It's semi-official! The government is now behind the movement to encourage banks to work with their borrowers in the commercial property loan market to insure of small business owners and investors who are in crisis. Why? The main reason is that the Administration and Economists both believe that the commercial real estate markets may be the next domino to fall during this slow to recover economic crisis.
Are they worried about the commercial property owners? Not really. It's still all about the Banks. Their balance sheets are still shaky. The vast majority of lenders who still hold commercial property loans are your local and regional financial institutions. The Fed has stabilized the large, can't let them fail banks, but really have not had a plan for the small and mid-sized lending institutions.
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In 2009, we have already seen more than 120 banks taken over by the government. Recently, two banks in southwest Florida, Orion and Century had their doors shuttered. What was the cost to the government and the tax payer? One Billion Dollars! No wonder the FDIC is running short on cash. Additionally, there was a loss-sharing agreement with the bank that came to the rescue of these failed lending institutions to protect it from any future losses due to poor performing loans. Yes, and this was just two small banks.
We are not in a depression, but it is a deep recession that does not seem to want to go away. None of the government's leading economic indicators show any real growth or sustained strength. Some of the examples we just saw during the past week were:
o Unemployment Highest in three Decades
o Job Growth Zero, but the rate of decline is decreasing
o Housing Sales Increasing, but coupled with sharply decreasing values
o Housing Starts Down, but builders worried that sales were tax credit driven
The commercial market follows right along with the residential market. All of the above factors correlate directly with the difficulty we see in procuring business and commercial property loans. Just six months ago, we only heard about residential foreclosures and the sub-prime borrower. Today, we find that the former A credit borrower with a low 30 year fixed rate loan now makes up more than 30% of the newest foreclosure statistics. Why is that? It's the economy, plain and simple.
It's no different with the commercial borrower. The banks are taking a very hard look at all of their business clients. They are also looking at the economic indicators and realizing the effect that it is having on the profitability of their business customers. Additionally, because of the asset requirements required by the Fed to cover portfolio loans, they have become even more reluctant to lend to the small business owner and investor.
The banks are in denial about their commercial real estate holdings. They have been writing down their residential loan portfolios, but most of their conventional loans never stayed on the books. These were almost immediately sold off to Fannie Mae and Freddie Mac, who either held or securitized. The jumbo loans were a slightly different story. Some remained on the books while others were securitized and sold to institutional investors. The vast majority of small commercial properties, land loans and development loans, however, remained on the balance sheets of these banks.
What can they do with properties that have declined in value or the loan is not performing? Not a lot! Most of them do not want to write them down as loan losses, because they cannot afford to do so and not run the risk of antagonizing the FDIC. They can't sell these properties because there are no buyers who can find a commercial property loan. If they sell to a vulture fund, they might only receive 30 cents on the dollar. So, they are just trying to ignore the problem in the hope that it will go away.
In conclusion, the major problem that many of our lending institutions are facing going forward is the small business or commercial property loan for both buildings and land. It's going to be a difficult road filled with both potholes and land mines. The banks can no longer hide them, nor continue to ignore them. They are going to need to look at alternative solutions.
So what's the next step? Commercial Property Loan Solutions can be found for most borrowers. You just need to know where to look!
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