Commercial mortgage failures threaten system: overseer
Losses may range between $200 billion and $300 billion, report says
By Ronald D. Orol, MarketWatch
Feb. 11, 2010, 12:01 a.m. EST
http://www.marketwatch.com/story/commerc....

WASHINGTON (MarketWatch) -- Over the next few years, a wave of commercial real-estate loan failures could threaten America's financial system, and in the worst case scenario, hundreds of additional community and midsize banks could face insolvency, a congressional watchdog group said Thursday.

According to a report by the Congressional Oversight Panel, a watchdog group for a $700 billion bank-bailout package, about $1.4 trillion in commercial real-estate loans will reach the end of their terms between 2010 and 2014, of which nearly half are now under water (that is, the borrower owes more than the underlying property is currently worth).

The report added that losses from commercial loans could range as high as $200 billion to $300 billion.

As a result, it said, banks that suffer from the losses or are discouraged by the economic future could become even more reluctant to lend, which could reduce access to credit for more businesses and families, accelerating a negative economic cycle.

"The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation's midsize and smaller banks, and that as the damage spreads beyond individual banks, that it will contribute to prolonged weakness throughout the economy," said the report, which was approved unanimously by the five-member COP.

The oversight panel also urged bank regulators to take a more thorough look at which banks they decide to unwind. "The [COP] is clear that government cannot and should not keep every bank afloat. But neither should it turn a blind eye to the dangers of unnecessary bank failures and their impact on communities," the report said.

The COP members said that not all banks should be treated the same way when it comes to recognizing losses. The panel contends that banks with weak portfolios across the board should be forced to recognize all losses.

Meanwhile, banks that have financed only the strongest projects and operated prudently, and banks with commercial real-estate portfolios that have weakened but are largely still based on performing loans, should be dealt with more carefully and should not be forced to recognize all potential losses immediately.

Having this group be forced to recognize potential losses immediately could create a "self-fulfilling prophecy," the report said, as selling commercial real estate at fire-sale prices could depress values of even relatively strong properties.

"Real-estate prices would be driven below actual long-term values, pushing the commercial real-estate sector into what has been termed a negative bubble -- not only forcing more banks in a particular region into perhaps unnecessary insolvency, but having ripple effects across the broader markets for commercial real estate," according to the report.

The report also includes a brief summary of the status of the Treasury's program to dispose of the warrants it acquired as part of its Troubled Asset Relief Program.

The COP projected the receipts from the sale or auction of the warrants -- those sold or auctioned and those yet to be disposed of -- will total $9.3 billion.

WSJ Version

TARP Panel: Small Banks Are Facing Loan Woes
By CARRICK MOLLENKAMP And MAURICE TAMMAN
FEBRUARY 11, 2010
http://online.wsj.com/article/SB10001424....

Nearly 3,000 small U.S. banks could be forced to dramatically curtail their lending because of losses on commercial real-estate loans, a congressional inquiry concluded.

The findings, set to be released Thursday by the Congressional Oversight Panel as part of its scrutiny of the Troubled Asset Relief Program, point to yet another obstacle for the slow-moving economic recovery. The small banks being threatened by loans they made for shopping centers, offices, hotels and apartments represent a major cog in the U.S. credit system, especially to entrepreneurs.

"The banks that are on the front lines of small-business lending are about to get hit by a tidal wave of commercial-loan failures," said Elizabeth Warren, a law professor at Harvard University who heads the TARP oversight panel.

Concern about banks' exposure to commercial real estate has been building for months. Job losses, corporate retrenchments and curtailed spending by many Americans are increasingly squeezing banks that financed commercial properties. Some troubled lenders were previously battered by residential mortgages that soured when the housing bubble burst, leaving banks with less capital to cushion them from commercial-real-estate-woes.

Of the roughly 8,100 U.S. banks, some 2,988 small institutions have problematic exposure to commercial real-estate loans, according to the oversight panel's report. That means their level of commercial real-estate loans is at least 300% of total capital or their construction and land loans exceed 100% of total capital.

In the 183-page report, the panel said it is "deeply concerned" loan losses could jeopardize the stability of many banks. Since January 2008, 181 banks and savings institutions have been seized by regulators, including 16 so far this year. The panel based its analysis on guidance issued by the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp. on risk-management practices for commercial-property lending.

To be sure, the report's prediction of gloom could end up being overstated if the economy and market rebound. A decrease in unemployment and more availability of credit for developers could stanch losses. That would ease the pressure on real-estate developers, retailers, restaurants and other businesses that have been struggling to keep up with their payments.

Representatives for the Federal Reserve, Treasury Department and OCC either weren't available for comment Wednesday or said they were waiting to read the report before expressing an opinion on it.

It isn't clear how much loan volume could disappear if banks rein in their already reduced appetites for extending credit as commercial real-estate losses mount. But banks that failed since the beginning of last year had combined about $73.8 billion in loans and leases at the end of the quarter before they were seized, according to an analysis by The Wall Street Journal of data submitted to federal regulators by the banks. The total includes loan-loss allowances, or money set aside to cover loans that aren't repaid.

