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Can bank trusts save commercial loans?
A CB Richard Ellis real estate sign in Atlanta.
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Kai Ryssdal: Financial firms are raising billions of dollars to create a slew of new real-estate investment trusts, or REITs. REITs make real-estate loans; they buy them, too. The new REITs will focus on buying commercial mortgages at deep discounts. Their timing looks pretty good because the commercial real-estate market is a mess. Marketplace's Jeff Tyler puts commercial property in the context of the wider mortgage crisis.
JEFF TYLER: The number of borrowers that have fallen behind on their commercial mortgages has doubled in the last year. Retailers like Circuit City and Sharper Image have gone bankrupt,
leaving buildings empty all over the country.
Barry Ritholtz is CEO of the financial research firm Fusion IQ.
BARRY Ritholtz: I suspect that this is going to be an ongoing problem that will get worse and worse over the next two to four quarters.
Many of these mortgages were made by small and midsized regional banks. Ritholtz says they've been reluctant to acknowledge that many of those loans are now underwater.
Ritholtz: The fear is if they actually take the legitimate write-downs that they'll be pretty illiquid and pretty close to insolvent.
So many banks are restructuring the commercial mortgages. Though that's often a short-term solution.
CHRISTOPHER Whalen: It's likely that when someone is restructured, there's a pretty good chance -- maybe one in three -- that they're gonna eventually default.
That's Christopher Whalen with Institutional Risk Analytics. He says not being straight about their financial situation could leave some banks dead on their feet.
Whalen: It will cost the banking industry and ultimately the taxpayer if we have to subsidize it more money if you keep the zombies open.
But he says that it's not just the banks that are reluctant to admit they are bleeding red ink. Federal and state regulators worry that coming clean could leave some small communities without a bank.
Whalen: They know when the banks are closed, the assets will be sold and there may not be a community bank there ever again. So there's a big political dimension here, don't kid yourself.
But because these banks are propping up these troubled mortgages, they have less money to make new loans that small businesses need. That slows economic growth, potentially prolonging the recession.
I'm Jeff Tyler for Marketplace.
Jeff:
Thanks for your comments re: "The fall of King Commercial." The fact is that we, the public and taxpayers will never know the full severity of this CRE depression! Forecasts are all over the place on total value, it's not just the CMBS's. It's CLO's, CMO's, CDO's and the whole slew of derivitives made of of both Residential & Commerical mortgages. If the Feds are offering $1 Trillion for support then you can bet your bottom dollar the true value is better then 3X that figure. It doesn't matter because if you let the Capital Markets absorb the toxicity the banks that should be closed will be and that creates space for new or exisitng banks to grow. Let the music play because when it stops the one without chairs deserve to be out. Why are the banks driven by the fear of loosing something they have (legacy assets) or not getting something they want(90 cents on the dollar for an asset that is 50% of its inflated value) instead of creating opportunities for businesses, jobs and returns to stockholders?
