Commercial Real Estate and Tricks And Traps

Houses Are Only One Kind Of Real Estate

There are also shopping malls, office buildings, stores and shops of all sizes. From the looks of things, by the end of the year more than 50% of those with loans will be underwater. From the February COP’s report (emphasis mine):

The Congressional Oversight Panel’s February oversight report, “Commercial Real Estate Losses and the Risk to Financial Stability,” expresses concern that a wave of commercial real estate loan losses over the next four years could jeopardize the stability of many banks, particularly community banks. Commercial real estate 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. While these problems have no single cause, the loans most likely to fail are those made at the height of the real estate bubble.

The Panel found that “a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.” When commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities. Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession.

And from the Executive Summary of that report:

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the
end of their terms. Nearly half are at present underwater – that is, the borrower owes more
than the underlying property is currently worth. Commercial property values have fallen more
than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from
eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which
have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful
downward pressure on the value of commercial properties.

Elizabeth Warren chairs the Congressional Oversight Panel. Below is a short piece of interview from CNBC.

Tricks And Traps

“For years, Wall Street CEOs have thrown away customer trust like so much worthless trash.

Banks and brokers have sold deceptive mortgages for more than a decade. Financial wizards made billions by packaging and repackaging those loans into securities. And federal regulators played the role of lookout at a bank robbery, holding back anyone who tried to stop the massive looting from middle-class families. When they weren’t selling deceptive mortgages, Wall Street invented new credit card tricks and clever overdraft fees.


So far, Wall Street CEOs seem determined to stop any kind of watchdog. They seem to think that they can run their businesses forever without our trust. This is a bad calculation.

It’s a bad calculation because shareholders suffer enormously from the long-term cost of the boom-and-bust cycles that accompany a poorly regulated market. J.P. Morgan CEO Jamie Dimon recently explained this brave new world, saying that crises should be expected ‘every five to seven years.’

He is wrong.”

~Elizabeth Warren, stating the case for a new Consumer Financial Protection Agency in the Wall Street Journal

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