Possible Taxpayer Bailout for Commercial Real Estate

by on Foreclosure Help

Last year and in the past months, taxpayer money was used to bail out the country’s largest financial institutions. Now, the question of using taxpayer money to bail out the commercial real estate sector is again floating around.

According to Neil Barofsky, special inspector general for the Troubled Asset Relief Program, the $700 billion initial bailout funding could balloon to $23.7 trillion in addition to the $7.4 trillion already allotted to TARP and other Treasury programs.

The country’s commercial real estate market, valued at $3.5 trillion, is now being battered by defaults on loans for office buildings, apartment buildings, retail centers, shopping malls, hospitals, hotels and residential towers.

Based on data from the Center for Real Estate at the Massachusetts Institute of Technology, commercial property prices have dropped by about 39 percent from their peak in the middle of 2007. Studies by Moody’s Investors Service also show substantial price declines.

The 39-percent price decline has already surpassed the 27-percent price drop that occurred during the savings and loan crisis in the late 1980s and early 1990s.

Additionally, Wall Street enterprises would further suffer from derivative securities backed by these commercial loans, at a time they are still carrying the burden of over $1.5 trillion in losses from delinquent residential loans and foreclosures.

In their most recent quarterly reports, Wells Fargo and Morgan Stanley posted large losses from bad commercial property loans. Regions Financial, Marshall & Isley, Zions, SunTrust and Comerica posted losses and are expected to continue struggling with their bad loans in 2010.

Citigroup, KeyCorp. and Bank of America also have reported commercial property losses. Enterprises like General Electric and Marriott International are also hemorrhaging from their commercial property losses.

According to Steven Sandler, CEO of private equity investor Crosswind Capital, about $1.4 trillion of commercial property loans will mature within the next 5 years and about $750 billion loans will mature in less than 3 years. This year alone, according to Sandler, about $165 billion to $204 billion commercial property loans will mature, adding more pressure for commercial loan refinancing to an already overwhelmed lending market.

Last May, the federal government launched the Term Asset-Backed Securities Loan Facility program to offer loans at low rates to investors buying commercial securities that are mortgage-backed. It announced an initial funding of $100 billion for loans with 5-year maturities, with further funding that could reach $1 trillion.