Commercial Loans and Fun Blog

Why Apartment Rents May Increase Sharply

Posted by George Blackburne on Sun, Jun 23, 2024

Screen Shot 2024-06-22 at 4.18.51 PMThe following excellent article was recently published on LinkedIn by Michael Comparato, President and Head of Commercial Real Estate at BSP/Franklin Templeton (NYSE: FBRT):

 

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Of the $6 trillion of outstanding commercial real estate (CRE) debt, approximately $3 trillion is held within our banking system. Of that $3 trillion, approximately 70% is with regional and community banks. 

There’s a reason why regional and community banks have all but stopped lending for the past 18 months.  It's not because things are good.  We are in the early days of a meaningful regional and community bank crisis, period, hard stop.

 

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And while the banking system represents approximately 50% of the overall CRE credit market, banks historically have represented a meaningfully higher percentage (70%?) of construction lending for multifamily assets. 

Are we dealing with an oversupply of multifamily in certain markets?  Yes.  But its a short-term oversupply.  Reminder, the US has had a chronic housing shortage for decades…and after “all” this supply comes online, guess what?  We’ll still have a multi-million unit housing shortage. 

 

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With banks on the sidelines, and staying there for the foreseeable future, supply is falling off a cliff. Multifamily starts are half of what they were a year ago.  They are only headed in one direction…down. 

2026, 2027, 2028 will go back to strong multifamily rent growth years because of the lack of supply.

 

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Topics: apartment shortage

The Hot New Term is Trading a Property

Posted by George Blackburne on Mon, Jun 17, 2024

During the Dot-Com craze, the hot new buzzword - the term the show-offs were using - was eyeballs.  This term referred to the number of visitors to your website.  The more eyeballs, the greater the traffic you were enjoying.

At the time, David-sized C-Loans.com, funded out-of-pocket by the Blackburne family, was competing against fifteen new commercial mortgage portals funded by Wall Street.  The Big Boys from New York were throwing millions at the space.  

No one seemed at all about concerned about closings.  It was all about eyeballs.  Me?  C-Loans had to actually close commercial loans so we could make payroll.  That real life requirement saved my business.

 

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I remember thinking to myself, "These guys are idiots.  They expect borrowers to spend four to five hours filling out these copious online forms before ever getting a real-life lender to say, 'Hey, we looked at your deal.  We are genuinely interested and think the loan will fly.'"  

Hey, Dummies, borrowers and brokers need feedback and encouragement!  When you use C-Loans.com, our online form takes just eight minutes to complete.  Within minutes, if your deal is do-able, hungry lenders will be chasing you with calls and emails. 

But if your commercial loan request is a dud, no one will call you.  You will get nothing but turndown emails.  But at least now you know.  You wasted no more than eight minutes.

 

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Dot-com stocks suddenly crashed.  The fifteen commercial mortgage portals competing against us suddenly had to show a profit.  Ha!  All fifteen competing portals had received at least $1 million in funding.  I doubt any of them ever closed a single deal.  

I remember thinking of that situation like it was a dark room full of giants, hacking and slashing at each other.  C-Loans was like a little person in that pitch black room, getting kneed and jostled by the giants, with no one paying any attention to us. 

Suddenly, the room was quiet.  "Hellooo?  I called out.  Anyone still alive out there?  They were all gone.  Probably $25 million in VC capital was burned up.  C-Loans.com went on to close well over 1,000 commercial real estate loans totaling over $1 billion.  We closed two large loans just this past week.

 


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Now on to trading, the new hot buzzword used by all of the Big Boys.   We traded this.  We traded that.

Surprisingly, it does not mean, in Big Boys slang, we exchanged this, or we exchanged that.  It simply means we sold this property.

Or it could mean that we financed this big property.  The aspiring Big Boys drop the term whenever they can.

 

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Your real estate license authorizes you to trade in real estate.

Simply put, trading in real estate is acting on behalf of a consumer or investor to buy or sell real property, which includes land and any dwellings attached to or included with the land, such as houses, apartment buildings, condominiums, commercial space and mobile homes. Trading also includes commercial leasing and commercial property management.

