Economic Update – Smaller Banks Face CRE Woes

On Wednesday, the eve of the stress test results, observers were wondering just how much trouble sour commercial real estate loans are going to cause those banks that hold them. Knee deep, waist deep, or up to their eyeballs?It depends on just how much a bank believed rising prices weren’t really a bubble back in the mid-2000s. The Wall Street Journal reported that, according to a document it obtained, the largest 19 U.S. banks are expecting losses of as much as 12 percent for the next two years on commercial real estate loans–a fair amount of believing in the durability of that bubble. Whatever the role of commercial real estate loans, about half of the really big banks will be directed by the government to shovel more money into their money bins, with federal funds if need be. On the other hand, the Journal also cited a report by Foresight Analytics L.L.C. that said that some 500 smaller banks (less than $1 billion in assets) have “too much” exposure to commercial real estate. Unlike the “too big to fail” banks, such banks may end up on the receiving end of a weekend visit by the FDIC. Thus far, 31 U.S. banks have been put into receivership by the FDIC this year, ranging in size from the Silverton Bank in Georgia, with assets of $4.1 billion, to the diminutive Citizens Community Bank in New Jersey, with assets of $45 million. The latest news about the residential side of real estate isn’t all that cheerful, either. According to, a real estate information company, 21.9 percent of U.S. mortgage-holders are underwater, meaning they owe more than they could reasonably expect to sell their property for, which is up from 17.6 percent in 4Q08. The figures, while high, may not be completely iron-clad, however, since it’s hard in a lot of markets to determine exactly what a house might sell for. Still, the geographic distribution of negative equity hasn’t much changed. The capital of underwater mortgages remains Las Vegas, with more than two out of three mortgage-holders in that situation. Other top underwater towns include Stockton, Modesto, Vallejo-Fairfield, Merced and Riverside, all in California, plus Reno, Phoenix and Orlando. Such a figure is feeding the foreclosure machine. As of the end of 1Q09, some 20.4 percent of all transactions in the previous 12 months involving housing were foreclosure sales, while 11.9 percent were short sales. These figures compared with foreclosures making up 19.9 percent of all transactions in the 12 months before the end of 4Q08, and short sales making up 10.9 percent during the same period. Ahead of Stress Test Day, Wall Street bounded upward. The Dow Jones Industrial Average gained 101.63 points, or 1.21 percent, while the S&P 500 was up 1.74 percent. The Nasdaq edged up 0.28 percent.