By John Ballard
Prepare for another shoe to drop. Secondary to the economic slowdown, the demand for commercial real estate has shrunk, leaving banks holding those high-stakes loans with really big worthless assets. It would be a satisfying case of poetic justice were it not for the tragic fallout -- yet again -- affecting ordinary people who depend on banks for smaller credit needs.
US banks facing $1.4tn crisis over commercial property loans
America's fragile high street banks are bracing themselves for a fresh financial crunch as a wave of commercial property mortgages go sour on offices, shops and factories, causing losses of up to $300bn (�192bn) hitting nearly 3,000 small- and medium-sized financial institutions.
A congressional oversight panel charged with scrutinising the Obama administration's bailout efforts has warned that $1.4tn of loans covering commercial premises will reach maturity between 2011 and 2014. After a plunge in property prices, nearly half of these loans are underwater, with borrowers owing more than their underlying property is worth.
An analysis by the panel found that 2,988 of America's 8,100 banks have potentially dangerous exposure to commercial property loans. The impact could damage hopes of a US economic recovery and could cause a further squeeze in the availability of credit to consumers and businesses.
"Are we arguing that this is a serious problem that we need to get in front of? The answer is yes," said Elizabeth Warren, chairman of the oversight panel. "It's like throwing a handful of sand into the economic recovery."
She said that if banks see that their commercial property liabilities are mounting, they will hold back on lending elsewhere: "They'll tend to husband their money so that it's not available for small business loans."
More at the link. British press, you know, last week. You don't expect the US media to be advertising such a mess until they figure out a way to smear blood and blame all over it. I'm not worried, though. By the time the Tea Party and the GOP finish gang raping health care, terrorist trials and torture, they will devise a way to lay this next steaming pile of stuff at the feet of the current administration.
The story broke today here in Atlanta. It shouldn't be long before it makes the national news.
Commercial Loans Threaten a Second Wave of Foreclosures
The Trump Towers luxury condominiums in Midtown are the latest major commercial real estate casualty in Atlanta. Last week, the site for the project was listed as a foreclosure.
Up until now, many distressed loans on office, retail, and condo buildings in Atlanta have defaulted, but few have gone into foreclosure. But the news about Trump Towers has resuscitated fears that a second wave of the mortgage crisis is on the horizon: this one caused by commercial loans.
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But just up the Peachtree street, as you move into Buckhead, things get worse. Andy Feinour, senior Vice President of Advisory Services for Carter Commercial Real Estate, surveys the Buckhead skyline from his midtown office tower. He easily picks off the buildings that are in trouble with their mortgages.
"From an office perspective, of those 16 or so tall buildings you've got four of them that are new, and basically vacant," says Feinour. He also points to several new condo buildings that sit empty. Feinour says that many of these and the office buildings are already in default.
The buildings were built in the peak of the market when land and construction costs were high, which required huge loans. At the time, that seemed OK, says Feinour, because office rents were higher than they are now.
"Even when they weren't filled, the borrowers could afford to keep those loans," Feinour explains. "But the terms are coming up and between today and 2013, all of those loans were maturing in some form or fashion."
With less rent coming in, it's impossible for building owners to pay off the huge loans. Feinour says ultimately, the banks will have to admit they'll never get paid back what they put in. But so far, he says, they've been dragging their feet.
"Everything's just getting delayed, delayed, delayed, delayed," says Feinour. But he adds, that hurts everyone. "They're making it more difficult for the average person to go to that bank and do business."
That's because when banks have lots of bad loans on their books, they're forced to shore up their reserves, tying up their money. So the $20 thousand car loan, or $100 thousand home mortgage that the average person might need will have a tougher time getting it.Harvard Law School Professor Elizabeth Warren predicts things will even get worse, once the banks admit their losses. Warren heads a congressional oversight panel that came recently to Atlanta to assess just how bad the picture is.
"These mortgages are going to fail, and they're already starting to fail," says Warren. "And we fear we're going to see more failures in 2011, 2012, 2013. We're only on the front end of this crisis."
I'm a big fan of Elizabeth Warren.
She's calm, clear, smart, candid and quick.
"Feinour says ultimately, the banks will have to admit they'll never get paid back what they put in. But so far, he says, they've been dragging their feet."
ReplyDeleteThe banks hope past performance will predict future behaviour. Banks didn't have to admit that many of them were insolvent during the housing forclosure crisis and they hope that happens again. Why not? And they're dragging their feet, hoping for another bailout. And again, why not? It worked before.
There doesn't seem to be any desire in Washington to help anyone on Main Street.
Unfortunately I'm afraid the casualties this time will be mid-sized to community banks, not the ones deemed "too big to fail." If I understand correctly, FDIC will coordinate much of the train wreck.
ReplyDeleteMeantime small businesses and others in need of credit may just have to wait until the market thaws.
I had occasion to drive into the new part of uptown Atlanta a couple years ago for the first time in years. There were so many new streets and big buildings I got lost. It was like being in another city, and I've lived in the metro area over forty years.
That was before the financial meltdown, but at the time I said to myself and the guy I was with there is no way all this stuff is paid for. What we're looking at is all borrowed money. Amazing. And obscenely over-extended, even then.
Commercial developers have a different mentality from residential. Their cycle is measured in increments of years rather than months, and in most towns there is little coordination to insure that overbuilding doesn't hurt developers. In a place like Atlanta which has had steady growth for decades it is presumed that sooner or later new space will be leased. So when the slump hits here, it has to be worse elsewhere.
I don't think most people really grasp the magnitude of the global mess we are in.