$1.4T in real estate loans coming due

A new report from the Congressional Oversight Panel says failed commercial real estate loans could mean the closure of smaller banks, empty buildings and another blow for the U.S. economy.

* Commercial property values have fallen more than 40% in the past 3 years.

* Unlike residential mortgages, commercial loans are refinanced every three to five years. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will come due for refinancing, the report says. For nearly half of them, borrowers could struggle to get new financing because they'll owe more than the properties are worth.

By DANIEL WAGNER
AP Business Writer
WASHINGTON — Over the next several years, failed commercial real estate loans could litter American cities with empty stores and office complexes, cause hundreds of bank failures and weaken the economy, a watchdog report says.

Banks face up to $300 billion in losses on loans made for commercial property and development, according to a report released Thursday by the Congressional Oversight Panel. The panel monitors the government's efforts to stabilize the financial system.

The report says the defaults could lead to reduced lending and cause the eviction of families from rental properties. Bank failures also could contribute to job losses and hurt the economic recovery.

Smaller banks are more vulnerable to the losses than their larger Wall Street counterparts. That's because commercial real estate makes up a larger portion of their portfolio.

The Federal Deposit Insurance Corp., which manages bank failures and insures deposits, is under stress that will intensify over the next few years, panel chairwoman Elizabeth Warren said in a call with reporters.
Small- and mid-size banks have been failing at the fastest rate since the savings and loan crisis of the 1980s and 1990s. The failures are due mostly to bad loans they made for commercial projects.

Banks often lent too much for land and buildings whose prices were inflated by a real estate bubble. They also relied on rosy assumptions about the profitability of retail and office projects and did not consider the possibility of a severe recession.

Commercial property values have fallen more than 40 percent in the past three years, the report notes.

Some have been unable to pay the loans. Others have stopped paying because they now owe more than the properties are worth. Losses are mounting for banks, more of which will close. That could spell trouble for the economic recovery, said Warren, a Harvard law professor.
“If hundreds more community banks go under, the effect would be to ... dump sand in the gears of the economic recovery,” she said.
Unlike residential mortgages, commercial loans are refinanced every three to five years. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will come due for refinancing, the report says. For nearly half of them, borrowers could struggle to get new financing because they'll owe more than the properties are worth.

The report attributes the looming crisis to failures of bank management and supervision. It says banks made loans based on property values inflated by the real estate bubble. They sometimes acted carelessly “in a rush for profit,” the report says. Banks and their regulators failed to consider the possibility of reduced consumer demand from a severe recession, the panel says.

The panel criticizes the Treasury Department and bank supervisors for not putting smaller banks through “stress tests” like those done last year on the nation's 19 largest banks. Warren notes that Treasury Secretary Timothy Geithner resisted calls to conduct public stress tests of smaller banks.

The Treasury Department referred to comments by Geithner that bank regulators routinely conduct such assestments confidentially.

Warren also noted that last year's tests gauged banks' strength only through 2010. The commercial real estate threat looms largest in 2011 and beyond.
The report says loan failures could weaken the financial system because banks that fear major losses will be less likely to lend. Economic recovery depends on the free flow of credit.

The report offers no specific recommendations. But it calls on the Treasury to enact a comprehensive plan to handle the expected crisis.

The bipartisan panel is one of three oversight bodies Congress mandated for the bailout at the height of the financial crisis in October 2008. It makes periodic assessments of how the government is managing the rescue program.

The bailouts also are subject to review by the Special Inspector General for the Troubled Asset Relief Program and the Government Accountability Office.

Community Banks Must Lend

I agree, the construction sector has been hit harder by this economic downturn than any other industry. Additionally, Pat Hillyer raises a sound point, "we" need to let our legislators know what is going on. We need banks to start lending to our local builders to bring jobs back.

The Miter Box
A Cross-Section of News and Opinion--Julianna Ross
With unemployment at historically high levels and billions of dollars flowing into the financial sector from Federal bailouts, taxpayers expect the needs and provisions to eventually intersect and provide relief to so-called ordinary Americans. Extensions of unemployment benefits and first time homebuyer tax credits are nice, but it’s hard to erase the vision of financial fat cats rolling in enormous pay bonuses just months after enjoying bailout dollars plucked from the pockets of the nearest newborn.

Irrefutably, no single industry has been hit as hard in this economic correction as construction. The construction sector is unique because it encompasses numerous and diverse fields factored into the GDP including real estate, utilities, wholesale, local government, forestry, manufacturing, transportation and warehousing, waste management, and science (a burgeoning profit center churning out all those new-fangled sustainable products). Yet mention homebuilder’s plights these days and it seems like every politician, regulator and lender is content to ignore one of our country’s most potent employment engines.

“Banks are so focused on the mess they’ve created for themselves,” says Nick Schmitt, a local private investment and banking consultant. “They are focused on their problem loans instead of the future. Once TARP is gone, banks will have to turn to entrepreneurial ways to generate new loans.” In a climate where many builders say it’s hard to even get a bank’s attention unless they stop paying on their loans, there is no reward for good behavior and understandable frustration. “I’m being forced into an early retirement,” says one Seattle builder, 42, who has as an exemplary lending track record. This is a builder fueling the other small businesses of local suppliers, employing staff and quickly selling through his stock of well-designed homes, even throughout 2008 – 2009.

Martha Rose, one of King county’s first spec builders of sustainable housing, launched an ambitious letter writing campaign on behalf of her business and the opportunity she sees as having a permanent impact on how people build. “The letter explains that spec construction loans must be made available to builders of homes that are super energy efficient. Green builders do not have access to other sources of funding and currently are lumped together with all spec builders,” she writes on her blog. The letter is to accompany an individual or business moving their money out of federally funded banks and into community banks, in return for the local banks agreeing to lend again, this time to responsible and environmentally minded builders.

Unfortunately, it is now the commercial credit crisis that has many of those community banks landing in the regulation handcuffs of their bigger brethren. Everyone agrees, the old days are gone and aren’t coming back. What option does an entire segment of industry have in a time like this?

One source cites Oregon Congressman Jeff Merkley’s bill titled Banking on our Communities (www.merkley.senate.gov). It strives to put TARP funds to work in partnership with private investors, recapitalizing community banks so they can lend again to small businesses and consumers. In fact, private investors could be the biggest winners coming out of the crisis, as builders begin imagining new partnerships and ways of securing funding. “We all know when a void is created, it gets filled,” says Scott Cameron of Windermere. “The banks need a plan, because they’ve created a void.”

The NAHB’s Put Housing First coalition was successful in lobbying for the $8,000 first time homebuyer credit and also its extension. Now it’s time to form a new coalition and let our elected officials know that we want community banks lending to community builders and bringing back jobs. “Our banks and our legislators don’t understand, and it’s our fault,” states Pat Hillyer of Umpqua Bank. “You’ve got to let them know what’s going on.”

Senator Patty Murray’s office recently reported holding dozens of meetings with small builders and is introducing legislation after the Thanksgiving break to focus credit and support on community banks lending to local builders. “Start a parade, and I’ll lead it,” Senator Warren G. Magnuson once said, and it is time to get this parade started and push our elected officials to lead. The needs and contributions of Main Street homebuilders cannot be ignored.

-- Julianna Ross, Publisher, The Builder’s Journal
The Miter Box is an ad-hoc column welcoming opinions about all topics concerning the residential building market, particularly as they pertain to King and Snohomish counties of Washington State.