Congressional Report Warns of Commercial Real Estate Crisis and Discusses Proactive Strategies to Potentially Minimize Losses
On February 10, 2010, the Congressional Oversight Panel released its much-anticipated report regarding “Commercial Real Estate Losses and the Risk to Financial Stability.” In the report, the Panel expressed its deep concerns that a wave of commercial real estate failures could threaten America’s already-weakened financial system and that “[c]ommercial loan losses could jeopardize the stability of many banks, particularly the nation’s mid-size and smaller banks.”
According to the Panel, $1.4 trillion in commercial real estate loans will mature between 2010 and 2014. Due to market decreases in commercial property values borrowers currently owe more than their property is worth on nearly half of these commercial real estate loans. The Panel noted that the impact of this decrease in value is particularly troubling with respect to small and midsize banks, which are expected to bear an estimated $200 to $300 billion in losses.
The Panel recognized that proactive steps in regulatory enforcement, accounting practices, capital enhancement and removal of risky assets from bank balance sheets should be coordinated to lessen the potential impact that the commercial real estate crisis might have on local communities, small businesses and individuals. The Panel noted that one potential means to address this issue is to speed the availability of TARP funds to these small and mid-size financial institutions or to legislatively make other sources of funds available to such entities. Whether such action would be approved by Congress, however, is unclear. The text of the report is at http://cop.senate.gov/reports/library/report-021110-cop.cfm.
Troutman Sanders partner Mark Elliott provided testimony at the Atlanta Field Hearings on Commercial Real Estate on January 27, 2010, and our firm regularly represents commercial lenders and financial institutions involving TARP and commercial real estate issues.