There has been a peculiar disconnect between the “the crisis is over, on with the recovery” drumbeat of news, and the sobering reality that a good deal of credit bubble overhang still remains to be dealt with.
One of the biggest areas is commercial real estate. Various experts, including Apollo Management’s Leon Black warned of $2 trillion in losses in the offing in the commercial real estate arena. Yet those losses seem not to have hit bank balance sheets and earnings.
The reason is simple. The Wall Street Journal tells us that banks have been dragging their feet on reserving for the losses:
Banks in the U.S. “are slow” to take losses on their commercial real-estate loans being battered by slumping property values and rental payments, according to a Federal Reserve presentation to banking regulators last month….
…banks with heavy exposure to such loans set aside just 38 cents in reserves during the second quarter for every $1 in bad loans, according to an analysis of regulatory filings by The Wall Street Journal. That is a sharp decline from $1.58 in reserves for every $1 in bad loans from the beginning of 2007.
The Journal’s analysis includes more than 800 banks that reported having more half of their loans tied up in commercial real-estate, ranging from apartments to office buildings to warehouses…
Mr. [K.C.] Conway’s presentation painted a bleak picture of the sliding real-estate values and enormous debt that will need to be refinanced in the next few years. Vacancy rates in the apartment, retail and warehouse sectors already have exceeded those seen during the real-estate collapse of the early 1990s, Mr. Conway noted. His report also predicted that commercial real-estate losses would reach roughly 45% next year. Valuing real estate has always been tricky for banks, and the problem is particularly acute now because sales activity is practically nonexistent….
Last month’s Fed presentation supports criticisms that banks have been slow to take losses on bad commercial real-estate loans. The value of commercial real-estate loans as recorded by banks has declined at a much slower rate than property values since 2005. But banks have been slow to absorb losses on their loans partly due to “capital preservation” concerns, the report states…
Commercial real-estate loans are the second-largest loan type after home mortgages. More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks.