CRE Crisis Hits U.S. Banks

From the WSJ:

Losses from loans tied to strip malls, office buildings, housing complexes, and the like are hurtling toward record levels not seen since the infamous savings-and-loan crisis.

But at some banks, according to the latest round of earnings reports, the commercial real estate crisis has already arrived. Those companies' worsening conditions could well foreshadow the heavy losses at regional lenders in quarters to come -- and failures or takeovers for some.

"Commercial real estate in the United States of America is going to get worse consistently over the next several quarters," said Jamie Dimon, CEO of J.P. Morgan Chase & Co., earlier this month when he discussed his company's earnings.

At SunTrust Banks Inc., an Atlanta-based bank with 1,700 branches, nearly 20% of the company's $8.2 billion in commercial loans tied to construction projects are nonperforming, or becoming uncollectable, as of June 30. At the same time last year, 6% of SunTrust's construction loans were in late-stage delinquency.

At KeyCorp., a Cleveland-based regional bank with nearly a thousand branch offices, nearly 11% of the company's $6.3 billion in commercial construction loans were classified as nonperforming in the second quarter. During last year's second quarter, 3% of Key's construction loans were nonperforming.

At the height of the S&L crisis, which lasted into the early 1990s, late-stage delinquencies among commercial real estate loans peaked at 6%, while slightly more than 2% of outstanding loan balances became losses, according to data from RBC Capital Markets.

Wells Fargo & Co., for example, said 2.3% of its commercial real estate mortgages were considered nonperforming as of the second quarter, up nearly three-fold from 0.8% a year ago.

The San Francisco bank purchased its large teetering rival Wachovia Corp. at the end of last year, and Wells Fargo now holds $138 billion in commercial real estate loans, more than any other lender. Wachovia expanded aggressively into commercial real estate before falling victim to rising losses from consumer loans.

Nearly a third of Wells Fargo's total commercial real estate loans are tied to properties in California or Florida -- two regions among the hardest hit by the real estate depression.

Remember, a lot of this paper is syndicated, so the losses will be spread over many, many more banks than is obvious. Many of the participating banks will not have the capital to absorb the losses that the large lead banks - who may be recipients of government support - will be willing and able to take.