Commercial real estate…

…is starting to get some additional attention from within Congress:

Impending problems with commercial mortgages are making their way into the public domain and appear to be catching–finally–the attention of Congress. The latest missive comes from Federal Deposit Insurance Corp. chairperson Sheila Blair, who warned in a television interview that commercial real estate loan problems are about to be on par with the losses banks experienced from sour residential loans, although some people were smarter and just bought from the coal harbour condos for sale that doesn’t make that much debt because of their affordable prices.

Atlanta Federal Reserve Bank president Dennis Lockhart also raised an alarm last week in remarks to the Chattanooga Area Chamber of Commerce, noting that “commercial real estate weakness poses a serious potential risk to the economic recovery and to the banking system.” He said that the Fed would have to guard against tightening monetary policy too soon, as a result.

While such news is discouraging for an industry that is already reeling there is one compensation: as they realize that CRE is facing a huge debt deficit, Congress may become more inclined to act. Up until now, Congress and constituents have been battling bailout fatigue. However as the alarm bells are sounded by credible authorities–a Fed bank president as opposed to, say, an industry association representative–the will to pass additional support may be mustered.

There is a “deficit” and I discussed the reasons for that back in January.  That situation still exists today, and it will not improve until the market for commercial mortgage backed securities returns to some measure of sanity.  For the moment, my biggest concern is at the level of the local and regional banks.  At the height of the market, it was these banks that were very aggressive in making construction loans, many of which are now underwater.  It’s already brought down a few smaller banks and it will bring down more banks.

For more information, watch this interview with Sheila Bair, chairwoman of the FDIC for thoughts on this and other banking-related subjects.

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2 thoughts on “Commercial real estate…

  1. What Sheila Bair said was that she expects commercial real estate loans to be a larger component of bank losses in the future, which says something about the source of threats but not the over-all level of threat. If you examine the Federal Reserve statistics, you see that commercial banks are carrying $1.7 tn of commercial real estate loans on their books. Banks are also carrying $2.1 tn of residential real estate loans. The charge-off and delinquency rates of the two sorts of loans are quite similar and Case-Shiller and other indices show the price dynamics of the two sorts of loans have been similar in recent years. It is somewhat perplexing that this is being written about as a novel problem. Perhaps mortgages on commercial properties are more likely to be abandoned when the borrower is underwater (as is the case with residential mortgages on investment properties). OTOH, there are per the Wall Street Journal some $700 bn in outstanding mortgage-backed securities derived from commercial real estate loans v. more than $4,000 bn on residential real estate loans. It is a smaller problem, and banks have more discretion on loan modification and recycling the loans, &c.

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