Commercial Buildings Go the Way of Foreclosed Condos

by Simon Lindsay on Foreclosure Crisis

A rising number of commercial buildings nationwide are now following the fate of foreclosed condos, putting into uncertainty the fate of regional banks which provided the money to build the buildings.

In recent months, according to the heads of regional banks, more and more commercial building developers are defaulting on their loans and more and more commercial real estate owners are stretching the number of months they are delaying payments.

In California, where the jobless rate is over 11 percent, a rising number of commercial loans are getting unpaid. More malls, apartments and office buildings are following the way of foreclosed condos.

If the defaults are bad for the largest U.S. banks like Wells Fargo, Bank of America and JPMorgan Chase, it is worse for the smaller banks which extended commercial loans to businesses and developers to earn money to survive the downturn.

Dominic Ng, head of East West Bancorp, said that commercial lending has been the main focus of regional banks, as the bigger consumer business like credit cards, home loans and checking accounts have been cornered by the giant banks. East West is the second biggest bank headquartered in Pasadena.

According to banking reports submitted to regulators, unpaid commercial mortgages increased four times over the past 3 quarters of 2008. Unpaid commercial construction loans rose eightfold over the same nine-month period.

Many of the commercial loans were secured by the buildings, in addition to the personal assets of the developers. As the developers get battered by failed projects such as foreclosed condos, the loans become uncollectable.

Uncollectable commercial loans increased three times at California Bank and Trust and City National Corp. in the last nine months of 2008.

Based on data from the Federal Deposit Insurance Corp., commercial loans in default increased almost ninefold since 2007. Just as foreclosed condos increased and clobbered mortgage banks, foreclosed commercial buildings will also clobber commercial banks.

Joe Morford, a financial analyst at RBC Capital Markets, said if the commercial buildings will follow the fate of foreclosed condos, the regional banks will bear the brunt because the major clients of regional banks are small and medium enterprises that include many commercial developers.

Morford is particularly worried about the financial conditions of Los Angeles County-based banks, namely City National, Cathay General Bancorp and East West.

In addition, Morford is also concerned about Utah-based Zions Bancorp and Oregon-based Umpqua Holdings Corp., which provided loans that built commercial buildings which soon might follow the way of foreclosed condos.