Elizabeth Warren, head of the Congressional Oversight Panel for TARP, said in her monthly report that it would be nice if the government would wake up and do something about the commercial real estate losses yet to come, 'cause until they do, "the crisis will not end." The "CRE is the next shit to hit the fan" lullaby has been going on for about two years now and despite a lukewarm consensus that something, anything, has to be done, seems like no one has a real clue how to go about it, or dare we say, give two cents about it?
"The most serious wave of commercial real estate difficulties is just now beginning. Experts believe that the volume of bank write-downs and potential loan defaults may swell in the coming years, in the absence of a strong immediate improvement in the economy."
Riiiight. Given that the unemployment rate is not likely to decrease anytime soon, that vacancy rates are increasing, that the economy's fundamentals remain weak and that between 2010 and 2014, about $1.4 trillion in CRE loans will reach the end of their terms, it's totally fine to write a 189-page exposé on the subject, but solutions anyone?
Anyway, no one has any clue as to what kind of CRE exposure banks have, because last year's stress tests year 1) only examined 19 major financial institutions' capital 2) only through the end of 2010 3) small and mid-sized banks were never subjected to the stress tests, "despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses."
That augurs well, as the panel said it's most concerned about the 3,000 smaller banks with assets of less than $1 billion with concentrations of CRE loans.
"The current distribution of commercial real estate loans may be particularly problematic for the small business community because smaller regional and community banks with substantial commercial real estate exposure account for almost half of small business loans."
So what's the panel recommending? Tougher bank supervision, more capital for banks and more government sponsored sales of troubled CRE assets by banks. Yep. Same ol'e lullaby.