Could banks be in more trouble than they've let on?

Federal Reserve Chairman Ben Bernanke recently talked about "green shoots" of economic recovery and declared the recession probably over, but some economists fear the worst is yet to come.

As bad as the residential real estate crisis was for banks, the impact of failed residential mortgages could be dwarfed by the problems now facing the banks regarding commercial real estate.

A loan for a commercial building like a shopping mall is very different from the mortgage you have on your home. Commercial mortgages have a much shorter term, usually only five to seven years. The bank doesn't expect the owner to pay the debt off in that amount of time, but when that time comes, they need to refinance the remaining balance into a new loan.

Do a little math, and the problem becomes clear: Many loans that were made during the peak of the boom are going to be coming due within the next year or two. Owners can't refinance because their vacancy rates have skyrocketed even as banks have tightened their lending requirements. Malls, office complexes and warehouses all have high -- in some cases, record high -- vacancy rates because so many businesses have folded.

This already bad news is magnified by the fact that no one really knows how big this problem could get until we're in the middle of it.

According to this Fortune article, some experts are warning that banks might be underestimating the amount of losses they could incur and aren't socking away enough of a fiscal cushion to help them weather commercial defaults.

Why wouldn't banks want to protect themselves? Part of the problem is that no one has a good grasp on just how much the properties that back the loan are worth. Banks all have to do their own calculations to try and figure out how much these loans are worth since there's no standard formula for factoring in the impact of the recession.

Think about it: If four houses on a street sell at foreclosure, when the fifth one forecloses, people have a good idea how much it will fetch at auction because they have other examples with which to compare it. But if the biggest shopping mall in the county is in foreclosure, how do you even begin to figure out how much that's actually worth, especially given that this economy means there's a dearth of deep-pocketed buyers out there?

According to one study cited in the Fortune article, commercial real estate prices have dropped by roughly one-third over the past year.

A research company quoted in the article says banks collectively should brace for $110 billion in losses but adds that banks have only counted about a third of those losses so far.

There are a few complicated accounting tricks banks can employ to make their bad debts look a little less bad, but these kinds of maneuvers are only effective for a limited time. Some experts worry that shareholders aren't getting the full picture of how much trouble banks are in when it comes to commercial real estate losses.

One thing is clear, though: We're not out of the woods yet.
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