Jon Winick is the CEO of Clark Street Capital
Editor’s Note: This guest post is an excerpt from the LightBox CRE Expert Predictions for 2024.
Disconnect between Sentiment and Reality
While the banking sector is experiencing significant challenges, the sentiment on the street is more negative than the reality. Yes, there is a storm coming in the lending sector, but it’s unclear whether it will be mild or severe. For banks with underwater securities or the need to raise capital, it won’t be easy and it may force them to lose their independence. The good news is that it’s coming at time where bank’s capital positions are quite strong. Most institutions will be able to navigate themselves to the other side.
The challenge is identifying how much influence banks have in mitigating the storm with respect to funding. The recent quarterly bank profile was somewhat encouraging from a funding standpoint, showing that banks’ margins actually grew.
How Today is Different from the GFC
We’re in a very different environment than the Great Financial Crisis when you had loans in which the properties were underwater, but the rates were low enough for borrowers to make payments on it. Today, it’s the opposite. The loan sale industry should be robust in 2024 and beyond because:
- Many sellers are now aware of the strong and diverse market for loan sales.
- Hold periods for substandard loans will be elongated due to the lack of credit.
- The cost of carrying bad paper is elevated.
- There is a need for liquidity.
In the near-term, interest rates will continue to be elevated until inflation is in the rear-view mirror or there is a recession, which will create its own set of issues. This idea that you are going to have a soft landing and rates will come down without a recession is very unlikely.
The best-case scenario is that consumer spending stays strong, the economy never enters a recession and inflation continues to come down and there is a gradual lowering of rates to the point that people feel like they can transact again.
The worst-case scenario is that rates stay elevated for so long that we enter a severe recession, fundamentals are stretched and the lenders are too battered from the stress of their own portfolios that they can’t put out enough money and we end up with another 2008.
It’s difficult to understand how banks can mitigate the potential hit to earnings next year. While it’s difficult to estimate a number, there certainly are going to be a number of banks that are unprofitable.