US Commercial Mortgages Pose Danger

Government Watchdog Raises Red Flag On $1.4 Trillion in Commercial Loans

For quite some time we have been hearing about the next shoe dropping with regards to the current recession. Over inflated residential property prices and sloppy mortgage regulations lead the US and most of the western world in to an economic tailspin. There have been rumblings from analysts and industry experts for the last year that we are not out of the woods yet when it comes to mortgage defaults and it appears the next wave of problems could start hitting within the next 12 months.

This time however it will be commercial real estate loans that cause the trouble. A recent report produced by a US government watchdog that was created to oversee the TARP bailout program, raises a red flag on the state of commercial mortgages in the US. There are approximately $1.4 trillion worth of commercial mortgages that will be coming to the end of their terms in the next 4 years and over half of them are underwater meaning the borrower owes more than the property is worth. We saw individuals did not hesitate to walk away from their homes when the same situation arose with residential mortgages.

Can we expect the same pattern to emerge with commercial real estate loans?

I would say probably not. With commercial mortgages you are dealing with much larger sums of money and the property owner tends to have more of their own equity in the property making it harder for them to walk away. Plus, an individual can walk away from their home and easily rent or stay with family, but a business can not just pick up their operation and move as easily. That being said, we are going to see a significant number of business walk away from their mortgage leaving many small regional banks holding the bag

Commercial mortgage crisis to affect small regional banks disproportionately

The report also highlighted that smaller regional banks and lenders have  disproportionate exposure to these commercial loans. Many of these smaller banks have already been weakened by the current financial crisis and would not be capable of weathering a storm of this magnitude. The US Government is being encouraged to act early to help keep this problem from turning into another financial crisis. One way to do this would be to inject capital into these smaller banks or help small business who are currently struggling to make their mortgage payments.

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