From a small northwestern observatory…

Great talk Wednesday at the Collateral Risk Network conference in DC. One-hundred or so in attendance, representing a great cross-section of stakeholders in mortgage collateral valuation, including some very senior folks from most of the Federal regulators. I spoke for an hour on the impacts of the Gulf Oil Spill on loan portfolios (current and future) in the affected region.

The news, by the way, isn’t very good. For starters, the property value losses are in the billions. While much of this will be compensable to the property owners, little is being done to the holders of the mortgages (banks, mostly). For example, assume a waterfront property in Louisiana valued at $500,000 before the oil spill. Today, it’s worth half that — $250,000. The property owner turns in a claim (which may be paid, or more likely at that level will need to be litigated). Even if the claim is paid, the property is still worth only $250,000. Now, what if before the spill event, the owner had taken out an 80% loan — $400,000. The bank is now sitting on a $400,000 loan collateralized by a $250,000 property.

In most circumstances, the property owners will continue to make payments, and the loans will be paid in full. However, if history tells us anything, a significant number of these loans will end up badly.

In the immediate, the lenders in the area are basically frozen. Anecdotal evidence coming in from the region indicates lenders are not lending, and even existing loan commitments are being cancelled. This has wide-ranging economic problems, not just for borrowers and lenders, but secondarily for a whole host of market participants (builders and brokers near the top of that list).

On that theme, I’m headed for Louisiana in a few days, with meeting scheduled on a variety of issues (some of them, oil spill related). As usual, I’ll keep you all posted.