Feds Trying To Soften Commercial Real Estate Woes

Washington, DC, Aug. 31, 2009--Commercial real estate financing could deliver the next blow to the economy just at it's starting to grow again.

Federal Reserve and Treasury officials are trying to prevent such a scenario, but their efforts could be hampered by growing foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds.

Similar securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn.

The CMBS sector is suffering in two ways, which, according to credit rating firm Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level of a year ago.

One is bad underwriting during the era of looser credit, as owners lent money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising.

However, a growing number of properties aren't generating enough cash to make principal and interest payments.

The other problem is the inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank.

Also, banks hold $1.7 trillion of commercial mortgages and construction loans, and delinquencies on this debt already have played a role in the increase in bank failures this year.

Realpoint found that 281 CMBS loans valued at $6.3 billion weren't able to refinance when they matured in the past three month, even though 173 such loans worth $5.1 billion were throwing off more than enough cash to service their debt.