Last week the Fed announced that it was extending its backstop and bailout for commercial real estate and similar enterprises with underlying assets crumbling under unmanageable levels of debt.
The Federal Reserve extended by three to six months an emergency program aimed at restarting credit markets, a move that may cushion the commercial real-estate industry from rising defaults and falling prices.
The Term Asset-Backed Securities Loan Facility, with a capacity of as much as $1 trillion, will expire June 30 for newly issued commercial mortgage-backed securities, instead of Dec. 31, the Fed and U.S. Treasury said today in a statement in Washington.
Property values have fallen 35 percent since peaking in October 2007, according to Moody’s Investors Service. That’s making it tough for owners to refinance almost $165 billion of mortgages for skyscrapers, shopping malls and hotels this year. The Fed is “paying very close attention,” Chairman Ben S. Bernanke said in congressional testimony last month.
While financial-market conditions “have improved considerably in recent months,” the markets for ABS and CMBS “are still impaired and seem likely to remain so for some time,” the Fed and Treasury said.
In the commercial real estate sector, the victim of over building, falling demand and unbelievable financing, which was the fault of the lenders, over the next three years sees $150 billion in properties up for refinancing. Sixty-three percent will not qualify for refinancing due to a 40% fall in value that will be followed by another 30% drop. In all about $500 billion in mortgages will have to be dealt with of which 50% won’t be refinanced. That means the banks’ balance sheets will be further clogged with properties with 70% losses. If you think the banks are buried now, three years from now most all of them will be insolvent. What else would be expected when they were lending 50 times their deposits when 8 to 10 times was normal? The Federal Reserve knew this was going on and they encouraged it.