Bank Failures in the U.S.

Massive Bank Failures Due, Says Oversight Panel

February 25, 2010

Epoch Times - Close to 3,000 banks are currently classified as having a risky concentration of commercial real estate loans, according to a recent report by the Congressional Oversight Panel (COP). All of them are small to mid-sized banks, already weakened by the financial crisis.

The COP is “deeply concerned” that commercial real estate losses could jeopardize the stability of these banks and the damage will contribute to prolonged weakness throughout the economy, according to chair Elizabeth Warren.

About $1.4 trillion in commercial real estate loans are due for refinancing between now and 2014.

“In today’s market, many applications will be turned down,” Ms. Warren said on a video posted on COP's Web site.

Property values have fallen 40 percent on average, and banks are unwilling to refinance; many wanting a lower loan-to-value ratio, which will trigger lot of foreclosures.

“Some loans were flat-out reckless when they were made and never should have been financed,” Warren said. Banks could suffer losses of up to $200 to $300 billion, the report said.

“A big enough wave of commercial mortgage defaults would trigger economic damage that would touch the lives of every American,” Warren said.

Empty offices, empty hotels, and empty stores could lead directly to job losses, and banks could fear lending. The largest loan losses are projected for 2011 and beyond. But the stress tests conducted on big Wall Street banks last year examined their stability only through 2010, the COP report states.

“Even more significantly, community banks tend to hold much greater concentrations of commercial real estate than big Wall St. banks. But community banks never underwent any stress tests at all,” Warren said.

Nearly 3,000 community banks (that’s nearly 40 percent of all banks in the United States), have a very high proportion of commercial real estate on their books and are at particular risk of being overwhelmed.

These are the same banks that provide loans to small businesses that create jobs and boost productivity.

“If hundreds of community banks go under, the effect could be to dump sand in the gears of our economic recovery,” Warren said.

Bailout Panel Cites Commercial Real Estate Danger

February 11, 2010

AP - Over the next several years, failed commercial real estate loans could litter American cities with empty stores and office complexes, cause hundreds of bank failures and weaken the economy, a watchdog report says.

Banks face up to $300 billion in losses on loans made for commercial property and development, according to a report released Thursday by the Congressional Oversight Panel. The panel monitors the government's efforts to stabilize the financial system.

The report says the defaults could lead to reduced lending and cause the eviction of families from rental properties. Bank failures also could contribute to job losses and hurt the economic recovery.

Smaller banks are more vulnerable to the losses than their larger Wall Street counterparts. That's because commercial real estate makes up a larger portion of their portfolio.

The Federal Deposit Insurance Corp., which manages bank failures and insures deposits, is under stress that will intensify over the next few years, panel chairwoman Elizabeth Warren said in a call with reporters.

Small- and mid-size banks have been failing at the fastest rate since the savings and loan crisis of the 1980s and 1990s. The failures are due mostly to bad loans they made for commercial projects.

Banks often lent too much for land and buildings whose prices were inflated by a real estate bubble. They also relied on rosy assumptions about the profitability of retail and office projects and did not consider the possibility of a severe recession.

Commercial property values have fallen more than 40 percent in the past three years, the report notes.

Some have been unable to pay the loans. Others have stopped paying because they now owe more than the properties are worth. Losses are mounting for banks, more of which will close. That could spell trouble for the economic recovery, said Warren, a Harvard law professor.

"If hundreds more community banks go under, the effect would be to ... dump sand in the gears of the economic recovery," she said.

Unlike residential mortgages, commercial loans are refinanced every three to five years. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will come due for refinancing, the report says. For nearly half of them, borrowers could struggle to get new financing because they'll owe more than the properties are worth.

The report attributes the looming crisis to failures of bank management and supervision. It says banks made loans based on property values inflated by the real estate bubble. They sometimes acted carelessly "in a rush for profit," the report says. Banks and their regulators failed to consider the possibility of reduced consumer demand from a severe recession, the panel says.

The panel criticizes the Treasury Department and bank supervisors for not putting smaller banks through "stress tests" like those done last year on the nation's 19 largest banks. Warren notes that Treasury Secretary Timothy Geithner resisted calls to conduct public stress tests of smaller banks.

The Treasury Department referred to comments by Geithner that bank regulators routinely conduct such assestments confidentially.

Warren also noted that last year's tests gauged banks' strength only through 2010. The commercial real estate threat looms largest in 2011 and beyond ...

What Isn’t Happening with the $3 Trillion Commercial Real Estate Market: Loans Falling and Vacancy Rates at Record Heights at 10 Percent