Trading does not include residential leasing and property management, selling time shares, businesses without land (like a mobile food truck), business equipment not including land (like hair salon furnishings), facilitating a new construction on already owned land and trailers or mini homes without land.

 

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Topics: trading a property

Iran Got Walloped.  Let's Celebrate!

Posted by George Blackburne on Mon, May 20, 2024

Iran is now out of the war.  Hooray!  Let's celebrate and have some fun.  Lots of memes today.

 

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World War III - The War of the Four Dictators - just lost a major combatant this month. Iran has been utterly humiliated and emasculated. Iran launched around 180 drones and 120 ballistic missiles at Israel in a massive attack designed to punish Israel for striking its embassy.  

Of the 120 ballistic missiles fired at Israel from Iran, the U.S. officials told CBS News only five got through Israeli and U.S. air defenses and hit Israeli territory. One U.S. official told CBS News that roughly half of their ballistic missiles failed on launch or crashed in flight.

 

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Do stock markets crash when they are
at all-time lows or at all-time highs?  Hmmm.

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The brilliant defense was not just a product of the Israel’s vaunted Iron Dome. Israeli F35i’s, their specially-modified F35’s, shot down dozens of drones and ballistic missiles while they were still hull down; i.e., below the horizon.

Israel was greatly aided by American warships, as well by missile batteries from Saudi Arabia, Jordan, and the United Arab Emigrates. Something like 94% of all of the 300 incoming airborne threats (including drones) were neutralized.

 

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Then Israel took its sweet ‘ole time in retaliating. For the first time, Israeli missiles struck targets on Iranian soil. The precedent has now been set. Iranian ground is no longer sacrosanct. If Iranian proxies attack Israel again, Israel’s retaliatory response may strike Iran proper again.  

Israel’s retaliatory attack was hilarious. Instead of attacking Iran’s precious nuclear missile factories, Israel simply struck the SAM sites guarding these facilities. These nuclear facilities are now defenseless.  It was as if Israel’s hero went over and kicked the shit out of the seven huge eunuchs guarding the Sultan’s harem… only to leave the pretty girls untouched. [Chuckle]

 

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Iran has been shown to be a paper tiger. The War of Four Dictators is now down to the remaining three of them.  It’s no wonder why the price of gold took a tumble (for about three weeks).

 

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Topics: Iran

The Interest Rate Was Too Low - You Should Have Known

Posted by George Blackburne on Wed, Apr 17, 2024

"Poop, poop, poop!" screamed the commercial mortgage broker, as he and his borrower suddenly realized that they had been scammed out of a $50,000 "application fee" by a con man masquerading as a direct commercial lender.

Let's examine today where this commercial mortgage broker went wrong, why he could end up getting sued by his client, and how he could lose his license when he cannot repay the $50,000 application fee, plus the $127,000 in legal fees run up by his client.

 

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The mistake that the commercial mortgage broker made was that the loan terms offered in the "commercial lender's" term sheet were too good.  This should have sent up a red flag.

The offer from the so-called lender was for a $6.5 million construction loan at 5.25%.  Hellooo?  Banks are paying 5.25% just for deposits today.  How could a bank possibly pay 5.25% for deposits, loan out money at 5.25%, absorb loan losses, pay for overhead, and then make a profit???

Is pot legal in your state?  Have you been smoking it?

 

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Perhaps this broker and this borrower were thinking that some special lender exists - maybe some mystery lender from New York or maybe even from overseas - which makes commercial real estate loans at really low interest rates.

Let's explore this possibility.  Let's suppose you manage the Saudi Sovereign Wealth Fund, and your orders are to win the best real estate loans in the United States.  You are authorized to keep dropping your interest rate until you win the deal.  Okaaay.  [Deep inhale.  This is good stuff, man.  Is it Hawaiian?  Haha!

Even if this were true, my question is this.  In light of the fact that residential mortgage rates today are around 7.25%, what is the name of competing bank or life company that is offering commercial loans at 5.5%?  Why would any lender drop their rate to 5.25%?

 

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There has to be a competing lender for the Saudi Sovereign Wealth Fund to lower its rate to 5.25%!  Otherwise, why wouldn't the Saudi's just make all the commercial real estate loans it wants at 7.0%?  After all, the Saudi's aren't giving their money away.

