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Monday, October 24, 2011

Commercial and Residential Mortgages

N. Eric Weiss
Specialist in Financial Economics

Government regulators, investment bankers, and others have testified at congressional hearings that a significant volume of commercial mortgages could default, causing major losses for commercial banks, savings institutions, life insurance companies, government-sponsored enterprises (GSEs), and issuers of commercial mortgage-backed securities (CMBS). These losses, coming after losses on residential mortgages and other loans, have the potential to further reduce the capital of lenders, perhaps leading to additional bank closings. The closings may result in Federal Deposit Insurance Company (FDIC) expenditures to honor its insurance on deposits. The FDIC could act in ways that would protect uninsured deposits, but this would cost the government additional money.

Widespread evidence shows that commercial mortgage defaults and losses have been unusually high. More recently, it appears that there is some recovery, but this recovery varies across the nation and across various types of commercial mortgages.

According to recent statistics, there are $3.1 trillion in commercial mortgages outstanding with $500 billion maturing in the next few years. One investment banker has testified to the Joint Economic Committee that losses for one type of commercial mortgage financing (commercial mortgage-backed securities) could reach 9%-12% or $65 billion to $90 billion; in the real estate bust of the early 1990s, the worst performing groups of mortgages had loss rates of around 10%. This suggests that commercial mortgage losses could be comparable to those in the early 1990s.

Some commercial real estate lenders will be more affected by mortgage losses than others. For example, FDIC statistics suggest that small banks (those with less than $1 billion in assets) are relatively more exposed to commercial real estate loans and losses than are large banks.

Treasury Secretary Timothy Geithner has expressed the belief that the commercial mortgage losses can be handled with the tools available.

This report discusses the severity of the problems that the commercial mortgage defaults may cause the financial system, the tools available to reduce such problems, and some areas for possible congressional oversight.

Date of Report:
October 13, 2011
Number of Pages: 14
Order Number: R4
Price: $29.95

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