Regulators Expect Further Woes to Come from CRE

By Hopkins, Cheyenne | American Banker, October 15, 2009 | Go to article overview

Regulators Expect Further Woes to Come from CRE


Hopkins, Cheyenne, American Banker


Byline: Cheyenne Hopkins

WASHINGTON - Bank regulators warned Wednesday of continuing credit- and asset-quality declines, particularly for commercial real estate loans.

Speaking at a Senate Banking subcommittee hearing on the state of the banking industry, the regulators overwhelmingly saw commercial real estate as their biggest worry.

"The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters is in CRE lending," Federal Deposit Insurance Corp. Chairman Sheila Bair said. "While financing vehicles such as commercial mortgage-backed securities have emerged as significant CRE funding sources in recent years, FDIC-insured institutions still hold the largest share of commercial mortgage debt outstanding, and their exposure to CRE loans stands at an historic high."

The hearing occurred as the House Financial Services Committee began debating the first bills designed to revamp the regulatory structure. Sen. Tim Johnson, the financial institutions subcommittee chairman, warned lawmakers not to lose sight of the existing problems for banks as they focus on regulatory reform.

"While restructuring our nation's regulatory system is this committee's top priority, I don't think we can do that without a clear understanding of what is happening within the sector," Johnson said. "Concerns and problems within individual financial institutions will still exist even with a new regulatory structure."

Regulators said community banks face the most exposure to potential CRE losses. And as of June, CRE loans backed by nonfarm, nonresidential properties totaled almost $1.1 trillion, or 14.2% of total loans and leases, according to the FDIC.

The Office of Thrift Supervision reported that business bankruptcies increased 64% in the first half of the year, the highest rate of increase in 16 years.

Federal regulators issued guidance on CRE loans in 2008 and will soon issue guidance on modifications to such loans. Large volumes of CRE loans are scheduled to roll over in coming quarters. Federal Reserve Board Gov. Dan Tarullo said $500 billion of CRE loans will need to be refinanced this year and next.

"That creates a set of challenges that are no more serious but different from the case with residential mortgages," Tarullo said.

CRE loans also have contributed to a number of the bank failures this year, which total 98. Regulators said they expected more failures to come. …

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