Heard enough bad news about failing residential mortgages to last you a couple of lifetimes?
Tired of headlines about huge losses at Citigroup and Bank of America?
Cheer up. The subprime, alt-A, and prime home mortgage meltdowns are about to be blown off the front page—by the meltdown in commercial mortgages. Commercial mortgages held by U.S. banks have been failing at the fastest rate in 20 years, according to the Wall Street Journal. Losses on loans to finance commercial real estate could hit $30 billion this year.
And you won’t have to hear more about problems at the huge banks that have dominated the crisis so far. The damage from commercial mortgages is worse, as a percentage of loans made, at regional and local banks. How much worse? Well, with three big regional banks, Zions Bancorporation (ZION), Regions Financial (RF), and KeyCorp (KEY) report earnings on July 20, 21, and 22, respectively, investors are about to find out.
And if the news out of Zions, the first to report, is any indication investors aren’t going to be happy about what they hear. The bank reported net loan and lease charge offs of $348 million or 3.4% of annualized average loans for the second quarter. That’s up from 1.5% in the first quarter.
At $14.5 billion Zions portfolio of commercial loans is the smallest of the three regional banks. About 38%, or $36.8 billion, of Regions Financials total loan portfolio was in commercial real estate and construction loans at the end of the first quarter. KeyCorp had 25% or $18.3 billion in commercial and construction loans.
Commercial real estate prices have tumbled 30% from their 2007 peak and market watchers expect prices will fall to 40% to 50% of that peak before the decline is over.
You don’t have to be a weatherman to know which way the wind blows. Agreed that yhou can see the commercial real estate meltdown just by walking around. I my neighborhood at the top of the bubble I saw landlords force out long-term tennants by raising rents to unaffordable heights. Those storefronts are still empty after a year or two years.
I’m no financial guru, but it makes perfect sense to me that the commercial real estate is the next banking crisis. I’ve spent the last five years in Phoenix watching not only the home mortgage crisis balloon and pop, but now see it happening on the commercial scale. All I have to do is drive down my block! It make perfect sense that when you build a glutton of homes, businesses follow suite. Now homes are being vacated and the businesses in some areas haven’t even had a chance to take root.