, bank failures due to the coronavirus pandemic and consequent shutdown of much of the US economy. The paper was posted late Sunday on online publishing platform Medium.

"Loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and home owners, landlords, developers, hotel operators and their respective tenants and employees," he wrote.

Mr Barrack said the impact could dwarf that of the Great Depression.

Rescue Plan

Specifically, his paper highlights the fragility of mortgage real estate investment trusts, or REITs, and credit funds and the lenders that provide them with liquidity via repurchase financing. He argues for a rescue plan coordinated by banks and supported by government that includes the following:

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US$500 billion of taxpayer funds to provide liquidity to the financial system, including for loans and repurchase contract

Temporary suspensions of both mark-to-market accounting and certain loan-modification rules

Delaying until 2024 a new accounting rule governing the recognition of credit losses

Leeway for banks to provide loan forbearance without triggering bank-capital rule violations

Mr Barrack, a longtime friend of President Donald Trump, has much at stake in the outcome. Most of Colony's investments are in or connected to real estate. The Los Angeles-based firm's year-end financial report lists US$3.54 billion of assets in hospitality real estate and US$725 million of debt and equity investments at Colony Credit Real Estate Inc, its publicly traded commercial mortgage REIT.

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