In February 2011, economists told us that the Great Recession is receding, if not over. If many consumers—and their banks—still feel mired in that same recession, at least the fiscal crisis of 2008 is history. The markets are stable, business profits are up, employment is improving, and it looks like the free fall in real estate values for homes, office buildings, hotels, and shopping centers has finally ended. Prices are not likely to climb much in the next few years, but at least real estate markets will probably be stable soon.
It looks like the worst is over for the banking community, too. More banks will struggle with troubled commercial real estate loans, and some will fail. Yet little has changed with the commercial real estate (CRE) loan situation.
How Serious is the CRE Risk?
Last year, reports on the safety and stability of commercial real estate (CRE) loan were grim. “The greatest exposures faced by community banks may relate to construction loans and other CRE loans,” said FDIC Chairman Sheila Bair in October 2009. “These loans made up over 43% of community bank portfolios, and the average ratio of CRE loans to total capital was above 280%.”
In its February 2010 report, the Congressional Oversight Panel (COP), created o oversee the government’s massive financial-crisis intervention programs and defunct as of April 3, 2011, reported that some $1.4 trillion in CRE loans need to be refinanced between 2011 and 2014. Nearly half of them are “underwater,” where the mortgage-holders owe more than what the underlying property is worth. The COP’s February report warned that “a wave of commercial real estate loan failures could threaten America’s already-weakened financial system” over the next few years.
As of April 2011, some 3,000 community banks were still in trouble, mostly because of their CRE loan portfolios. At the end of the third quarter 2010, about $3.2 trillion of this real estate debt was outstanding, and about $1.6 trillion was held by community banks, so they faced great risk from default and foreclosure.