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Panel says commercial lending losses on the rise

NEW YORK – May 29, 2009 – Commercial lending markets remain stagnant and losses in the sector are likely to sharply increase in the coming years, though government action could help reduce the downturn, a group of politicians and industry executives said during a hearing in New York on Thursday.

Speaking before a Congressional Oversight Panel reviewing the impact of government lending efforts’ effects on corporate and commercial real estate lending, Congresswoman Carolyn Maloney, D-N.Y., said anecdotal evidence shows “access to commercial credit is absolutely frozen.”

That lack of access to capital could lead to huge losses for banks and lenders in the coming years as loans originated during the peak in commercial real estate come due.

Unlike residential real estate loans like mortgages, commercial real estate loans often do not involve much repayment of the principal loan balance and the length of the loans is much shorter. So as the loans mature, borrowers are either forced to refinance the loan or pay off up to the entire principal amount. If borrowers are not able to refinance the loans, defaults are likely to soar, adding to already mounting loan losses, industry experts agree.

Richard Parkus, head of CMBS and ABS synthetics research at Deutsche Bank Securities Inc., said nearly two-thirds of outstanding loans packaged into commercial mortgage-backed securities could face trouble refinancing in the coming years. Those loans are worth about $400 billion, he said.

Commercial-mortgage backed securities are pools of commercial real estate loans that are packaged and sold to investors. Loans packaged into securities only account for about one-quarter of all commercial loans outstanding, so total losses are likely to be even higher as those held by banks and other institutions also default, Parkus said.

However, some who testified at the hearing did say recent government actions have provided a little help to the market and additional actions could help reduce potential risk.

Jeffrey DeBoer, president and chief executive of the Real Estate Roundtable, said the government’s Term Asset-Backed Securities Loan Facility, or TALF program, has provided a bit of additional liquidity to the market and helped improve pricing on some asset-backed securities.

Adjusting rules used to structure commercial-backed mortgage securities could provide some help, DeBoer said. Currently those regulations often do not allow the refinancing of a loan that was packed in a security until just before it defaults. Easing those restrictions to allow for earlier refinancing would minimize potential losses for investors and fewer defaults, he said.

AP LogoCopyright © 2009 The Associated Press, Stephan Bernard, AP Business Writer. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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