US banking regulators warned this weekthat commercial property loans pose the biggest threat to the country’s financial institutions, as America braces itself for a swathe of failures among small lenders and real estate companies.
Following the sub-prime crisis, the US is waking up to the potential problems posed by commercial property lending, with the numbers of loan defaults rising sharply.
This week, regulators began the process of creating guidelines for lenders to workout the estimated £1.1trn of debt secured against commercial property in the US.
“The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters is in commercial real estate lending,” said Sheila Bair, chairman of the Federal DepositInsurance Company. “Prudent loan workouts are often in the best interests of financial institutions and borrowers.”
Loan delinquencies in securitised loans -loans where interest has gone unpaid for 60 days or longer – jumped in the third quarterto 3.6%,more than three times higher than in the same period last year, saidrating agency Moody’s.
According to the Wall Street Journal, the US Federal Reserve is concerned that lenders will not face up to their property loan problems quickly enough.”Banks will be slow to recognise the severity of the loss -just as they were in residential,” saida Fed presentation to banking chiefs last month.
Hardest hit will be smaller regional banks, which took on too much commercial property exposure relative to theiroverall size. According to Foresight Analytics, as many as 581 small regional banks couldcollapse by the end of 2011.
However, this will provide opportunitiesfor deal-hungry investors. Last week, Barry Sternlicht’s Starwood Capital confirmed it had teamed up with private equity firm Texas Pacific Group to pay $2.8bn for $4.5bn of property loans from failed Chicago-based bank Corus.
