TBL Thinks: CRE Fraud & Chinese Hackers

Jul 12, 2024

Dear Readers,

It’s Thinking time. This week we learn about more troubles in commercial real estate, the boom in US airline travel, and a powerful Chinese hacking group.

TBL Thinks is our way to summarize the most important paywalled, longer reads relevant to global macroeconomics, helping you cut through the noise. With that in mind, please enjoy.

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Commercial Real Estate Continues to Struggle

Property Fraud Allegations Snowball as Commercial Real-Estate Values Fall (WSJ) US prosecutors are cracking down on commercial mortgage fraud—according to regulators and federal prosecutors, property loans based on doctored building financials and valuations have been rising. The fraudulent schemes are now coming more to light with the drop in property values cased by higher rates and a rise in defaults.
Lenders usually take a hands-off approach when it comes to assessing a building’s value, and are often reluctant to antagonize landlords with expensive and time-consuming auditing of the books.
At the heart of the problem is the way lenders underwrite commercial mortgages—borrowers typically must have financial statements showing building income and expenses for the past year. Lenders use these documents to assess how much they are willing to lend. The trouble arises when these statements are not verified to ensure that the inflow and outflow of monies actually took place in the landlord’s account.
Government-backed mortgage enterprises Fannie Mae and Freddie Mac are cracking down on questionable practices in their rental-apartment lending business, and are blacklisting brokers at several firms for fraud.
Landlords have an incentive to come up with inflated building profits so that they can land bigger loans, and lenders often have an incentive to accept these inflated numbers, especially if they plan to repackage the loan and sell it off to investors. Bigger loans mean bigger fees.
There are some regional banks and potentially global ones with bad exposure here. We’ll continue to dig, but sometimes, a slow disclosure of trouble via the Wall Street Journal is the best we have—same thing happened throughout 2007 as the housing crisis and MBS crisis picked up.

Surge in Travelers Passing Through the US

Daily Travelers Passing Through US Airport Security Top 3 Million for First Time (WSJ) July 4th weekend marked the first time ever that more than three million people passed through US airport security, setting another daily record as summer travel surges.
Cheaper flights, a stronger dollar, and younger people eager to vacation are some of the reasons behind the busiest air-travel days on record. Screened traveler on July 4 were up 14% from the same day last year.
The travel boom of this summer boasts of seven of ten of the busiest air-travel days in the history of TSA, between May 23 and June 27.
If a rise in unemployment causes a slowdown of the consumer, the airline industry certainly hasn’t felt it yet. In a recession, how far might these numbers fall, and are TSA numbers even a good economic indicator? We have no idea, but it’s a good thought exercise.

Free White United Airlines Plane Stock Photo

Allies Issue Warning on Chinese Hacking Group

US Allies Issue Rare Warning on Chinese Hacking Group (WSJ) Australia, US, and six other allies issued a warning that a Chinese state-sponsored hacking group poses a threat to their networks.
This warning was a rare instance where US and its allies sounded an alarm on China’s cyber activity. Australia led the advisory, and was joined by US, UK, Canada, and New Zealand—the five countries are part of an intelligence-sharing group known as the Five Eyes. Germany, South Korea and Japan also signed on in attributing malicious cyber activity to China.
The advisory detailed a group called Advanced Persistent Threat 40, or APT40, which conducts cybersecurity operations for China’s Ministry of State Security and is based out of a southern island province of Hainan.
In response, China accused the US and its allies of hyping China’s cyber activities as a bid to smear Beijing and to distract from Washington’s efforts to engage in surveillance and espionage worldwide.
There has been growing public criticism for Beijing in recent months—in March the US hit alleged Chinese hackers with more sanctions and criminal charges; the UK accused Beijing of hacking into its electoral register; and officials in New Zealand accused APT40 of a cyberattack on the parliament’s network in August 2021.
Does the relationship between the US and China really feel like it’s improving, especially heading into November? We think not.

Free A Man Looking at a Computer Screen with Data Stock Photo

Until next time,

TBL Thinks