GlobeSt.com: So Tim, you think people are joining thepositivity train a little early?

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Mazzetti: There's a significant amount of distressin commercial real estate. If it doesn't look not as bad now, it'sbecause the government has done a lot to kick the can down theroad, to prevent the banks from failing in larger numbers, bychanging the rules of the game. For example, in an October 2009edict, banks can take a loan that cannot be refinanced, where theunderlying property may be worth half of the outstanding loanamount, and can extend it and call it a "performing" loan withouthaving to take a charge to their core capital so long as the cashflow from the property covers the debt service payments. Thispractice cannot go on indefinitely.

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GlobeSt.com: What's your view of today's real estatefinancial picture?

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Mazzetti: My personal view is that none of this isgood for the industry or the economy. There's still a huge amountof overleverage still throughout the system. With CMBS we'reexperiencing trouble in record numbers. As of the end of April, theamount of loans in special servicing crested 10%, with $80 billionin defaults, and the latest report is that 7% CMBS delinquencies isalso a record. Most people anticipate that delinquency number willcrest 10%.Then add what's going on with banks, it's pretty bleak,regardless of the government's footsies game, it's still going toget a lot worse. There's still a lot of pressure onincome-producing commercial real estate, a lot of rewrites ofoffice and industrial leases. Multifamily may have hit bottom. Allthese small community banks have toxic balance sheets, withnon-performing loans, and they aren't in a position to make newloans to small businesses, which make the jobs that drive realestate.

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GlobeSt.com: So you think there needs to be a harder lookat a long-term fix, rather than short-term happiness?

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Mazzetti: Exactly. If you look what happened backin the old days when the RTC was created, they took the bull by thehorns and closed 1,000 banks over a five-year period. This allowedthe natural bottom to be found, to work itself through, and gotassets back to the private sector. Then, the CMBS became the lenderof all the smaller C- and D-class assets.However, now with allthese troubled assets out there, and CMBS likely to crest at $100billion delinquent, it doesn't even compare to the hundreds ofbillions of dollars worth of assets clogging small regional banks.We have to wash this stuff out of the system. We've got someserious issues. We need to become more fiscally conservative,there's no such thing as too big to fail. If you're not performing,you should die, and allow the stronger ones to pick up the pieces.That's not happening with us or the rest of the world, and of thebig macro economic problems of the world, real estate is just onepiece.

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GlobeSt.com: Well, some would say that forcing failurewould drive us back into a recession. Do you thing the governmentis doing the right thing?

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Mazzetti: It's true that on a macro level, in thefall of 2008 when Fannie and Freddie and Merrill and all of themwere imploding, the government did what it had to do to avertglobal financial meltdown. The Fed can't even shut down all thebanks that it should, it would knock the fragile economy backagain. And there is movement - about 140 banks were shut down in2009, and they've shut down about 70 banks so far this year, andwill likely hit 200 closures by the end of 2010. But the banks aretelling me that they have regulators all over them not allowingthem to make loans. If there's no lending, how are we going todrive a healthy economy?The problem is that we all know thegovernment has no discipline to know when to pull back. This slightrecovery that we're experiencing is still weak, with no jobscreated, and then you have the question of are we going to be backin trouble again when the $1.5 trillion in loans come due betweennow and 2017.

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GlobeSt.com: Do you have any fixes that you canpropose?

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Mazzetti: Well, it's not that simple. You have tolook at some of the wide-angle causes, like a macro look at jobloss. Look at the comparisons to the lost decade of Japan in the1990s, we've already experienced our "lost decade." At the end of2009, we had the same number of jobs that we had at the end of1999, despite that we added tens of millions to our population.We've lost more than eight million jobs. The only jobs we've gainedwere created by the government and unions, which are on average payalmost 50% more than the private sector. If you look at the 40states that are running a deficit, at least 26 of them could be inthe black today if we could reduce union and state jobs to privatesector wages. You can't just solve answers for real estate withoutalso looking at needs for the macro economy.

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GlobeSt.com: What's your prediction for the nextthree-to-five years?

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Mazzetti: My crystal ball is cloudy, and there's alot of questions to answer. It's now a dysfunctional market. Youhave well positioned Class A properties selling with plenty ofcapital loans available, but those assets only represent 10-20% ofreal estate. What about the other 80%?Then look at lending that'savailable. More than $500 billion needs to be refinanced every yearfor the next few years. We hit that in the go-go days of themid-2000s, but we know that doesn't make sense right now.Historically we've only financed about $300 billion to $400 billiona year. And now you have CMBS basically dormant, there's stillsignificant obstacles to CMBS coming back. The life companiesaveraged up to $35 billion, banks did up to $200 billion andFannie-Freddie picked up an average of $70 billion.The problem islife insurance firms in 2009 only did about $15 billion,Fannie-Freddie have tightened up, banks are cutting back on lendingsignificantly...that $300 billion we did historically is now abouthalf that...who's going to make up the difference?Until banksdetoxify their balance sheets and allow assets to find the bottom,and buyers start to have confidence that they're not going to betrying to catch a falling knife, you're not going to have a healthymarket. My crystal ball only shows that we will be bouncing alongthe bottom for quite some time.

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