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Commercial property defaults predicted to have major impact on us banks and lenders

The possible collapse of Capmark Financial Group is seen as the start of a new wave of real estate losses for banks, this one tied to business property, that could push the year’s tally of failures past 100, they are warning.

Capmark, ranked among the largest US commercial real estate lenders by Moody’s Investors Service, posted a $1.6 billion quarterly loss last week and said it might go bankrupt.

The Pennsylvania-based company is struggling because of the default rate on commercial mortgages held by US banks.

‘We haven’t really experienced the full extent of the distress. When you look at community banks and some smaller regional banks you see they tend to have a far greater concentration in terms of exposure to real estate,’ said Sam Chandan, chief economist at property research firm Real Estate Econometrics LLC in New York.
Residential real estate losses have already pushed US bank failures to 84 so far this year including Colonial BancGroup, the sixth- largest failure in the history of the Federal Deposit Insurance Corporation.

It is estimated that US banks hold about $1.087 trillion of commercial property loans, almost 15% of their loans and leases.

Stress tests conducted by regulators in May found that the largest US financial firms could face losses of $53 billion tied to commercial real estate.
Risks are heightened for commercial property owners who need to refinance because property values have dropped, according to Terry McEvoy, an analyst with Oppenheimer & Company. in Portland, Maine.

That makes it harder for owners to get new loans covering their original debt, he explained.

‘We’re still in the early stages of the commercial real estate cycle and things will get worse before they get better,’ McEvoy added.