Underwater Loans Leading to Potential CRE Disaster May Prolong Recession

Treasury Department and bank supervisors must undertake a coordinated effort to address a developing commercial real estate "crisis" that could be very damaging to the economy, according to a Congressional panel that oversees the government's Troubled Asset Relief Program. Nearly half of the $1.4 trillion in commercial real estate loans that need to be refinanced between 2010 and 2014 are under water and this could lead to a "significant wave of CRE defaults" and "prolong an already painful recession" the Congressional Oversight Panel says in a new 190-page report. CRE losses at banks could range as high as $200 billion to $300 billion with small and mid-sized banks facing the greatest exposure to write-downs and losses, the report warns. The banking regulators are encouraging banks to refinance CRE loans if the borrowers have the capacity to make the payments on the restructured loan. This policy allows banks to avoid writedowns of problematic loans for now but its success depends on a quick recovery of the overall economy. "Lenders obviously like" this policy, the COP report says. But investors looking to buy distressed properties warn it will push losses into the future and slow the recovery of the CRE market. "It is critical that bank supervisors fully recognized and are publicly clear about the potential for a CRE crisis and are quick to force loss recognition where necessary," the COP report says.