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US banks face massive commercial real estate loan defaults

Having suffered record losses from the worst housing slump since the Great Depression, the country's 10 biggest banks have $327.6 billion in commercial mortgages, which face a wave of defaults as office vacancies grow and retailers and casinos go bankrupt.

A projected tripling in the default rate would result in losses of about 7% of total unpaid balances, according to estimates from analysts at research firm Reis Inc.

Commercial property prices are down almost 20% in the past year, and with the global recession worsening, there is significant stress in the market, according to William Schwartz, a credit analyst at DBRS in New York.

Moody's Investors Service is reviewing the financial strength ratings of 23 regional lenders. 'These losses are likely to meaningfully weaken the capital position of many banks in 2009,' said Managing Director Robert Young in New York.

Bank of Hawaii, City National Corp, Comerica Inc and Sovereign Bancorp Inc are among the companies recently put on Moody's list of lenders with a negative outlook on partly because of their risk concentrations in the commercial market.

Wells Fargo and Bank of America account for about half of commercial mortgages owned by the 10 largest banks, company reports show.

With US unemployment at 8.1%, the highest in a quarter-century, and more than 100,000 people and companies filing for bankruptcy in February, commercial property defaults are poised to rise, analysts agree. That may lift the vacancy rate at office buildings to 16.7% this year from 14.5% at the end of 2008, analysts at Reis estimate.

'In the office market we are starting to see signs of mammoth job losses. As people aren't buying as many goods, they're not shipping as many goods so we have stress in the industrial market,' said Mark Scott, senior vice president of NorthMarq Capital, a commercial real estate brokerage and property management company.

While the housing boom of the past decade drove banks to issue tens of thousands of subprime residential property loans, lenders also made cheap credit available to builders and buyers of high rise office buildings, strip malls and apartment complexes.

The number of retail properties seized by banks or in some state of default rose to 464 this month, more than triple the number in December with a total value of $7 billion, according to Jessica Ruderman, a research analyst at Real Capital Analytics. That means banks aren't being repaid and are stuck owning properties that have plunged in value.