Three Thousand Banks Face Commercial Real Estate Risk

A new report from the Congressional Oversight Panel which tracks the progress of the TARP program projects that commercial real estate losses threaten nearly 3,000 mid-sized and small banks and may severely compromise their ability to make loans.

At the core of the report is the observation that “Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present ‘underwater”‘–that is, the borrower owes more than the underlying property is currently worth.” This means many of the banks which hold these loans have commercial real estate borrowers who will not be able to make interest and principal payments and cannot refinance their mortgages.

The panel also points out that there have been no “stress tests” of these smaller banks so the scope of their real financial problems is unknown.

The new analysis underscores the problems that the Administration and Congress face as they attempt to increase the capital available to consumers and small businesses. Banks are still unlikely to make all but the safest of loans because of current and anticipated problems with their balance sheets. The issue is exacerabated by the worry that modest-sized businesses are at greater risk of failure and therefore loan defaults in a slow economy.

The only practical solution to the problem for both banks and their current and potential customers is for the federal government to take money it does not have to bolster the balance sheets of the nearly 3,000 banks at risk for large commercial real estate write-offs. Alternatively, these firms could be leany money by the government to make money available to small business which need credit. That process might stimulate lending but would not solve the problem of the write-offs these financial institutions face.

The Treasury has said that the $700 billion TARP program is no longer necessary to rebuild the bank and credit systems. It turns out that if the Congressional Oversight Panel forecasts are accurate, the Treasury’s observation is not even close to the truth.

Douglas A. McIntyre