Financial Regulatory Forum

US banks must mind commercial real estate book-Fed

July 9, 2009

   By Patrick Rucker
   WASHINGTON, July 9 (Reuters) – Many U.S. banks need to check their commercial real estate holdings more carefully and ensure that a continued decline in the property market does not threaten the lender, a Federal Reserve bank examiner said on Thursday.
   “Many institutions would benefit from additional and better stress testing, improved management information systems and stronger appraisal practices,” Jon Greenlee, associate chief of the Fed’s banking supervision division, told congressional lawmakers.
   New loans for projects such as shopping malls or office buildings evaporated during the credit crisis and economic downturn and regulators are concerned that many banks have dangerously large holdings of commercial real estate loans.
   The commercial real estate sector has been caught in a double bind for more than a year, with regulators warning about bloated real estate holdings while trying to kick-start financing for the frozen sector.
   With an estimated $400 billion in commercial real estate debt set to mature this year and another $300 billion due in 2010, the sector is facing an acute crisis, said New York Rep. Carolyn Maloney.
   “The commercial real estate time bomb is ticking,” Maloney, a Democrat, said in an opening statement. “If mortgages are unable to refinance or otherwise pay their large balloon payments, we could expect to see the default rate soar.”
   Maloney, chairman of the Joint Economic Council, said lawmakers are largely relying on the Fed and Treasury Department to use their tools to help markets.
  
   FED ACTION
   The Fed could eventually invest as much as $1 trillion under its principal program to restore credit markets — the TALF, or Term Asset-Backed Securities Loan Facility.
   Last month the Fed began to allow some fresh commercial loan securities to be used as collateral under TALF and next week some existing, or “legacy” assets will also be part of the program.
   In normal times, commercial mortgage-backed securities funded as much as 30 percent of loan originations, Greenlee said. “New CMBS issuance has come to a halt,” he said.
   After a record $233.7 billion in CMBS issuance in 2007, that number fell to $12 billion in 2008 and none this year,  according to Credit Suisse.
   Investors have so shunned commercial real estate that existing properties are being pushed toward default.
   “Loans that do make it to maturity, a very large percentage, perhaps in excess of 65 percent, may not qualify for refinancing under the dramatically tighter new underwriting standards,” said Richard Parkus, a research analyst with Deutsche Bank Securities in New York.
   The Joint Economic Committee has no law-writing power. But its research and hearings can highlight urgent financial issues.
   Maloney said that lawmakers are “watching closely” to see if Fed and Treasury actions can restore markets.
   (Reporting by Patrick Rucker and Al Yoon in New York; Editing by Andrea Ricci and Dan Grebler) ((patrick.rucker@thomsonreuters.com, +1 202 310 5474)))
  Keywords: FINANCIAL/REALESTATE 
  
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 Thursday, 09 July 2009 17:41:10RTRS [nN09449184] {EN}ENDS

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