Commercial real estate loans gone bad imperil banks

It's no secret that one of the biggest dangers facing banks today is that loans to builders of office towers, malls and other commercial properties are going sour at a quickening pace. Financial regulators, including Fed Chairman Ben Bernanke and Federal Deposit Insurance Corp. chief Sheila Bair, have warned of the risk. Now one research shop is predicting those losses will get a lot worse.

Real Estate Econometrics, a New York-based consulting and analytics firm, predicted Tuesday that delinquencies among commercial real estate mortgages held by banks will surge to 4% by the end of this year. That's after doubling to 3.4% in the third quarter compared with the same period in 2008, the firm said in a report.
That could push even more banks to, or over, the brink. The FDIC disclosed last week that there are 552 lenders on its confidential list of troubled banks, and many of them are there because they're being ravaged by losses on loans to builders that can't fill, or even complete, big commercial real estate (CRE) projects.

There have been 124 bank failures this year as toxic assets, including mortgages and construction loans gone bad, have mounted on lenders' balance sheets.

How important is commercial real estate to banks' health? In a Nov. 16 speech to the Economic Club of New York, Bernanke said that while credit conditions were thawing, "the fallout for banks from commercial real estate could slow that progress."

And here's Bair describing the threat in testimony before Congress in October: "The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters is in CRE lending." Indeed, she said, at community banks, CRE mortgages account 43% of all loans on average.

Unsurprisingly, it's the mortgages that originated in 2006 and 2007, just as the real estate bubble was beginning to deflate, that are showing the greatest signs of stress, Real Estate Econometrics' report said.

But if the firm's snapshot of present conditions in the CRE world is sobering for financial executives, investors and customers, the outlook over the next couple of years must be like a bucket of ice water in the face. Real Estate Econometrics predicts CRE delinquencies won't peak until 2011, meaning Bair and Bernanke's top threat to banks won't be going away anytime soon.

And that could be the catalyst that pushes regulators to seize more of those 552 banks on the brink -- or push that number even higher.
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