February 4, 2011 / 2:05 PM / in 6 years

UPDATE 2-US commercial property loans a drag,not huge threat

5 Min Read

*Lawmakers, regulators eye weakened commercial real estate

*Loan losses won't pull down systemically important banks

*Not telling banks to curb lending, but be prudent

(Adds comments from other officials at congressional hearing)

By Mark Felsenthal and Glenn Somerville

WASHINGTON, Feb 4 (Reuters) - Soured commercial real estate loans pose a continuing threat to recovery from the 2007-2009 financial crisis but won't pull down any systemically important banks, regulators told a congressional panel on Friday.

The chairman of the Congressional Oversight Panel, Ted Kaufman, noted at the start of a hearing that some $3.4 trillion in debt is outstanding on commercial real estate loans for everything from office buildings to hotels and apartments.

"If borrowers default in large numbers, commercial properties could face a wave of foreclosures," Kaufman said.

"Small banks in particular could face insolvency, as nearly 1,300 banks nationwide are considered by regulators to have concentration in commercial real estate."

A top Federal Reserve official played down extreme concerns but said there will be difficulties in coming years as current loans mature and need rolling over, putting banks under strain.

Most commercial mortgages have shorter maturities than those offered by banks for residential loans, generally three to 10 years and often are structured so that they are not fully repaid during the life of the loan but are instead rolled over.

"While we expect significant ongoing CRE-related problems, it appears that worst-case scenarios are becoming increasingly unlikely," Patrick Parkinson, the Fed's director of banking supervision and regulation, told Congress.

Hefty Dollar Losses

Parkinson said that since the beginning of 2008 through the third quarter of 2010, commercial banks had incurred almost $80 billion of losses from commercial real estate exposures. Banks are estimated to have taken roughly 40 percent to 50 percent of losses they will incur over this business cycle, he said.

"Even if CRE delinquency metrics continue improving, there remains a sufficiently large overhang of distressed CRE at commercial banks such that loss rates for this portfolio will likely stay high for some time and many banks with CRE concentrations will remain under stress," he said.

Parkinson said some systemically important financial firms had large exposures to commercial mortgage-backed securities and derivatives such as commercial real estate collateralized debt obligations. But he said risks in those areas had been reduced and significant markdowns already applied to those securities.

The banks with the biggest totals of commercial real estate loans were small to medium-sized, with assets between $1 billion and $10 billion, Parkinson said. Among big banks with $10 billion or more of assets, only about 10 percent had high concentrations of commercial real estate loans.

"While problems in the CRE market will be an ongoing concern for a number of banking organizations and a negative factor for economic growth and lending, we do not see CRE losses as a threat to systemically important financial institutions," Parkinson said.

Sandra Thompson, director of the Federal Deposit Insurance Corporation's division of supervision and consumer protection, noted that the number of failing banks has increased in each of the past four years, reaching 157 in 2010.

"While the number of failures is expected to remain elevated in 2011, we expect that 2010 represented the peak year for failures in this cycle," she said, adding the FDIC was not telling banks to restrict lines of credit or deny a refinancing request solely on the basis of weakened collateral.

"The FDIC expects that banks will work with commercial borrowers who remain creditworthy despite some deterioration in their financial condition," Thompson said.

The Fed's Parkinson said there was no question that losses due to commercial real estate, particularly residential construction and land development lending, were a chief reason for the high number of bank failures since 2008 and there will be more due to commercial real estate losses over the next few years.

Regulators were encouraging loan restructuring by banks and their commercial customers to reduce losses, he added. (Reporting by Glenn Somerville and Mark Felsenthal, Editing by Andrea Ricci)

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