Please grasp the concept that there are only a handful of different types of commercial lenders.  They are, in the order of best to worst, (1) Life Companies; (2) Conduits (CMBS lenders); (3) Commercial Banks; (4) Credit Unions; and finally (5) Private Lenders (hard money).

Yes, there are some hedge funds which make commercial real estate loans; but these are just private "partnerships" looking to earn a very high interest rate and a big handful of points.  Loans from hedge funds are expensive.

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Each of these commercial lenders has to get the money they use to lend from somewhere.  After all, to be a commercial lender, you need money to lend.  Victims of application fee fraud always forget this.  To be a bona fide commercial lender, you need money to lend.  The question then become, where does this so-called lender get its money to lend?

Life companies (life insurance companies) get their money from life insurance premiums.  Conduits sell their completed loans into the bond market.  Banks and credit unions have depositors.  Hard money lenders raise their expensive money from wealthy private investors. 

So how on earth is the advance fee scammer going to raise money at 3% so he can lend it at 5.25%?  The idea doesn't make sense. 

 

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Bottom line:  If some strange "commercial lender" has issued a term sheet for a commercial loan, look at the interest rate he is offering.  Is it less than market?  If so, drop this crook like a hot potato.

 

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Topics: advance fee fraud

Advance Fee Scammer Pummeled Into a Bloody Mess

Posted by Tom Blackburne on Mon, Apr 15, 2024

I don't know if you heard about this, but last week a furious real estate developer stormed into the offices of an advance fee scammer in New Jersey.  The developer had just been scammed out a $200,000 "application fee."

The brawny developer pounded the face of the con man into bloody ground beef.  According to the paramedics, they could barely identify the face of the con man as human.

 

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Okay-okay, the above story never happened.  I just made it up to demonstrate a point.  The featured image of a pummeled person is actually just a "victim" wearing makeup.  Ha!  

But given the very real possibility of a beating, if you were an advance fee scammer, would you prominently display your actual office address?

Or would you simply use a P.O. Box?  Or perhaps - and I have definitely seen this before - would you provide no address on your website at all?  After all, who wants to to be pounded by an angry customer?

 

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The advance fee scamming industry is huge.  Developers and commercial real estate borrowers get conned out of millions of dollars in "good faith deposits" or "application fees" every year.

These con men issue term sheets for very attractive commercial real estate loans.  The borrowers, desperate for a loan, steal from their mother's grocery money jar, to raise the immense application fee required by the "lender." 

Once the money is in the hands of the grubby little con man, the "lender," of course, stops returning any phone calls and emails.  No loan is ever forthcoming.  It is all a con.

 

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Over the next few weeks, I hope to teach you other ways of these spotting these con men; but for now -

Any time a "lender" issues a term sheet with darned attractive terms, look at his website.  Does his website have a street address?  Does he even have an address at all?

"Danger, Will Robinson, danger!"  --  the Robot in the original Lost in Space TV series.

 

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Topics: advance fee fraud

When Einstein Spoke of God, He Mentioned Spinoza.  Who?

Posted by George Blackburne on Sun, Mar 17, 2024

Last week I blogged on whether Albert Einstein believed in God.  Einstein said, "I am fascinated by Spinoza's Pantheism."  Who???  A loyal blog reader, Tom Harrier, wrote and explained it to me.

God according to Baruch de Spinoza

When Einstein gave lectures at U.S. universities, the question students asked him most was: Do you believe in God? And he always answered: I believe in the God of Spinoza.

 

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Baruch de Spinoza was a Dutch philosopher considered one of the great rationalists of 17th century philosophy, along with Descartes.  According to Spinoza, God would say: “Stop praying. I want you to go out into the world and enjoy your life. I want you to sing, have fun and enjoy everything I've made for you."

“Stop going into those dark, cold temples that you built yourself and saying they are my house. My house is in the mountains, in the woods, rivers, lakes, beaches. That's where I live, and there I express my love for you."

“Stop blaming me for your miserable life; I never told you there was anything wrong with you or that you were a sinner or that your sexuality was a bad thing. Sex is a gift I have given you and with which you can express your love, your ecstasy, your joy. So don't blame me for everything that others made you believe."

