Yet Another Hurdle for the Weak Economy

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Outside the Box

Feb. 17, 2010, 12:01 a.m. EST · Recommend (4) · Post:

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Relax, it's just a correction

First Take "º

Slow job growth means no exit for Fed

By Josh Lipton

NEW YORK (MarketWatch) -- Over the next few years, a wave of commercial real estate loan failures could threaten America's already-weakened financial system.

So warns a new report from the Congressional Oversight Panel as part of its oversight of the Troubled Asset Relief Program, highlighting yet one more hurdle for this country's fragile economy.

The panel, chaired by Harvard law professor Elizabeth Warren, says it remains "deeply concerned" that commercial loan losses could jeopardize the stability of many banks, particularly the nation's mid-size and smaller banks. Read the 183-page report for yourself here.

Worries about CRE loans -- those loans taken out by developers to purchase and maintain shopping malls, offices, hotels, and apartments -- have been simmering for months, as we noted in an October article. See "How Banks Will Fare in a Commercial Real Estate Crash."

The problems now plaguing commercial real estate have no single cause, and the panel notes that the loans most likely to fail were made at the height of the real estate bubble when commercial real estate values had been driven above sustainable levels and loans.

"[M]any were made carelessly in a rush for profit," the panel said.

But the full impact of this CRE challenge now lies ahead of us: the largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion.

"A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American," the panel warns us.

The report issued today shouldn't surprise anybody that's been listening to our central bankers, who have made it known, loud and clear, that they're sweating the potential impact of CRE on the broader economy.

For instance, in a recent speech, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said he was particularly concerned about the interaction among bank lending, small business employment, and CRE values.

In a signal of consolidation in commercial real estate, Simon Properties has bid to buy fellow mall operator General Growth for about $10 billion. John Spence of MarketWatch discusses.

Here's the issue, as Lockhart spelled it out: A lot of CRE exposure is concentrated at smaller institutions -- banks with total assets under $10 billion. These institutions carry almost half of total CRE loans.

The problem is that many small businesses depend on these smaller banks for credit. In fact, small banks account for almost half of all small business loans.

Moreover, Lockhart said, small firms' reliance on banks with heavy CRE exposure is substantial: Banks with the highest CRE exposure account for almost 40 percent of all small business loans.

When small banks, hoarding capital to offset future losses in the value of their CRE portfolios, don't make loans, then small businesses can't grow and expand and create the jobs we need. During the last two economic expansions, small firms -- those with fewer than 50 employees -- contributed one-third of net job growth.

Everyone should be aware of the CRE time bomb that is going off right now. For every commercial property going under, there are jobs and businesses lost. this fake rally in the markets does nothing to instill confidence in the system, as it is nothing more than program traders in dark rooms front-running everyone else's bids. When the scheme comes apart, and it will, the fall will be epic..."

- Silverismoney | 10:07 a.m. Today10:07 a.m. Feb. 17, 2010

Some policy makers at the Federal Reserve seem to be chomping at the bit to get the Fed out of the mortgage business, but the Federal Open Market Committee's forecast for only a modest economic recovery and excruciatingly slow job growth could mean it'll take years before that happens.

17 min ago2:52 p.m. Feb. 17, 2010 | Comments: 5

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