Commercial Real Estate Assessment By the COP

The inevitable commercial real estate crisis still looms, this time the COP chimes in:

The Congressional Oversight Panel today released its February oversight report, “Commercial Real Estate Losses and the Risk to Financial Stability.” The Panel is deeply concerned that a wave of commercial real estate loan losses over the next four years could jeopardize the stability of many banks, particularly community banks, and prolong an already painful recession.

Commercial real estate (CRE) loans made over the last decade – including retail properties, office space, industrial facilities, hotels and apartments – totaling $1.4 trillion will require refinancing in 2011 through 2014. Nearly half are at present “underwater,” meaning the borrower owes more on the loan than the underlying property is worth. While these problems have no single cause, the loans most likely to fail are those made at the height of the real estate bubble. The Panel notes, however, “Even borrowers who own profitable properties may be unable to refinance their loans as they face tightened underwriting standards, increased demands for additional investment by borrowers, and restricted credit.”

Community banks, unlike the largest Wall Street banks, face the greatest risk of insolvency due to mounting commercial real estate loan losses. According to federal guidelines, 2,988 banks nationwide are classified as having a “CRE Concentration.” None of these banks are among the 19 largest bank holding companies. Forecasts project that banks will suffer their worst losses well after the timeframe examined by the stress tests – an exercise conducted only on the nation’s 19 largest bank holding companies – and well after Treasury’s authority expires under the Troubled Asset Relief Program (TARP).

The Panel found that “a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.” When commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities. Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession.

The full report is available at cop.senate.gov.

Since we all have been talking about this inevitable and impending CRE bust, it seems kind of strange that the COP would issue such a report without specific intentions in mind. One can assume that this report along with others will be utilized in order to justify additional programs to provide corporate welfare to failing CRE projects in the form of additional bailout programs.


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