Congressional Oversight Panel Predicts Real Estate Loan Failures

A recent report by the Congressional Oversight Panel chaired by Harvard Law School professor Elizabeth Warren predicts a wave of commercial real estate loan failures that could jeopardize the stability of many banks, particularly mid-size and smaller banks.

The report, published on Feb. 10, cautions that even borrowers who own profitable properties may be unable to refinance their loans as they face tightened underwriting standards, increased demands for additional investment by borrowers, and restricted credit.

“Over the next four years, a wave of commercial real estate loan failures will add to the pressures on the struggling American economy,” said panel spokesman Peter Jackson. “$1.4 trillion in loans will come up for refinancing between 2011 and 2014.”

Nearly half of commerical real estate loans are currently “underwater,” meaning that the borrower owes more than what the property is worth.

Unlike the current housing crisis, the report indicated that smaller community banks face a greater risk than large Wall Street banks.

“[The crisis] has the potential to jeopardize small businesses,” Jackson said. “Community banks stand to suffer the most and they are the primary lenders to small businesses.”

Jackson added that a wave of community bank failures may “prolong the already painful recession.”

Associate Vice President of Harvard Real Estate Services James W. Gray said that while he agrees commercial real estate markets are stressed, the situation is less dire in Cambridge.

“The Harvard Square market and the Cambridge market are a little bit insulated by the University’s presence, so I don’t foresee it being as much of a problem there,” Gray said. “Harvard owns a great many commercial properties, but I don’t think this problem is going to have much of an effect on Harvard’s holdings because they are long-term and not heavily leveraged.”

Noting that “there are a lot of different tools in the toolbox when it comes to strategies for the threat posed by commercial real estate to the financial industry,” Jackson said the report does not recommend one specific course of action.

“The panel was clear that when it comes to the idea of injecting more capital into financial institutions,” Jackson said. “There are investors that made some bad bets in commercial real estate and everyone doesn’t deserve new funding.”