By Silla Brush - 02/11/10 05:00 AM EST
The economy faces up to $300 billion over the next four years in potential losses on commercial real estate investments, a government watchdog said.
Elizabeth Warren, head of the Congressional Oversight Panel over the $700 billion financial bailout package, said the losses could "dump sand in the gears of our economic recovery." The commercial real estate problems lag the residential housing market collapse that helped push the economy into a deep recession and spurred the financial crisis.
Nearly half of those loans are now "underwater," meaning the borrower owes more on the loan than the property is worth. "Over the next four years a wave of commercial real estate financing could overwhelm an already weakened financial system," Warren told reporters on Wednesday night.
The commercial real estate market represents roughly $3.5 trillion in debt. The panel said the industry could face losses as high as $200 billion to $300 billion.
The panel said loan losses would fall disproportionately on smaller and regional banks rather than on Wall Street. Banks with less than $10 billion in assets hold large volumes of commercial real estate loans but may lack the necessary capital to withstand potential losses.
"The panel is concerned that because of their role in the real economy, more failures among these banks would prolong an already painful recession," Warren said.
The panel said the government does not need to subsidize the commercial real estate loans and that some banks should be allowed to fail but that regulators should closely scrutinize individual banks. "At some point bank failures represent a move toward a functioning market, but if they gather too much steam they risk creating a collateral problem. It's just more nuanced than 'Let them all die or save them,' " Warren said.