Posted by: BayAreaComRE | February 16, 2010

CAPITOL HILL: Small Banks and Small Business at Risk, According to Congressional Oversight Panel’s Feb Report

The newly released report by a congressional panel sheds light on the seriousness of the rolling debt on commercial real estate (CRE) loans in the next few years. The report is quite long so we provided a pithy review, but if you have the time it’s worth reading. It covers TARP, TALF, CMBS, full range of commercial properties, historical significance and attempts to offer solutions.

Small and mid-sized banks are the most exposed to commercial lending, which also predominately cater to small businesses. Small businesses were catalysts during the last two bull markets. This creates a negative feedback loop. The COP (Congressional Oversight Panel) noted $1.4 trillion of CRE debt maturing in the next three years, and nearly half of which is underwater (property worth less than the loan).

Of the approximately 8,100 banks in the U.S., 2,988 are small banks that are dangerously exposed to commercial real estate. In addition to the lack of diversification, these community and mid-sized banks also hold high concentrations of the riskiest and least sought-after loans, including transition properties and construction loans in secondary or tertiary markets, according to the panel.”

“For financial institutions, the ultimate impact of the commercial real estate whole loan problem will fall disproportionately on smaller regional and community banks that have higher concentrations of, and exposure to, such loans than larger national or money center banks.  The impact of commercial real estate problems on the various holders of CMBS and other participants in the CMBS markets is more difficult to predict.  The experience of the last two years, however, indicates that both risks can be serious threats to the institutions and borrowers involved” – COP Report.
The office market has seen 40% declines in values since the peak in 2007 and vacancy rates eclipse 18%. BayAreaComRE will track the troubled assets in San Francisco and Greater Bay Area, as well as the banks and businesses most affected by this negative feedback loop.
See NREI Online for further coverage on the report.

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