Commercial real estate loans could turn sour and threaten an already fragile U.S. economy unless regulators prepare now, says Elizabeth Warren, a Harvard law professor and chairman of the Congressional Oversight Panel of the Troubled Asset Relief Program.
Between 2010 and 2014, about $1.4 trillion in commercial real estate loans reportedly will reach the end of their terms, and about half of those loans are “underwater,” meaning the borrower owes more than the property is worth.
If economic conditions and tighter lending standards mean that borrowers can’t refinance, “hundreds” of banks could fail, says Warren's commission.
“There is a serious problem coming and it will hit an already weakened financial system,” says Warren, according to Bloomberg.
Small and medium-sized banks could bear the brunt of a collapse in the commercial real estate sector, and those institutions should undergo stress tests and receive federal aid, but not everyone, according to a report issued by Warren's watchdog panel.
“The panel is clear that government cannot and should not keep every bank afloat,” the report said.
Treasury Secretary Timothy Geithner has said that many smaller financial institutions do not need stress tests.
Others say the sector is in better shape than how Warren and her commission see it.
“We believe that the Congressional Oversight Panel overstates the threat commercial real estate loans present to the vast majority of community banks nationwide,” says Camden R. Fine, the chief executive of the Independent Community Bankers Association, according to the New York Times.
“While there are certain specific areas of the country where commercial real estate is very weak, in other regions of the country commercial real estate is stable.”
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