Subprime Mortgage Fallout Expected To Continue For Years, Threatening Community Banks, COP Says

Here’s a report that you have to have a strong stomach to be able to read: "Commercial Real Estate Losses and the Risk to Financial Stability," prepared by the Congressional Oversight Panel, which was created to oversee the expenditure of the Troubled Asset Relief Program funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 and to provide recommendations on regulatory reform. The panel says a lot of things in this report, including that it is “deeply concerned” that a wave of commercial real estate loan losses over the next four years could jeopardize the stability of many banks, particularly community banks, and prolong the recession. It notes that commercial real estate ("CRE") loans made over the last decade – including retail properties, office space, industrial facilities, hotels and apartments – totaling $1.4 trillion will require refinancing in 2011 through 2014. Nearly half are at present "underwater," meaning the borrower owes more on the loan than the underlying property is worth. 

The report indicates that although these problems have no single cause, the loans “most likely to fail” are those made at the height of the real estate bubble. The report states, moreover, that, "Even borrowers who own profitable properties may be unable to refinance their loans as they face tightened underwriting standards, increased demands for additional investment by borrowers, and restricted credit."
 
This is a potential problem for community banks, according to the report, which “face the greatest risk of insolvency due to mounting commercial real estate loan losses.” It notes that, according to federal guidelines, 2,988 banks nationwide are classified as having a "CRE Concentration."