Few experts are predicting a resurgence in commercial real estate anytime soon. Commercial real-estate debt in the U.S. totals about $3.4 trillion. Of that amount, banks hold $1.5 trillion, or 45%. Bondholders who own pools of real-estate debt hold $708 billion, or 21%.

Over the past decade, many banks increasingly relied on property loans for profits. According to the oversight panel, as of 2003, banks with $100 million to $1 billion in assets had commercial real-estate portfolios equal to 156% of their total risk-based capital. By the third quarter of 2006, that ratio had increased to 318%. The concentrations have been especially worrisome in the western and southeastern U.S., the panel's report said.

Commercial real-estate loans typically come due in three to 10 years, and monthly mortgage payments usually aren't enough to cover the loan in that period. At the end of the loan term, the panel's report said, the borrower needs to take out a new loan to maintain ownership.

Given the turbulent environment, lenders are facing several risks. The first is that a borrower won't be able to cover the interest and principal payment that comes due. The second is that a borrower won't be able to refinance the loan because of tougher bank underwriting standards or decreases in the value of the property.

From 2010 to 2014, some $1.4 trillion in commercial real-estate loans is coming due. But for nearly half of those loans, the borrower's debt is more than the property value, the panel said.

Ms. Warren, one of five members of the panel, said that a related problem is that federal bank regulators should have better information on specifically which banks are in the most trouble. Ms. Warren said she believes that regulators should undertake stress tests of small U.S. banks in the same way that regulators scrutinized the 19 largest U.S. banks in 2009 to examine their ability to withstand future losses.

"The banks most at risk were never stress tested," Ms. Warren said. "Their ability to withstand a coming storm has never been examined."

In September at a congressional hearing, Treasury Secretary Timothy Geithner said it hadn't been feasible to stress-test thousands of banks. Bank supervisors, he said, were working to stay on top of loan risks at smaller banks.

The Obama administration is trying to offset the loss of potential lending by devoting $30 billion in Wall Street bailout funds to small-business lending through community banks. Still, that amount only represents 4.3% of the $700 billion in small-business loans held by U.S. banks and savings institutions, according to the Treasury Department. Gene Sperling, a counselor to Mr. Geithner, said the plan "has the potential to leverage a far higher amount of actual new small-business lending."

Yahoo,AP.

By DANIEL WAGNER, AP Business Writer Daniel Wagner, Ap Business Writer – Thu Feb 11, 12:07 am ET
WASHINGTON – 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.

Rest--http://news.yahoo.com/s/ap/20100211/ap_o....


Burn,burn

$300 billion is optimistic.

Treasury Department to issue one tube of K-Y to every American.
Problem solved.

I know,its just a round number they threw out of their ass.

So the COP is advocating extend-and-pretend for "some" banks with "strong" portfolios. Gee, where have I heard that before?

Yep, $300 billion is optimistic. At least this will be the bullet to the head that puts an end to suffering. Depending on your point of view.

Paulson should be tried for treason.

I have no statistics, but I'm sure CRE greatly exceeds residential in growth by dollar, in Palm Beach County. I mean you wouldn't f'n believe the new vacant commercial, let alone vacant existing.

KD's ticker a few months ago explaining the financing of CRE make the lightbulb go off in my head about why this didn't collapse yet. I truly believe nothing will escape CRE detonation; if the country hasn't already collapsed, this will do it. I mean, we have a county whose entire ****ing infrastructure doubled in about 5 years, predicting viable business tax revenue to fund everything, let alone home owners. I know I'm stating the obvious, but I don't think anything can be taken for granted...I wonder if they'll even be able to push electric and water through the new network.

I gotta send a picture of a park, in a remote area of the county, about 10 beautiful ballfields with batting cages, everything, that gets about a couple hundred visits a month. Everytime I'm there it's 100% empty.

so are they priming us so we can get lubed for another bailout? or is it time
to go long CRE?

Allclear,

YES and NO.

Privatize the profits, bailouts and bonuses and foist any losses onto the taxpayer.

Commercial Real Estate Threat to Banks


The Congressional Oversight Panel is out with its latest report, which looks at the impact commercial real
estate loan failures could have on community banks. Elizabeth Warren, the panel's chair, shares her insight.
http://www.cnbc.com/id/15840232?video=14....

I posted a link to the report over in General.

You can see the report here;
http://www.scribd.com/doc/26713537/Cop-0....

CRE loans are not just for strip malls either. Multi-Family dwellings ( >5-8 units) are frequently considered, and financed as commercial R/E.

Call Hef, so he can prep his bailout bunnies, again.

This will get to another round of warren buffy buying and Icahn investing, and bla bla more bull****.
Residental is far from over, geez.
But now that Thain is with CIT, we know we are all saved. He must of needed more content for his up coming book, too.