A Ticking Time Bomb (CRE)

WASHINGTON -(Dow Jones)- Some lawmakers welcomed news Tuesday that 10 of the nation's largest banks are poised to repay billions of federal assistance but warned that a "ticking time bomb" in commercial real estate could deal a punishing blow to lenders and the economy.
"I am very concerned about the ticking time bomb we face in commercial real estate lending," congressional Joint Economic Committee Chair Carolyn Maloney, D-N.Y. said at a hearing Tuesday. She noted that an estimated $400 billion of commercial real estate loans are coming due this year, with another $300 billion due in 2010.

If commercial real estate developers cannot refinance or pay off that debt, " we could expect to see the default rate on commercial mortgages climb much higher," Maloney warned.
Maloney's comments came at a hearing into the $700 billion Troubled Asset Relief Program approved by Congress to help banks saddled with soured assets linked to risky home mortgage loans. Just before the hearing began, the U.S. Treasury Department announced that 10 recipients of so-called TARP funds will repay a total of $68 billion, which Maloney called "welcome news."

The hearing follows the release of a new Congressional Oversight Panel report on the TARP, which faulted recent "stress tests" of 19 large financial firms by the Treasury Department and the Federal Reserve, saying the economic assumptions probably were too rosy and that the projections only run through 2010.

"We simply are asking for more," Congressional Oversight Panel chair Elizabeth Warren told lawmakers. She recommended that the stress tests be run again, with tougher assumptions, and be continued as long as banks hold troubled assets.As a case in point, Warren noted that the U.S. unemployment rate projected for 2009 under the stress tests' "worst-case scenario" was 8.9%, but "we're now at 9.4%,"

"This is a real concern, the worst case scenario in 2009 is in fact not the worst case," said Warren, whose panel is monitoring the Treasury's spending of the bailout money.
In addition, the oversight panel called for regulators to issue more information about the stress-test methodology, allowing outside analysts to replicate the tests themselves. -By Judith Burns, Dow Jones Newswires

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Its Only Just Begun

NEW YORK (Reuters) - The default rate of U.S. commercial real estate bank loans reached its highest level in 15 years and is not expected to peak until 2011, according to a report by Real Estate Econometrics.

During the first quarter 2009, the national default rate for commercial real estate mortgages held by regulated depository institutions rose to 2.25 percent from 1.62 in the fourth quarter of 2008, according to the real estate research firm's report released on Tuesday. The 0.63 percentage-point jump is the largest quarterly increase since at least 1992, and pushed the default rate to its highest level since 1994, the New York-based firm said. The default rate does not include loans on apartments, which increased by 0.68 percentage points between the fourth quarter and first quarter 2009 to 2.45 percent. The analysis of the data from the Federal Deposit Insurance Corporation (FDIC) includes non-farm, non-residential property where the primary source of repayment during the term of the mortgage is derived from the property's rental income. The multifamily results include buildings with five or more units.

Depository institutions hold about half the $3.2 trillion in debt on U.S. commercial property, with the commercial mortgage-backed securities market accounting for about 25 percent of that. Insurance companies and government-sponsored entities such as Fannie Mae account for the remainder.

Real Estate Econometrics attributed the default surge to rising vacancy rates, falling rents and increasing operating expenses all of which made it more difficult for borrowers to meet principal and interest obligations. Additionally, those borrowers who had been current were not able to refinance or sell their properties in order to meet balloon payments required by maturing mortgages because of the tight lending markets. Mortgages originated in 2006 and 2007 experienced the most significant cash shortfalls because of the large number of mortgages that were based on overly aggressive rent and occupancy projections.

"Increasingly, a challenge in refinancing these mortgages is that some lenders are seeking to diversify away from commercial real estate, while others are lending only with existing relationships," the report said. Real Estate Econometrics also revised its default projections higher. It sees the default rate rising to 4.1 percent by the end of the year, up from its prior forecast of 3.9 percent. By the end of 2010, the default rate is expected to rise to 5.2 percent, up from the prior outlook of 4.7 percent.


It expects the default rate for U.S. commercial loans held by banks to peak at 5.3 percent in 2011, up from its forecast of 4.8 percent. The more sour forecast was due chiefly to a more pessimistic outlook for the overall economy, a projected rise in long-term interest rates and a slower-than-expected policy response to commercial real estate credit constraints. It sees the national default rate for multifamily mortgages is projected to rise to 4.5 percent in the fourth quarter of 2009 and peak at 5.5 percent next year. ~ Reporting by Ilaina Jonas, editing by Matthew Lewis (Reuters)


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Commercial Real Estate In A Credit Crisis?

According to the Wall Street Journal, in a worst case scenario analysis, roughly $100 billion of losses could hit smaller banks by the end of next year. The root cause of which are commercial real estate loans.

Taking at look at 900 small to midsize banks across the US, the Wall Street Journal estimates that commercial real estate loans pose a massive threat to the banks' livelihood. Using a similar process that was used on the 19 'big banks' in the Federal government's stress tests, the Journal is seeing danger from the loans in the commercial real estate sector.

The study estimates a worst-case scenario in which unemployment hits 10.3%, which also means that banks would do better if unemployment topped out at a more manageable 8.9%. The contrast in the smaller banks losses to some of the larger banks the government is examining, has as much to do with investor interest as anything else. Some of the smaller banks, the Journal asserts, may not find the same kind of opportunistic investing when these smaller institutions run into trouble, meaning there is a likelier chance of those banks going under should the recession stretch on, which will further tighten lending markets.

Stay tuned for the latest in CRE market information!

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