A crash of the commercial mortgage market could be imminent due to loans that are set to mature on properties that have lost a significant amount of value. This is according to the San Francisco Federal Reserve president who warns of potential price drops in the neighborhood of 30-40%. For more on this story, see the following article from HousingWire.
As the industry looks for signs the housing sector is beginning to stabilize, the threat of a crash in the commercial mortgage market grows, according to San Francisco Federal Reserve president Janet Yellen.
Speaking this week at a bankers convention in Idaho, Yellen said while there are signs that the economic growth is beginning to return — house price declines are abating, consumer spending is stabilizing and new unemployment is lessening — the recovery will be painfully slow and the Fed believes commercial real estate is the economy’s next vulnerable spot.
The problem, Yellen said, is maturing loans for commercial properties that lost significant value.
“Borrowers seeking to refinance will be expected to provide additional equity and to have underwriting and pricing adjusted to reflect current market conditions,” Yellen said. “In some cases, borrowers won’t have the resources to refinance loans.”
Yellen urged the community bankers at the conference to be proactive in preparing for a potential downturn, which could include, she said, property value drops as high as 30% to 40%. Namely, she told the audience to address emerging credit problems and commission new appraisals, but also encouraged them to continue lending to creditworthy borrowers.
The remarks fall in line with a number of credit ratings reports that warn commercial real estate is set to take a tumble.
Fed says residential real estate slowly improving
While residential real estate remains weak overall, many local markets are showing signs of improvement, according to the Federal Reserve’s Commentary on Current Economic Conditions, also known as the Beige Book.
Sales volume is up, especially in the Fed’s Minneapolis and San Francisco districts, and with the exception of the St. Louis district, sales declines are letting up.
The Fed credited the federal government’s $8,000 first-time homebuyer tax credit for the improvement to the low-end of the residential housing market, especially in its New York, Kansas City and Dallas districts.
While sales are up, prices are still down. Many districts pointed to foreclosures as the cause of continued decline in prices. New residential construction remains low due to financing difficulties.
All of the districts reported varied levels of weak or slow commercial real estate leasing. Commercial real estate sales are low and even non-existent in some markets due to tight credit and weak demand, and most construction activity is on the decline.
Overall, the 12 districts reported economic activity would be weak throughout the summer, but the decline has shown signs of bottoming out.
This article has been republished from HousingWire. You can also view this article at HousingWire, a mortgage and real estate news site.
