TARP watchdog says commercial real estate loans pose danger

WASHINGTON: Commercial real estate loans have the potential to go sour and wreck the US economy unless regulators prepare now, according to a report on Feb 11 from a watchdog Congress created for the government’s financial bailout programme.

The report should be a “red flag” that prompts regulators to increase preparations for staving off another banking crisis, said Elizabeth Warren, a Harvard law professor and chairman of the Congressional Oversight Panel of the Troubled Asset Relief Program. The panel was created in October 2008 to monitor the Treasury’s efforts to rescue the banking system from the worst financial crisis in decades.

Between 2010 and 2014, about US$1.4 trillion (RM4.8 trillion) in commercial real estate loans will reach the end of their terms and nearly half are “underwater,” meaning the borrower owes more than the property is worth, the report said. If economic conditions and tighter lending standards mean that borrowers can’t refinance, “hundreds” of banks could fail and the broader economy could suffer, said the report, which the panel approved unanimously.

“There is a serious problem coming and it will hit an already weakened financial system,” Warren said on a conference call on Feb 10 with reporters.

Small and mid-sized banks may bear the brunt of coming losses on commercial real estate loans, the report said. It found that nearly 3,000 banks have concentrations in commercial real estate loans, including 2,115 banks with US$100 million to US$1 billion in total assets.

Warren said there’s no “single bullet” that regulators could use to prevent a meltdown. Instead, she recommended stress tests of small and mid-sized banks and urged regulators to spend more time on planning.

Available tools could include more capital injections for small banks, lending help for small businesses or a government fund to guarantee loans held by smaller banks, the report said. – Bloomberg LP