The distressed commercial real estate is slowly killing off the nation?s small and regional banks, and industry specialists are frightened the worst is yet to come.
The delinquency rate on commercial mortgage-backed securities hit a record 9.62 percent in April, according to a report by Trepp, a firm that tracks commercial real estate and banking data.
Analysts expect that to rise above 10 percent by year end. On the bright side, that forecast marks a slight improvement over prior estimates that called for defaults to top 12 percent.
The bulk of these rising delinquencies is falling squarely on the shoulders of the nation?s already struggling small and regional banks, forcing dozens to close.
Thirteen banks failed in April, with nearly all them heavily exposed to commercial real estate. It?s a familiar pattern that U.S. regulators say they?ve been observing for several months.
Small to regional banks ? defined as banks holding less than $100 billion in assets ? have $784 billion in commercial real estate loans on their books, according to the Independent Community Bankers Association of America. That?s about 71 percent of the total market.
When the housing bubble popped in 2007, those small and regional banks were left holding billions of dollars worth of risky commercial real estate projects. Those included newly constructed vacant buildings as well as unused land.
At the height of the bubble, small-to-midsized banks underwrote more than $200 billion in risky land and construction loans, where the collateral on the loan wasn?t office space but vacant land or incomplete construction sites.
Among the 13 banks shut down last month, commercial real estate loans made up 79 percent of their non-performing loans, defined as loans in default or close to default. Non-performing residential real estate loans made up only 15 percent of those loan portfolios.
For instance, Cortez Community Bank in Florida, which was shuttered by the FDIC on April 29, had 76 percent of its loans in commercial real estate. Another failed bank, Nexity Bank of Alabama, had a loan portfolio that was 87 percent commercial real estate loans.
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Source: http://mortgageticket.com/real-estate-market/distressed-commercial-real-estate-kills.html
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