Close to 3,000 banks are currently classified as having a risky concentration of commercial real estate loans, according to a recent report by the Congressional Oversight Panel (COP). All of them are small to mid-sized banks, already weakened by the financial crisis.
The COP is “deeply concerned” that commercial real estate losses could jeopardize the stability of these banks and the damage will contribute to prolonged weakness throughout the economy, according to chair Elizabeth Warren.
About $1.4 trillion in commercial real estate loans are due for refinancing between now and 2014. “In today’s market, many applications will be turned down,” Ms. Warren said on a video posted on COP's Web site.
Property values have fallen 40 percent on average, and banks are unwilling to refinance; many wanting a lower loan-to-value ratio, which will trigger lot of foreclosures.
“Some loans were flat-out reckless when they were made and never should have been financed,” Warren said. Banks could suffer losses of up to $200 to $300 billion, the report said.