A report from the watchdog group that oversees the government’s TARP bailout program, said on Thursday, that the commercial real estate industry has fallen a significant amount over the last several years. They are afraid we are going to see a mass tidal wave of foreclosures on these loans in the near future.
Since early 2007 this part of the real estate market has tanked 40% and continues to decline. According to a report by the Congressional Oversight Panel, the panel that oversees the govt’s efforts to gain financial stability, said that banks are looking at a loss of about three-hundred billion dollars on failed commercial mortgages.
The report comes to point out that if this matter is not solved, these failed mortgages can potentially lead to a major reduction in lending. Some people who live in rental properties may also be in danger if the loan fails because they will be evicted from the property and this may cause our economic recovery to come to a halt.
Banks are also going to be in serious danger of collapse if this is to happen, especially mid-size and smaller banks. Mainly because these smaller institutions invest a lot of money in commercial mortgages and if those loan are to fail, so is the bank that lent the funds. This is putting major pressure on the FDIC because they will be the ones in charge of the banks when they are to fall.
During the housing bubble, many banks approved loans that were really much more than borrowers needed, due to the inflated housing prices this has caused about twenty percent of Americans to have mortgages that are underwater, or owe more on their mortgage than their property is currently worth.
Commercial mortgages are much different than traditional home loans because of the fact they are typically three to five year loans, and will generally have a balloon payment due at the end of the term. Normally, the borrower of this loan will need to refinance the mortgage before the balloon payment is due, in order to avoid this large lump sum payment.
With a good percentage of these mortgages underwater it is going to be very difficult for the loans to be refinanced, and with this we may see another mass wave of commercial defaults to come. The report comes to Treasury and suggests they come up with a new strategy to help avoid the commercial real estate crisis.
It is reported that about $1.4 trillion in commercial loans are due for refinancing before the year 2014.