Bailout Panel Cites Commercial Real Estate Danger

Bailout watchdog: Billions in commercial real estate losses could threaten banks and economy

By DANIEL WAGNER AP Business Writer
WASHINGTON February 11, 2010 (AP)

Over the next several years, failed commercial real estate loans could litter American cities with empty stores and office complexes, cause hundreds of bank failures and weaken the economy, a watchdog report says.

Banks face up to $300 billion in losses on loans made for commercial property and development, according to a report released Thursday by the Congressional Oversight Panel. The panel monitors the government's efforts to stabilize the financial system.

The report says the defaults could lead to reduced lending and cause the eviction of families from rental properties. Bank failures also could contribute to job losses and hurt the economic recovery.

Smaller banks are more vulnerable to the losses than their larger Wall Street counterparts. That's because commercial real estate makes up a larger portion of their portfolio.

The Federal Deposit Insurance Corp., which manages bank failures and insures deposits, is under stress that will intensify over the next few years, panel chairwoman Elizabeth Warren said in a call with reporters.

Small- and mid-size banks have been failing at the fastest rate since the savings and loan crisis of the 1980s and 1990s. The failures are due mostly to bad loans they made for commercial projects.

Banks often lent too much for land and buildings whose prices were inflated by a real estate bubble. They also relied on rosy assumptions about the profitability of retail and office projects and did not consider the possibility of a severe recession.

Commercial property values have fallen more than 40 percent in the past three years, the report notes.

Some have been unable to pay the loans. Others have stopped paying because they now owe more than the properties are worth. Losses are mounting for banks, more of which will close. That could spell trouble for the economic recovery, said Warren, a Harvard law professor.

"If hundreds more community banks go under, the effect would be to ... dump sand in the gears of the economic recovery," she said.

(02-11-2010 03:48 PM)SumOfAllFears Wrote:  "If hundreds more community banks go under, the effect would be to ... dump sand in the gears of the economic recovery," she said.

I fixed that for ol' Warren, the Harvard law professor

(02-11-2010 03:48 PM)Lord Stanley Wrote:  "If hundreds more homeowners go under, the effect would be to ... dump sand in the gears of the economic recovery," she said.

Just to add to the irony of all of this

http://blogs.wsj.com/developments/2010/0...PMENTSFEED

The only problem I see w/ the original article is that it seems to presume the housing crisis has past. (As Lord Stanley has already pointed out.) In fact there is evidence that many foreclosed homes are being maintained by banks, kept hidden from the market, simply so the banks don't have to write down their true value. Many banks are already insolvent based on home loans...commercial loans will worsen the situation.

http://www.calculatedriskblog.com/2010/0...-away.html

Uh, banks have been dealing with commercial real estate trouble for some timé now.

(02-11-2010 08:31 PM)STLouis Blazer Wrote:  Uh, banks have been dealing with commercial real estate trouble for some timé now.

By "dealing with" do you mean, "hiding the declining asset values in a fraudulent manner?"

I thought it was taxes and regulation that was doing them in.

The last time I checked banks have been building up their reserves and have takens billions in credit losses on CRE.

Check your facts before you spout off some liberal rhetoric, Dr. Torch.

It would also help you to learn about MTM accounting and how relevant and observable inputs play a factor.

(02-12-2010 02:12 PM)STLouis Blazer Wrote:  The last time I checked banks have been building up their reserves and have takens billions in credit losses on CRE.

Check your facts before you spout off some liberal rhetoric, Dr. Torch.

It would also help you to learn about MTM accounting and how relevant and observable inputs play a factor.

I assume you mean "libertarian".

And I assume you mean this guy is just making stuff up

http://market-ticker.org/archives/1958-W.........html

http://market-ticker.org/archives/1939-M...nting.html

I heard an interesting analysis at lunch. I'm not at liberty to identify the source, but let's just say that Geithner and Paulson return his phone calls. This source says that the second-tier banks (below the top 19) have way too many eggs in the commercial real estate basket. Absent changes which he does not see forthcoming, he expects 400-700 bank failures in the next 18 months. For perspective, we've had 183 since 2007.

(02-12-2010 03:38 PM)Owl 69/70/75 Wrote:  I heard an interesting analysis at lunch. I'm not at liberty to identify the source, but let's just say that Geithner and Paulson return his phone calls. This source says that the second-tier banks (below the top 19) have way too many eggs in the commercial real estate basket. Absent changes which he does not see forthcoming, he expects 400-700 bank failures in the next 18 months. For perspective, we've had 183 since 2007.

Do us a favor and let us know when you decide to relocate abroad.