US property market losses could top $387.5 billion
* Banks could lose $250-$300 billion from commercial loans
* CMBS defaults estimated at $236.1-$291.1 billion
* CMBS losses estimated at $66.2-$87.5 billion
NEW YORK, July 15 (Reuters) - More than one fifth of the commercial real estate loans securitized in 2007, the peak of the boom, could be wiped out by borrowers failing to make payments, according to a new report by Deutsche Bank AG (DBKGn.DE) released on Wednesday.
Total losses for outstanding commercial mortgage-backed securities (CMBS) loans may be as high as 9 percent to 12 percent as borrowers fail to meet monthly payments, or get an adequate loan to meet the balloon payment when a current loan matures, according the report.
Total losses on loans securitized from 2005 through to 2008 are expected to be in the range of 11.5 percent to 15.3 percent. Total losses on loans securitized in 2007 are expected to exceed 21 percent, said the report by Richard Parkus, Head of CMBS Research of Deutsche Bank Securities.
The report was based on some 54,000 fixed-rate CMBS loans with a total balance of $625 billion.
Commercial real estate borrowers face trouble on two fronts: They are at risk of defaulting before their loans mature because the U.S. recession has sent vacancies at hotels, office buildings, shopping centers, warehouses and apartments rising and rents falling.
Secondly, if they are able to make it through the life of the mortgage, borrowers might find it difficult to refinance loans on properties that are now worth less. Loans also will cover a lower percentage of that lower value. So many borrowers might come up short repaying the principle.
Deutsche Bank projects total defaults on loans securitized between 2000 and 2008 to be between $236.1 billion and $291.1 billion, depending upon economic conditions. Losses to investors are projected between $66.2 billion $87.5 billion, with the largest appearing in 2012 as 5-year loans made at the peak of the market come due, according to the report.
U.S. banks are likely to fair even worse because they were active in riskier loans, particularly construction loans and loans for condominiums. Parkus estimates losses for banks from a combination of construction loans and loans on existing properties will be $250 billion to $300 billion, excluding loans for apartment buildings.
"In our view, banks, will once again, be at the epicenter of the commercial mortgage crash, just as they were in the early 1990s," the report said.
Smaller regional and community banks are likely to suffer more than the larger banks, as their exposure to the riskiest construction and land development loans is greater.
In total, U.S commercial mortgage losses could top $387.5 billion.
So far, banks have avoided foreclosing on loans by extending them and kicking the problem down the road. But that will only lengthen the time the commercial real estate sector remains languishing in a slump, Parkus said.
Private capital used to snatch up distressed loans and property or add equity to fill the gap between maturing loans and expiring ones could mitigate the sector's suffering, Parkus said.
"We regard the entry of private capital into commercial real estate as a critical step in dealing with the problems that, without question, lie ahead over the next five years or more," he added. (Reporting by Ilaina Jonas; editing by Andre Grenon)
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