Potential Good News for our Commercial Real Estate Partners (finally): Irrespective of the government’s motivations — wrestling between helping the commercial real estate market and bailing out insured banks — there is, nonetheless, an encouraging story in the WSJ regarding the “possibility” of commercial real estate help that may be on the way.

News Flash >> According to reports, federal bank regulators are close to issuing guidelines that would encourage lenders to rework troubled commercial real-estate loans, a sector of the economy they expect to topple scores of additional financial institutions.

Avoiding A Larger Danger:Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair told a Senate subcommittee that reworking the terms of these loans could help banks avoid larger losses. She likened it to the push regulators made last year for banks to rework troubled residential mortgages. Reworked commercial real estate loans “should be encouraged, not criticized,” she said. “We are encouraging banks to restructure these loans.”

The Impending House of Cards (and where we’re at): The guidance comes as regulators are bracing for many more bank failures, particularly at small banks with high exposures to commercial real-estate loans.

• Commercial real-estate loans are the second-largest loan type after home mortgages.
• More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks.
• Deutsche Bank AG has projected that commercial-real-estate losses for banks could end up being as high as $300 billion.

Should No Action Be Taken:Regulators said high levels of CRE loans are concentrated in smaller banks, although regional and large banks also have exposure to problems in these areas.

Regulators say the types of loans causing the most problems are construction and development loans, not investments on existing properties. One reason: Construction and development loans are likely not bringing any income or revenue for the borrower, making it much easier to fall behind.

Tags: CRE Help, FDIC, Regulation

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