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Thursday, November 26, 2009

$430 Billion in CRE Losses?

by Calculated Risk on 11/26/2009 05:55:00 PM

From Jon Lansner at the O.C. Register: How banks may lose $430 billion more

Banks are projected to lose $430 billion on commercial real estate loans in the next two to three years [said] Stan Mullin, an associate with California Real Estate Receiverships in Newport Beach
Highlight’s of Mullin’s talk:
•$1.4 trillion in commercial loans are coming due in the next five years.
•That’s equal to the same amount that came due in the last 15 years.
•Lenders could take massive losses on their real estate portfolios from 2010-2013.
This is similar to the recent presentation by Dr. Randall Zisler, CEO of Zisler Capital Partners:
A crisis of unprecedented proportions is approaching. Of the $3 trillion of outstanding mortgage debt, $1.4 trillion is scheduled to mature in four years. We estimate another $500 billion to $750 billion of unscheduled maturities (i.e., defaults).
And from the WSJ in October:
Commercial real-estate loans are the second-largest loan type after home mortgages. More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks.

The Fed presentation states that the most "toxic" loans on bank books are so-called interest-only loans, which require borrowers to repay interest but no principal. Those loans "get no benefit from amortization," the report states.

"Today, most of the borrowers are paying because interest rates are so low, but the question is whether the loans will get paid off when they come due," said Michael Straneva, global head of Ernst & Young's transaction real-estate practice.
And of course this is why the FDIC released the recent Policy Statement on Prudent Commercial Real Estate Loan Workouts
This policy statement stresses that performing loans, including those that have been renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral declined.
And the "value of the underlying collateral" had definitely declined - by 43% on average according to Moody's.

In the end, the size and timing of the losses really depends on the success of the workouts, and I expect the terms on many of these loans will be extended for a number of years - taking advantage of the very low interest rates and hoping property values eventually rebound.