(The following story is the first in a two-part series discussing the Congressional Oversight Panel's report on banks at risk from high concentrations in commercial real estate loans.)
NEW YORK (TheStreet) -- The U.S. financial system, torpedoed by subprime loans and the stock-market crash, faces another threat, this time from commercial real estate loans that have soured, according to the Congressional Oversight Panel. But the government group exaggerates the number of banks in trouble.
A total of 2,988 of the country's 8,100 banks and thrifts had "problematic exposure" to commercial real estate (CRE) loans, said the report, "Commercial Real Estate Losses and the Risk to Financial Stability." The "CRE-concentrated" banks and thrifts have loans for construction, land, commercial real estate and multifamily residences exceeding 300% of total capital, or construction loans exceeding 100% of total capital.
Hundreds of banks will be in a pickle as an estimated $1.4 trillion in commercial real estate loans mature between 2010 and 2014. The committee estimates that half of those loans are "underwater," with property values having dropped so much that borrowers won't be able to renew loans without pledging more collateral or cash, which most won't have. It's not hard to imagine regulatory forbearance allowing lenders to renew many of the loans anyway by lowering underwriting standards.Many lenders with high concentrations in commercial real estate loans had underwriting standards that kept loan-to-value ratios low enough to absorb a significant decline in property values. Others are in areas less affected by the boom-to-bust real-estate bubble, and some specialize in property loans in which the collateral already has a track record of strong cash flow from rental income.
Of the 10 largest banks that are held by publicly traded companies and meet the committee's criteria, there are five that remained profitable through 2009 despite a high concentration in CRE, construction or multifamily mortgages. They are: