While the subprime and prime home mortgage loan problem is still far from being solved, there is the continual loan failures coming from commercial and Alt-A loans that will continue to put tremendous pressure on the banking industry for the next couple of years, and possibly longer.
Interestingly, at this time the Federal Reserve is clueless as to the risk and vulnerability inherent in commercial loans, especially at mid-sized banks, and is, under the leadership of Federal Reserve Governor Daniel Tarullo, working on ways to be able to identify how much of a threat commercial loan failures present to the banking system.
After reaching their highest levels of value in 2007, commercial property has plunged by 36 percent since, and according to Moody’s Investors Service, probably won’t recover until 2012. As far as office rents, the PricewaterhouseCoopers Korpacz Real Estate Investor Survey, which was recently released, said in major cities like San Francisco and New York they could drop by 20 percent.
Some in the industry have been attempting to downplay the risk and threat connected to the commercial real estate industry, but according to the FDIC, banks hold $1.08 trillion in commercial real estate loans on their books as of June 30. And if it’s anything like the home mortgage market, there’s a lot more they simply haven’t officially listed in their books yet.
Alt-A Loans
To help you understand what we’re talking about a little better, an Alt-A loan is one between a prime and sub-prime loan, which people have good credit but non-conventional ways of generating income. For example, people that qualify for and use these types of loans would be many entrepreneurs, or people with commission-based income – like those selling cars or Realtors. Interest rates on these types of loans are usually a quarter to half a point more than prime loans.
While some research has implied Alt-A loans won’t be a major problem until the middle of 2011, that may not be the case, as Standard & Poor’s Ratings Services just slashed its ratings on another $32.1 billion of Alt-A residential mortgages. These mortgages were implemented from 2005 to 2007, which depending on the terms of the deals, will be due for re-sets, which are mandated by law. This is just one of many rating cuts in Alt-A mortgages made by Standard & Poor’s Ratings Services over the last several months.
People won’t be able to refinance when re-sets come, as the value of their homes are now worth less than the loans they made, and unless they can come up with the difference in cash, they’ll be forced to walk away from their homes, which many are already doing, and which will increase over time.
So we have all this still unresolved and nobody really having a handle on how big the problem really is. We also continue to have growing unemployment and people saving their money and paying down their debt. Yet Bernanke asserts we’re “very likely” out of the recession. He added that he was thinking of it in technical terms when he said that; seemingly leaving a weasel clause he can fall back on when he finds out we’re still in big trouble.
Either way, as far as reality goes, we haven’t even started experiencing the pain from these loans we’ve just talked about, and adding up all the rest, Bernanke’s positive thinking or “technical” end of the recession is nothing more than words built on shifting sand, which will come tumbling down when the wind from these mortgages and other problems blow down his verbal house made of cards.
