| Anyone who owns commercial real estate knows | | | | funds as to whether that is constitutional to do so |
| that there are cycles in commercial real estate. | | | | without additional legislation. |
| There are times when the commercial real estate | | | | A more practical approach might be to allow the |
| market is "hot" and times when the real estate | | | | banks to extend the due date for the underwater |
| market is oversaturated and is considered "soft." | | | | loans, rather than to force a bank to recognize |
| As the economy has been in a deeper than | | | | losses at this time. This would allow the economy |
| normal recession, the commercial real estate | | | | to recover and over time, the commercial market |
| market is also experiencing deeper issues than | | | | place would recover, allowing the fair market |
| normal in a soft market. In fact, a congressional | | | | values to recover as well. It would also allow the |
| watchdog panel raised new warnings about the | | | | owners of the property to find additional tenants |
| condition of the commercial real estate market. | | | | for the property or sell the property and pay off |
| In its monthly report, the Congressional Oversight | | | | more of the outstanding balances of loans for the |
| Panel for Troubled Asset Relief program predicted | | | | property. This may allow the banks to recover |
| that the failure of these loans could further | | | | 80% or more of their loans outstanding, as |
| endanger the banking system and preclude a true | | | | against taking a loss for the entire loan, reselling |
| economic recovery. The report noted that about | | | | the property, and being able to recover maybe |
| $1.4 trillion in commercial real estate loans will | | | | twenty cents on the dollar. In addition, if the bank |
| come due at the end of their terms and about | | | | forecloses and cannot sell the property, as there |
| half of those are considered "under water", where | | | | are few buyers out in the marketplace at this |
| the fair market value of the property is less than | | | | time, the bank will have to pay the maintenance |
| the mortgage debt outstanding. The report | | | | and upkeep for the property, the insurance cost |
| further stated that the potential losses from | | | | and the real estate taxes, as well as a |
| these loans could amount to $300 billion, which | | | | management fee. These costs, along with the |
| would severely impact small to mid size banks, | | | | legal expense, may force the bank to take a |
| who have a high concentration of commercial real | | | | lower offer than that they would have normally |
| estate in their portfolios. The concern is that if | | | | accepted in a decent market. |
| these banks do not have adequate reserves to | | | | Hopefully, the federal government will enact the |
| cover these losses, that there could be more | | | | necessary regulations that will allow the banks to |
| bank failures, which will adversely impact any real | | | | extend the due dates of the loans on terms that |
| recovery in the economy. | | | | will allow the borrowers to pay, which may include |
| There were several potential solutions that were | | | | the accrual of a small interest amount, e.g. 1-2%, |
| listed in the report, including doing a "stress test" | | | | until three to five years have passed which would |
| of individual banks whose portfolios contain a | | | | allow the cycle to pass. After all, most of the |
| concentration in commercial real estate loans. Due | | | | commercial real estate loans were good loans hit |
| to the sheer volume in number of these small to | | | | by a really bad economy. In other words, the |
| midsize banks, it may not be feasible to review | | | | borrowers did not cause the loans to go bad-it |
| these banks' records at such a detailed level. | | | | was the economy. Enacting regulations of this |
| Another suggestion is that the federal | | | | nature would make the best of a bad situation for |
| government could inject additional capital into the | | | | both the borrower and the banker, as well as for |
| small banks, buying their toxic assets or | | | | the overall economy. Absent these type of |
| guaranteeing loans. Based upon the fact that the | | | | regulations that would allow a "lend-extend" type |
| federal government is considered by many | | | | of loan adjustment, the federal government may |
| taxpayers as spending too much of the | | | | cause the other shoe to drop, which will cause |
| taxpayers' money already, this may not be a | | | | additional bank failures and additional economic |
| feasible approach. There are also concerns if the | | | | problems. |
| federal government "reuses" paid back TARP | | | | |