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CRE Troubles Hurting Big/Small Banks Alike

According to Federal Deposit Insurance Corp. Chairman Sheila Bair, troubled commercial real estate loans are hurting both large and small banks alike. Bair also says that CRE mortgage woes are in many ways “even more pronounced” than those in the residential market.

Bair made the comments during this afternoon’s speech at the Commercial Mortgage Securities Association’s annual conference in New York.

She blamed the CRE troubles on loose underwriting in recent years and called for more reforms in securitization of loans going forward.

FDIC-insured banks now hold the largest share of mortgage debt and their exposure is “at historic highs.” As of September, CRE loans backed by income-producing properties - nonfarm, nonresidential properties or multifamily real estate - totaled $1.3 trillion, or nearly 18% of total loans and leases. Banks and thrifts also held almost $500 billion in construction and development loans.

It seems that every 5 minutes some commentator on the major business news networks mentions that smaller banks are the ones most at risk from CRE loans. But Bair threw cold water on that notion.

“Despite what you may be hearing, CRE credit problems are affecting big and small banks alike. In fact, CRE noncurrent and charge-off rates are higher at banks with over one billion dollars in assets than at community banks. Industry analysts expect CMBS delinquency rates to continue climbing.”

When it comes to bank and thrift portfolios, Bair said she expects a rise in noncurrent rates and charge-off rates on CRE loans backed by income producing properties in the coming quarters. “Of course, the ultimate scale of losses in CRE loan portfolios depends on the pace of recovery in the U.S. economy and financial markets. On this point we remain hopeful.”

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