Workouts: Recovery's Downside

There's good news and bad news in the recovery. Fortunately, there's more of the first than the second.

By John Salustri

One of the oddest facts of the recent recession was that, as the economy once again gets back on its feet, the number of defaults is likely to increase. Interest rates, at historic lows for a historically long time, are once again inching up, a natural upshot of the return to fiscal normalcy. The downside, of course, is that real estate, as always, is lagging behind the national economy, and rising rates are going to put the squeeze on those investors who are holding adjustable-rate paper on still-under-performing assets—especially if they entered their plays highly leveraged. They're going to have to start paying the piper, and for those who come up short, defaults and the workouts they spawn are in the cards.

It's a sure bet that the number of workouts will blossom, and no expert we spoke with thought any differently. In fact, a few voiced surprise that more workouts were not already on the table. But they also agreed that the number of defaults will be marginal at best, for a number of reasons--all of them tied to the way the recovery plays itself out.