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.
Showing posts with label TARP. Show all posts
Showing posts with label TARP. Show all posts
Wednesday, February 17, 2010
Friday, February 12, 2010
3,000 Banks Face Commercial Real Estate Risk
A new report from the Congressional Oversight Panel which tracks the progress of the TARP program projects that commercial real estate losses threaten nearly 3,000 mid-sized and small banks and may severely compromise their ability to make loans.
At the core of the report is the observation that “Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly 50% are at present "underwater” – that is, the borrower owes more than the underlying property is currently worth.”
This means many of the banks which hold these loans have commercial real estate borrowers who will not be able to make interest and principal payments and cannot refinance their mortgages.
The Panel also points out that there have been NO “stress tests” of these smaller banks so the scope of their real financial problems is unknown.
The new analysis underscores the problems that the Obama Administration and Congress face as they attempt to increase the capital available to consumers and small businesses.
Banks are still unlikely to make all but the safest of loans because of current and anticipated problems with their balance sheets. The issue is exacerabated by the worry that modest-sized businesses are at greater risk of failure and therefore loan defaults in a slow economy.
The only practical solution to the problem for both banks and their current and potential customers is for the federal government to take money it does not have to bolster the balance sheets of the nearly 3,000 banks at risk for large commercial real estate write-offs.
Alternatively, these firms could be loaned money by the government to make money available to small business which need credit. That process might stimulate lending but would not solve the problem of the write-offs these financial institutions face.
The Treasury Department has said that the $700 billion TARP program is no longer necessary to rebuild the bank and credit systems.
It turns out that if the Congressional Oversight Panel forecasts are accurate, the Treasury’s observation is not even close to the truth.
Douglas A. McIntyre @ 24/7 Wall Street
At the core of the report is the observation that “Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly 50% are at present "underwater” – that is, the borrower owes more than the underlying property is currently worth.”
This means many of the banks which hold these loans have commercial real estate borrowers who will not be able to make interest and principal payments and cannot refinance their mortgages.
The Panel also points out that there have been NO “stress tests” of these smaller banks so the scope of their real financial problems is unknown.
The new analysis underscores the problems that the Obama Administration and Congress face as they attempt to increase the capital available to consumers and small businesses.
Banks are still unlikely to make all but the safest of loans because of current and anticipated problems with their balance sheets. The issue is exacerabated by the worry that modest-sized businesses are at greater risk of failure and therefore loan defaults in a slow economy.
The only practical solution to the problem for both banks and their current and potential customers is for the federal government to take money it does not have to bolster the balance sheets of the nearly 3,000 banks at risk for large commercial real estate write-offs.
Alternatively, these firms could be loaned money by the government to make money available to small business which need credit. That process might stimulate lending but would not solve the problem of the write-offs these financial institutions face.
The Treasury Department has said that the $700 billion TARP program is no longer necessary to rebuild the bank and credit systems.
It turns out that if the Congressional Oversight Panel forecasts are accurate, the Treasury’s observation is not even close to the truth.
Douglas A. McIntyre @ 24/7 Wall Street
Subscribe to:
Posts (Atom)
