Commercial real estate has long been a danger and now we’re starting to see it hit the mainstream. Let’s take a look…
Kocherlakota Sees Risk of Small Banks Sparking Crisis
Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said he sees a chance that smaller banks will become the source of the next financial crisis, given their links to commercial real estate.
“Yes, the last financial crisis was centered in larger banks and financial institutions,” Kocherlakota, 46, said in a speech today in Minneapolis. “This hardly means that the next crisis could not come from smaller institutions,” whose ties to commercial real estate “may be exerting a significant drag on the overall economic recovery.”
Kocherlakota underscored the need for the central bank to keep its supervisory powers, saying suggestions in Congress that the Fed no longer oversee small banks show “a dangerous lack of imagination.” The government’s efforts to boost regulation of larger firms will lead to more risk-taking at smaller banks, boosting the odds they’ll trigger the next crisis, he said.
TARP Watchdog Says Commercial Real Estate Loans Pose Danger
Commercial real estate loans have the potential to go sour and wreck the U.S. economy unless regulators prepare now, according to a report today from a watchdog Congress created for the government’s financial bailout program.
The report should be a “red flag” that prompts regulators to increase preparations for staving off another banking crisis, said Elizabeth Warren, a Harvard law professor and chairman of the Congressional Oversight Panel of the Troubled Asset Relief Program. The panel was created in October 2008 to monitor the Treasury’s efforts to rescue the banking system from the worst financial crisis in decades.
Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms and nearly half are “underwater,” meaning the borrower owes more than the property is worth, the report said. If economic conditions and tighter lending standards mean that borrowers can’t refinance, “hundreds” of banks could fail and the broader economy could suffer, said the report, which the panel approved unanimously.
Warren estimates half of CRE loans will be under water! While a certain percentage of households may feel a moral obligation to continue paying these types of mortgages, I can guarantee there won’t be too many businesses making that same choice. After only 2 months, we’ve already had 22 bank failures, putting us on pace to match last year’s 140 figure. I think we’ll easily top that amount as the CRE crisis has yet to fully reach its peak. Whether this spreads to the overall economy remains to be seen, however, we should not be listening to the Fed’s inaccurate reassurances this time. This is a serious problem, potentially even greater than the residential crisis. Stay tuned to this one…