The pain felt in the distressed commercial real estate (CRE) sector will affect the residential mortgage industry on two fronts. The affects range from banks’ disposition of residential assets to a reluctance to lend to the residential sector at all, according to commentary Friday by John Burns Real Estate Consulting. The consulting firm indicated banks may need to dispose of residential assets to concentrate on commercial real estate distress as it continues to pressure the banks. This should have the affect of creating land-buying opportunities at low prices and sparking a bit of recovery, the firm said. But banks with high exposure to commercial real estate may not lend to the residential sector — many may not survive at all, the firm said. Commercial property prices are down 35% from the peak and will likely fall further as leases expire and tenants begin to reduce costs by renting less space at a lower price. This will have significant implications for commercial banks holding commercial mortgage assets, as commercial banks own nearly 45% of commercial mortgage debt outstanding, according to John Burns Real Estate Consulting. By contrast, commercial banks own 21% of the single-family mortgage debt outstanding, the firm said. As the distress in the commercial mortgage sector worsens, banks holding outstanding commercial mortgage debt may turn insolvent. John Burns Real Estate Consulting indicated the resulting pressure on the regulatory system will delay the emergence of a healthy banking system by another three years. “We expect the government to intervene even more than it has in order to save the US banking system,” the firm said. “When this occurs, it could indirectly benefit home builders by providing great distressed land buying opportunities, and by shoring up the banks so the better banks can start lending again soon.” Write to Diana Golobay.