 

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“Stop reading alleged sacred scriptures that have nothing to do with me. If you can't read me in a sunrise, in a landscape, in the look of your friends, in your son's eyes—you will find me in no book!"

“Stop asking me, ‘Will you tell me how to do my job?’ Stop being so scared of me. I do not judge you or criticize you, nor get angry or bothered. I am pure love."

“Stop asking for forgiveness, there's nothing to forgive. If I made you, I filled you with passions, limitations, pleasures, feelings, needs, inconsistencies, and best of all, free will. Why would I blame you if you respond to something I put in you? How could I punish you for being the way you are, if I'm the one who made you? Do you think I could create a place to burn all my children who behave badly for the rest of eternity? What kind of god would do that?"

 

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Reloaded

 

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“Respect your peers, and don't give what you don't want for yourself. All I ask is that you pay attention in your life—alertness is your guide."

“My beloved, this life is not a test, not a step on the way, not a rehearsal, not a prelude to paradise. This life is the only thing here and now—and it is all you need."

“I have set you absolutely free, no prizes or punishments, no sins or virtues, no one carries a marker, no one keeps a record.  You are absolutely free to create in your life. It’s you who creates heaven or hell."

 

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“Live as if there is nothing beyond this life, as if this is your only chance to enjoy, to love, to exist. Then you will have enjoyed the opportunity I gave you. And if there is an afterlife, rest assured that I won't ask if you behaved right or wrong, I'll ask, ‘Did you like it? Did you have fun? What did you enjoy the most? What did you learn?’"

“Stop believing in me; believing is assuming, guessing, imagining. I don't want you to believe in me, I want you to believe in you. I want you to feel me in you when you kiss your beloved, when you tuck in your little girl, when you caress your dog, when you bathe in the sea."

“Stop praising me. What kind of egomaniac God do you think I am? I'm bored with being praised. I'm tired of being thanked. Feeling grateful? Prove it by taking care of yourself, your health, your relationships, the world. Express your joy! That's the way to praise me."

 

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“Stop complicating things and repeating as a parrot what you've been taught about me. Why do you need more miracles? So many explanations?
“The only thing for sure is that you are here, that you are alive, that this world is full of wonders.”

The above is what Albert Einstein believed.

For myself, I will keep praying and thanking God for this beautiful world and this wonderful life, with my lovely wife of 40 years and my three great kids.  I will continue to beg Jesus, in whom I believe, to please forgive me and advocate for me when it ends.  Heaven knows I am an unworthy bum.  :-/

 

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Topics: Spinoza

Did Einstein Believe in God?

Posted by George Blackburne on Thu, Mar 14, 2024

Albert Einstein was once asked if he believed in God.  His answer was interesting:

 

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"I am not an Atheist. I do not know if I can define myself as a Pantheist. The problem involved is too vast for our limited minds. May I do not reply with a parable?

The human mind, no matter how highly trained, cannot grasp the universe. We are in the position of a little child, entering a huge library whose walls are covered to the ceiling with books in many different tongues.

The child knows that someone must have written those books. It does not know who or how. It does not understand the languages in which they are written."

 

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"The child notes a definite plan in the arrangement of the books, a mysterious order, which it does not comprehend, but only dimly suspects. That, it seems to me, is the attitude of the human mind, even the greatest and most cultured, toward God.

We see a universe marvelously arranged, obeying certain laws, but we understand the laws only dimly. Our limited minds cannot grasp the mysterious force that sways the constellations. 

I am fascinated by Spinoza's Pantheism. I admire even more his contributions to modern thought. Spinoza is the greatest of modern philosophers because he is the first philosopher who deals with the soul and the body as one, not as two separate things."

 

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-- Albert Einstein (1879-1955), as mentioned in Glimpses of the Great by G. S. Viereck (1930), paraphrased in Walter Isaacsson's Einstein: His Life and Universe

 

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Topics: Einstein and Commercial Loans

What Happened to New York Community Bank?

Posted by George Blackburne on Fri, Mar 8, 2024

I saw this analysis on LinkedIn or X recently, so I thought I'd share.  I can't find the author again to give him credit.  Sorry.


