Banks losing on falling property values

Professor Elizabeth Warren, chairman of the Congressional Oversight Panel set up to oversee the TARP program

TEXT OF INTERVIEW

Steve Chiotakis: The congressional panel overseeing the Troubled Asset Relief Program says
it has new concerns for banks that made loans for commercial real estate. It says many community and regional banks face up to $300 billion in losses. That's because property values have fallen by nearly half in the past three years. Professor Elizabeth Warren is chair of the Congressional Oversight Panel and she joins us now with some details of the report. Welcome Professor.

Elizabeth Warren: Glad to be here.

Chiotakis: Why are you so concerned about mid-sized and smaller banks?

Warren: Well, when the large financial institutions moved heavily into credit cards and home mortgages, the part of the market that was left for community banks was really commercial real estate and small business lending. And that means now that the commerical real estate market is in real trouble, that that hits disporportionately in these smaller financial institutions.

Chiotakis: Don't we know the health of banks, though?

Warren: Hah, actually no we don't in some sense. Remember, the stress tests were performed only on the 19 largest financial institutions, and it included data only through 2010 -- $1.4 trillion in commercial real estate loans are going to come up for new financing 2011 to 2014. In other words, we're just on the front end of that wave of foreclosures.

Chiotakis: But there are some businesses that are doing OK. I mean, can't the good sustain us through another bad period?

Warren: Well, there's a real problem though: commercial mortgages are different from residential mortgages. You make payments for somewhere in the neighborhood of three to 10 years, depending on how the loan's set up. But it doesn't cover the principle. So it's whether or not the mrotgage on that property can be refinanced.

Chiotakis: And what's the remedy here? What do you recommend?

Warren: Well you know, there aren't any good remedies. Let's face it -- when a bubble pops, somebody's gonna have to bear some losses here.

Chiotakis: Does that mean no more bank bailouts?

Warren: I don't want to see any more bank bailouts, but we're really caught on this one. There are more losses coming, and they are really, really substantial. And we have an already fragile banking system. We need to start swinging into action now to deal with the problem that's heading our way.

Chiotakis: Harvard law professor Elizabeth Warren, chair of the Congressional Oversight Panel. Professor, thanks.

Warren: Thank you.

About the author

Steve Chiotakis was the host of Marketplace Morning Report until January 2012.

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