In testimony before Congress, the vice chairman of the Federal Deposit Insurance Corporation warned that commercial mortgages will continue to plague financial institutions for “the next several quarters.”
FDIC Vice Chairman Martin J. Gruenberg testified today before the U.S. House Of Representatives’ Committee On Financial Services and Committee On Small Business, according to a transcript of his prepared statement. The hearing addressed the availability of credit for small businesses and commercial real estate.
“Small and mid-sized institutions, who tend to make business loans secured by residential and commercial real estate properties, are dealing with the effects of large declines in real estate values, which tend to reduce the collateral coverage of existing loans and make it more difficult for household and small business borrowers to qualify for new credit,” Gruenberg said. “Losses in CRE portfolios thus far have been most prominent in construction and development loans.”
The delinquency rate on C&D loans reached 15.95 percent as of the end of last year — the highest rate among all types of bank assets. In addition, the net charge-off rate on C&D loans was 7.77 percent in the fourth quarter — higher than any other category of bank loans except credit cards.
Gruenberg noted that job losses and the recession have dried up demand for office space and other types of commercial real estate — hurting performance, pushing up cap rates and dragging down property values.
The FDIC official said that commercial mortgage-backed securities issuances came to a complete halt between July 2008 and May 2009, and since then, only $5.1 billion in CMBS has been issued.
“The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters continues to be in CRE lending,” Gruenberg stated. “FDIC-insured institutions still hold the largest share of commercial mortgage debt outstanding, and their dollar volume exposure to CRE loans stands at a historic high.”
Commercial mortgage held by FDIC-insured institutions as of Dec. 31, 2009, were $1.8 trillion — or about a quarter of all loans held by the sector.