 

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What happened to NY Community Bank yesterday? The stock was $10 in January, yesterday it dropped below $2 (an 80% drop from January). An investor group led by former Trump Treasury Secretary Steve Mnuchin injected $1B of capital, removed all legacy board members, and replaced the CEO Allesandro DiNello (who had the job less than a week) with Joseph Otting, former head of the OCC. The stock popped back up to ~$4 on the news.

This is a $100B bank, not some mom-and-pop shop. It's turning into a convention of ex-government officials too.

Plus, this isn't Mnuchin's first rodeo rescuing a failing bank. In 2009, with an FDIC assist, he swooped in and bought IndyMac. He eventually made hundreds of millions when he sold IndyMac to CIT Group. Which leads to the question: Why did this happen?

 

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NYCB bought Flagstar in 2022. Flagstar has an excellent mortgage servicing platform with about $300B in loan servicing. This has a high value and can be sold; but if I'm understanding this correctly (please chime in if I'm misinformed), the fact that Moody's downgraded NYCB to below-investment-grade significantly limits their capital market flexibility.

Without an investment grade credit rating, banks aren't allowed to hold escrow balances for conventional or government loans. If that's true, I think they have to sell the Flagstar loan servicing business.

And why did they get downgraded?

 

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NYCB's big problem is its $40B multifamily CRE portfolio, made up mostly of rent-controlled apartments. In 2019, Governor Kathy Hochul signed the Housing Stability and Tenant Protection Act (HSTPA) into law. Per Chris Whalen, "...all banks in New York that hold rent stabilized assets on the books are now considered impaired... several banks in New York City may fail as a result."

What did this rent control law do that is so onerous?

Well, I think the gist of it is this: if a renter leaves an apartment, the landlord has no right - no right - to raise the rent on that apartment for a new tenant more than 2%. The law prior to 2019 was a max 20% increase.

 

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This law dis-incentivizes landlords from investing any capital to improve the look and feel of apartment buildings. They will just sit there and deteriorate, and drop in value.

Think about it: why would you put any money into an existing building if you can't pass on the expense into higher rents to new tenants? It's not worth it.

So it's a Law of Unintended Consequences situation. A law passed to benefit renters will slowly deteriorate living standards for renters. Investors will sell and leave NYC and move to a location where they have the freedom to pursue profits.

 

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Puts the whole NYCB / Signature Bank situation in a new light, right?

 

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Topics: New York Rent Control

The Very Scary Bear Case For Multifamily and Apartment Loans

Posted by George Blackburne on Sat, Feb 17, 2024

I didn't write this article.  I found it on LinkedIn, and I am reposting it here, with the author's permission.


It took me a really long time to truly understand liquidity when it comes to investments. It's not just about cash balances in the bank, but about the ability and willingness to transact.

According to MSCI, apartment/multifamily sales volume fell to $119 billion last year, a 61% drop from 2022. That shows a lack of liquidity in a market which recently saw as much as $300B of volume in 2021/22.

 

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To put that into perspective, the coming maturity wall (which has gotten worse with extensions, by the way) is up to over $900B. Let's assume that multifamily makes up the same % of this volume as it does CMBS, which is about 35% (this would be a hypothetical assumption in an appraisal). That would mean ~$315B of multifamily loans are to mature in 2024, and assuming a 65% LTV, that's about $450B in estimated value of multifamily assets maturing.

Right now, cap rates AND interest rates are significantly higher than they were for nearly all of these maturing loans at origination, and many do not qualify for a new loan at "market" terms. If only 50% of that maturing loan volume needs to trade via sale, that would mean that transaction volumes would need to double in 2024 to work through the backlog, without even accounting for everyday sales like those caused by 1031, death, divorce, or disaster.

When you have a rush of inventory and folks looking for the exit, that's when prices really drop due to lack of liquidity. I think that this is the single biggest risk in CRE today, especially given the new data on 2024 maturities increasing nearly 50%. I am not personally confident that cap rates and interest rates can or will drop in time to avoid this type of outcome.

