Comml Real Estate Loan Delinquencies Inch Higher For Banks
January 23 2009 - 11:46AM
Dow Jones News
While still a relatively small amount, delinquencies on
commercial real estate loans are creeping higher on the balance
sheets of U.S. banks.
The scope of the delinquencies in commercial property amid a
deepening recession hasn't caught up with residential real estate,
yet. And, banking analysts note that many banks classify loans to
home builders as commercial real estate loans, skewing the
delinquency numbers higher in this category.
That said, more mortgage loans for brick-and-mortar commercial
properties such as office buildings, malls and hotels are becoming
more distressed amid a continuing credit crunch. This poses a
full-fledged dilemma for banks, while exacerbating financing
constraints for the commercial real estate industry.
Gerard Cassidy, a banking analyst at RBC Capital Markets, said
he is seeing rising delinquencies for commercial construction
loans, normally provided to home builders, and for commercial real
estate mortgages. But "commercial mortgage defaults are rising
rapidly because of the weakness in the U.S. economy," and the
problems in commercial property related to rising vacancy rates in
strip malls, office buildings and hotels, he said.
Bank of America Corp. (BAC) currently holds $64.7 billion in
commercial real estate loans, of which the bank said it considers
$3.9 billion, or 6%, nonperforming. However, the bank said during
its earnings report for the fourth quarter that 72% of its
nonperforming commercial real estate loans are from home builders
falling behind on payments amid a depressed residential market.
As such, about 1.5% of its non-home builder commercial real
estate loans are in or near foreclosure. That compares with about
1.8% in the fourth quarter of 2007,when the bank didn't
specifically separate home builder loans, which account for many of
the losses.
Meanwhile, delinquent commercial real estate loan ratios - 90
days or more past due - for U.S. Bancorp (USB)rose to 3.34% during
the fourth quarter from 1% in the year-earlier period, the bank
said in its fourth-quarter statement.
"We believe commercial real estate loan...defaults from the end
of the third quarter should increase...in the next 12 months four-
to five[fold]," excluding construction loans, Cassidy said. He
noted that regional banks including Zions Bancorp (ZION) and Cathay
General Bancorp (CATY) are more vulnerable given their high
exposure to commercial real estate loans.
Mounting concerns about bank exposure to such loans come as
financing resources for commercial property are drying up,
especially from the commercial mortgage-backed securities market.
This sector had provided a significant source of financing for
acquisitions and refinancing transactions in commercial
property.
After the housing market crumbled more than a year ago, many
industry experts predicted that commercial real estate would bend
but not break like its residential counterpart. Indeed, these
experts said it was unlikely that the market would experience the
hardship endured in the early 1990s, when oversupply and an
unfavorable tax policy created one of the worst industry crises in
history.
But with the credit markets in lockdown mode, consumer
confidence battered and the U.S. in a painful recession, industry
watchers expect a commercial correction as severe or worse than
that in the early 1990s.
Omotayo Okusanya, an analyst at UBS, said UBS is projecting that
$400 billion in commercial real estate loans will come due this
year with a refinancing shortfall of between $125 billion and $150
billion. "Some of these loans will end up in default, causing
default rates to rise up the wazoo," Okusanya said.
He noted there are $3.5 trillion in commercial real estate loans
outstanding and banks have about 40% of these loans on their
balance sheets, while 26% are securitized in CMBS debt.
-By A.D. Pruitt, Dow Jones Newswires; 201-938-2269;
angela.pruitt@dowjones.com
(Marshall Eckblad contributed to this report)
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