Commercial Loan Exposure Pulls Down Banks, Weighs on CMBS
Commercial real estate (CRE) woes lay at the center of the most recent five banks to be shut down by regulators and their assets and deposits sold off, according to e-mailed commentary from commercial mortgage-backed security (CMBS) analytics firm Trepp. The banks, which were shut down Friday at a cost of $317m to the government, had total assets of $2bn. Trepp found that non-performing CRE loans made up 80% of total non-performing loans for these five banks. That percentage was split between 40.9% construction and land loans and 39.1% commercial mortgages: Non-performing CRE loans will have a knock-on effect within CMBS, which will likely see increased loss severities through 2011, according to Fitch Ratings. The inventory of CMBS loans in special servicing is at an all-time high and likely to tread higher, despite more loan resolutions including REO workouts in 2009 than last year, the credit-rating agency said. "Assets will take longer to resolve as special servicers continue to see high volumes of underperforming loans," said Fitch senior director Richard Carlson. "Continued high inventory and the declining frequency of modifications means there is no relief is in sight." And where banks hold distressed CRE loans, failures are sure to follow. Trepp said that CRE analytics firm Foresight Analytics, has anticipated on its troubled bank watchlist 235 out of 245 banks that were seized during the past year. All five banks that were closed Friday, for example, sat on the Foresight watchlist for at least four quarters and were identified among the 20% most likely to fail. Trepp, which recently acquired Foresight for an undisclosed amount in February, said it "heard the [Foresight] team point to recent and rapidly growing weakness in Washington state" last week. A contagion of troubled construction loans in the Northwest would come as no great surprise, Trepp said. "Most of the problems [in the Pacific Northwest] stem from a construction cycle that lagged behind the US in the upswing [and] got hit hard by the economic downturn," said Foresight's Matt Anderson. "[We] still see more failures to come in Washington, according to our latest estimates," Anderson added. "Other areas of recent concern are Colorado, South Carolina and North Carolina where the number of banks on our watchlist has spiked in just the last few quarters. If economic conditions don't improve there soon, we could see more failures in those states by the end of the year or into 2011." The June issue of HousingWire magazine offers an in-depth analysis, data and market commentary of the state of so-called green shoots in CRE. Write to Diana Golobay.