 

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Calling in sick-1

 

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How can an asset owner avoid being burned by this? Buy cash flowing assets from day 1 (hard in this environment), don't take on maximum leverage, and build or maintain cash reserves that would enable you to refinance at current market interest rates and leverage. It may not be the most efficient way to run a business, but being in real estate investing is not a finite game.


Written by Dillon Freeman, LBC Capital - 818-648-9470

Dillon Freeman


You need to follow me on LinkedIn.  I am posting important news daily.  I posted this yesterday:

Russia may have placed nuclear EMP devices in space over the U.S. If exploded 75 miles above, almost every electric device in the country would be fried. Most of us would die in 18 months from starvation, disease, and crime.  Our National Security Advisor is... "quite concerned."  (Folks, he is freaking out.)

 

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Topics: apartment loans

Mad Cow Disease in Humans

Posted by George Blackburne on Fri, Feb 2, 2024

The United Kingdom has recently reported increasing cases of humans dying of Mad Cow Disease.  In humans, the disease is called Creutzfeldt-Jakob disease (CJD).

 

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Creutzfeldt-Jakob Disease (CJD) is a devastating brain disorder that manifests in rapid progression, causing distinct alterations in brain tissue and severely impacting muscle coordination, cognitive abilities, and memory.  With an estimated annual incidence of approximately 350 cases in the United States, CJD remains a significant concern in the field of neurology.

Abnormal proteins called prions accumulate in the brain, causing irreversible damage and impairing the normal functioning of neurons. This disruption in neural activity results in the characteristic symptoms of CJD, including difficulty with muscle coordination, confusion, memory loss, and changes in behavior.

One of the most distressing aspects of CJD is its rapid progression. Unlike other neurodegenerative disorders, this condition swiftly advances.  Complete dementia usually occurs by the sixth month, and death follows quickly.

 

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Do any of you old football fans remember Lyle Alzado?  He was a 6'5" defensive end for the Oakland Raiders in the late 1980's.  He was a monster who couldn't be stopped.

Alzado took human growth hormone injections in order to get even bigger.  The problem was that the hormone was taken from cows, and many of them were infected with Mad Cow Disease.  

Alzado contracted CJD and was dead within a year.  I remember that he came on a talk show with his brand new bride.  She had to do most of the talking because he was already losing it.  They explained that there was no cure for these horrible prions.  Despite being newly-wed, he was a dead man walking.  It was pretty sad because she clearly loved him.  

 

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The thing about prions is that you can't kill them.  They are not alive - not even in the sense of a virus.  They are merely a protein that twists to the right rather than to the left.  (Gross oversimplification.)

Apparently "twisting to the right" is what "all the cool kids are doing," so if a prion-infected brain cells rests next to a healthy cell, the healthy cell twists to the right too.  Each time brain cells multiply, the infected cells touch even more healthy cells.  Soon everyone gets Reefer Madness.  (Haha!  From an anti-marijuana movie in my school days.)

CJD is very difficult to treat, but if you catch it earlier enough, surgeons can carve out a huge chunk of your brain.  You're left severely impaired, but at least you're alive   (as saliva drips down my chin.)

 

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The hospital has to throw away the surgical instruments because no amount of heating or chemical treatment can "kill" the prion.  You can cook them at 600 degrees, but it doesn't help.  The next patient that falls under that particular knife dies of CJD.

The use of human growth hormone continues to this day.  My precious Cisca and I were considering using it on my shortest child, but she talked me out of it.  "Let them experiment on someone else's child."  

Three years later, we read that every child - about 250 of them - that got human growth hormones injections died.  Yup.  I know.  I have a very smart and wonderful wife.

 

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Anyway, a lot of old people are dying in Britain right now from what is originally diagnosed as Alzheimers, but which is in fact CJD.  

If you are exposed to CJD as an adult, when your brain cells are growing more slowly, you can sometimes live with CDJ for decades.  These folks in Britain who are being incorrectly diagnosed as Alzheimer's victims are actually victims of CJD.  They probably got it from eating contaminated beef.  Fortunately this is not terribly common.

You will recall that, almost 20 years ago, British cows were being fed bone meal made from cows who had collapsed from Mad Cow Disease.

 

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Topics: Mad Cow Disease