Wednesday, May 13, 2009

Commercial Delinquencies Skyrocket

The long-dreaded increase in commercial loan delinquencies has arrived and will have a profound impact on the regional banks that underwrote those loans.

Seriously overdue loans against commercial developments have shot up dramatically in recent months, as delinquencies snowball on construction loans and mortgages for office buildings, malls and apartments.

That's bad for giants like Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. But it's even worse for smaller banks, which stepped up lending to local developers and businesses as a way to stay afloat after the national institutions grabbed big-ticket consumer businesses such as home loans, credit cards and checking accounts.

For instance, Pasadena-based East West Bank set aside $226 million to cover loan losses in 2008, up from $12 million in 2007.

The rate of increase in commercial delinquencies is staggering.

Uncollectable commercial mortgages quadrupled over the last three quarters of 2008, according to data reported to regulators. Uncollectable commercial construction loans increased eightfold during the same period.

The collateral that these loans were made on – the equity in the commercial properties and the assets of developers – has all but vanished.

Most of the loans were secured not only by the properties but also by the personal fortunes of the developers. Now, many have been wiped out by the recession, making the loans uncollectable.

The increase in foreclosures in the residential sector is old news. But the increase in commercial defaults and foreclosures may be in its early stages, boding ill for any quick recovery in commercial real estate values.

"While [residential] mortgage losses may be halfway to the peak, card and consumer losses may only be about one-third of the way, and industrial and commercial real estate problems (except construction) seem in the early stages."

In the next year, look for regional bank failures and commercial properties priced at generational lows. [Los Angeles Times]