Commercial Real Estate Is The Next Crisis

The Congressional Oversight Panel said in a report that mounting commercial real estate losses could endanger the banking system and thwart economic recovery.

A total of $1.4 trillion in commercial real estate loans will require refinancing in the next 4 years, and more than 50% of those loans are underwater, written for properties whose value has dropped like a rock.

The expected losses when loans go bad could hit between $200 billion to $300 billion and threaten 3,000 small and mid-size banks with a disproportionate share of commercial real estate assets on their books, according to the panel.

The report is intended to "wave a red flag" to the White House and Congress that the commercial real estate loan market is going to get a lot worse before it gets better.

"We're at a point where even as TARP is ramping down another major challenge in our economy is ramping up," said Elizabeth Warren, the oversight panel's chairwoman.

"We need to start now, before the system is on the brink of collapse to figure out a plan," she added.

The Panel's research found that 2,988 banks are heavily invested -- with more than 3 times their assets tied up -- in commercial real estate loans. Of that number, 2,500 banks each have less than $1 billion in assets.

The Panel offers a number of possible solutions for policymakers to head off a commercial real estate crisis, including stress tests for banks, injecting capital into these small banks, buying their toxic assets, or guaranteeing loans.