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Fed Concerns About Commercial Real Estate Grow

October 7, 2009

The Federal Reserve is becoming increasingly concerned about commercial real estate. A Fed presentation reviewed by the WSJ indicates the body’s concern over the speed with which banks are recognizing commercial real estate losses and that the banks are on a similar track as when they were slow to react to the residential crisis.

In another sign that many U.S. financial institutions are inadequately protected against potential losses on commercial real-estate loans, banks with heavy exposure to such loans set aside just 38 cents in reserves during the second quarter for every $1 in bad loans, according to an analysis of regulatory filings by The Wall Street Journal. That is a sharp decline from $1.58 in reserves for every $1 in bad loans from the beginning of 2007.

For now, interest rates remain low so many investors can afford to pay their mortgages. One question really is what happens at maturity and how many extensions banks can continue to provide in the face of high vacancy rates and dropping rents.

[via WSJ]

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Categories: Commercial Finance and Lending
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