When we think about the current economic crisis that was, to a large extent, brought on by the lax lending practices of banks when financing the residential real estate market, what is it that comes to mind?
Is it the low documentation/no documentation mortgages given to a borrower with no realistic hope of being able to manage the payments? This, because income was not being made by the applicants in an amount sufficient to pay the loans debt service. Perhaps it’s the teaser rates that lured many a home buyer into the market with the dream of quick price appreciation, leading to a quick flip before the mortgage reached a market interest rate making payments impossible.
Maybe the thoughts that come to mind are somewhat different, but the reality is that the economy in the United States faces another impending crisis, this time in the commercial real estate market.
Much like residential, the collateralized mortgage backed securities market (CMBS) allowed lenders in the commercial mortgage space to underwrite loans with the thought in mind that it had to fit into the box that would allow it to be purchased and packaged. Not that it would be sitting on that underwriter’s balance sheet so they better make sure that the loan was money good.
Many of these loans were made with a five-year window, at which time the loan would have to be refinanced. Again, like the residential market, many of guarantors of these loans assumed that they would either flip the building or that refinancing would not be an issue.
Congressional Oversight Panel on Commercial Real Estate
This is a brief statement taken from the conclusion of the Committee on the potential crisis:
“…There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public. An extended severe recession and continuing high levels of unemployment can drive up the LTVs, and add to the difficulties of refinancing for even solidly underwritten properties. But delaying writedowns in advance of a hoped-for recovery in mid- and longer-term property valuations also runs the risk of postponing recognition of the costs that must ultimately be absorbed by the financial system to eliminate the commercial real estate overhang…”
The report paints a somewhat bleak picture of the problem, and offers no real solutions for this $3.4 trillion market that has approximately $1.4 trillion due to roll over between 2010 and 2014. In 2011 alone there are estimates at lending institutions in the $200-$300 billion range.
Once again the economy of the United States faces some very high hurdles with no great and obvious solutions at hand.
The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com