The February report from the Congressional Oversight Panel (COP) expresses deep concern for the state of commercial property lending between 2011 and 2014.
At the same time as they gave the US government permission to spend $700 billion to support the economy, the US congress on October 3rd 2008 created the Office of Financial Stability (OFS) to administer the Troubled Asset Relief Programme (TARP) and the COP to “review the current state of financial markets and the regulatory system.”
“Through it regular reports the COP must:
- Oversee Treasury’s actions
- Assess the impact of spending to stabilize the economy
- Evaluate market transparency,
- Ensure effective foreclosure mitigation efforts
- And guarantee that Treasury’s actions are in the best interest of the American people.”
The COP is a serious body of people.
The February report entitled “Commercial Real Estate Losses and the Risk to
Financial Stability” throws some serious doubt on the ability of the US economy to withstand the possible shock coming from a large reset in the commercial property market. “The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation’s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.”
Their main concern is that there is about $1.4 trillion in commercial property loans that will have to be refinanced between 2010 and 2014. Many of the loans are already in negative equity because they were taken out at the height of the boom when prices were high and more critically checks on the loans were less than adequate.
The report goes on to say that commercial property has fallen in real and rental value by some 40% since 2007.
Another point of serious concern is that the much heralded stress tests conducted on the banking system only involved 19 major institutions and only looked ahead to 2010. The Pandora’s Box of commercial property was not investigated as the serious problems were not due to emerge until 2011.
The loans concerned are not due to be repaid, just refinanced and, unless the borrower can repay in full or take on heavier repayments they may well default. The losses to banks alone are estimated at $200-$300 billion.
The COP are worried that this could lead to people being evicted if landlords default and also cause banks to further retrench making loans even harder to obtain. There will also be many small lenders that go bust in the process.
Although offering no real solutions the COP report asks that the problem be looked squarely in the eye as soon as possible.
Then of course there is the question of how much of this is on the books of UK financial institutions in one way or another?