There have been warnings for months that commercial real estate defaults would be the next plague to bank earings. Then Dubai indicated that it would default on some of its obligations. The kingdom in the desert has vast commercial real estate holdings around the world.
New research shows that default rates were already rising sharply in the middle of the year. According to the FT, “During the third quarter the commercial default rate rose from 2.88 per cent to 3.4 per cent, the highest level since 1993.” The total balance of delinquent and defaulted real estate in the US rose to mor than $50 billion.
It does not take an economist or bank analyst to know that the forecasts about commercial real estate and the impact that they will have on banks earnings are true. What is not as obvious is whether there is any government policy that might slow the problem, or if the Administration and Congress will wait until the trouble is acute before acting.
There is a $75 billion program in place to help homeowners to lower monthly mortgage payments. The government and the public clearly view individual homeowners and the investors who hold large commercial real estate holdings differently. That may not turn out to be an approach that helps prevent another credit crisis. A loan is a loan for the most part and banks that face huge write-offs from commercial real estate are no better or worse off than if the loans they are dealing with were from mortages or credit cards.
The government is anxious to shut down the TARP program. It is an embarrassing reminder that federal officials did not stand guard over the financial systems enough to prevent systematic irresponsible behavior by banks. But, shuttering the TARP now may be way too soon. Commercial real estate problems may be another 50-year storm as mortgage-backed securities were. That would make two 50-year storms in two years.
Douglas A. McIntyre
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