U.S. programs seen too late to stem foreclosure wave

By Ilaina Jonas

NEW YORK (Reuters) - The new federal programs to aid the U.S. financial markets will likely not fend off the impending wave of foreclosures on U.S. commercial real estate loans, experts said.

U.S. Treasury Department officials unveiled this week more specifics of a program that will enable the federal government to help private buyers purchase toxic loans and asset-backed securities, including commercial mortgage-backed securities (CMBS).

While there is much public debate about whether it will get the banking industry back on its feet, many real estate experts said that it won't prevent an approaching wave of defaults of current loans in the U.S. commercial real estate sector

"This isn't designed to head off foreclosures," said Thomas Barrack Jr, head of real estate private equity firm Colony Capital, which has $36 billion of assets under management. "This is designed to start the banks lending."

The U.S. commercial real estate boom that started around 2004 and peaked in 2007 was fueled by cheap debt. Banks and other lenders were often willing to lend up to 90 percent or more of the purchase price. The loans often assumed optimistic rent growth and rising occupancies in the future.

Borrowers and lenders assumed that the loans, often interest-only, would be repaid by property sales or by new loans that would more than cover the principal due.

But the market began to collapse in the second half of 2007, when the credit markets froze. Now borrowers are finding themselves squeezed as older loans come due and there is little lending to support sales or refinancing.

About $814 billion in commercial mortgages -- for apartment houses, office buildings, shopping centers, warehouses and hotels -- are expected to mature this year through 2011, with $250 billion due this year, according to Foresight Analysis.

That means borrowers will have to raise more equity, which is expensive, or lenders will have to foreclose or extend loans, hoping values will rise again.

"The myth has been that commercial is far more solid than residential," said Robert White Jr, president of Real Capital Analytics. "We were all patting ourselves on the back, that we weren't overbuilding."

AS BAD AS THE HOUSING BUST

Those cheery days seem long past.

U.S. commercial real estate prices are falling at a similar rate to residential, down about 17 percent year over year, according to Real Capital Analytics.

Sales volume for commercial real estate was down 80 percent in February because of the inability to get a loan and the wide gap between the prices buyers and sellers want.

U.S. commercial real estate prices may fall 35 to 45 percent from their peak, exceeding the declines of the painful downturn of the early 1990s, according to Richard Parkus, head of CMBS research for Deutsche Bank. Rent declines and vacancy rates may approach those of the early 1990s.