Treasury Works on 'Plan C'

From the Washington Post:

The officials in charge of Plan C -- named to allude to a last line of defense -- face a particular challenge in addressing the breakdown of commercial real estate lending.

Banks and other firms that provided such loans in the past have sharply curtailed lending.

That has left many developers and construction companies out in the cold. Over the next few years, these groups face a tidal wave of commercial real estate debt -- some estimates peg the total at more than $3 trillion -- that they will need to refinance. These loans were issued during this decade's construction boom with the mistaken expectation that they would be refinanced on the same generous terms after a few years.

The credit crisis changed all of that. Now few developers can find anyone to refinance their debt, endangering healthy and distressed properties.

"It's not a degree to which people are willing to lend," she said. "The question is whether a loan can be made at all."

The problem affects not just the recipients of the loans but also the institutions that lend, many of them small community banks and regional firms.

Thousands of these institutions wrote billions of dollars in mortgages on strip malls, doctors offices and drive-through restaurants. These commercial loans required a lot of scrutiny and a leap of faith, and, for much of the decade, the smaller banks that leapt were rewarded with outsize profits.

In doing so, many took on bigger and bigger risks. By the beginning of the recession in December 2007, the median midsize bank held commercial real estate loans worth 3.55 times its capital cushion -- its reserve against unexpected losses -- according to the Federal Deposit Insurance Corp.

Borrower defaults increasingly are draining capital from many of those banks, forcing some to close. Financial analysts said losses on commercial real estate loans are now the single largest cause of bank failures.

The federal government has set up bailout programs to provide relief to the commercial real estate market, but none of these efforts is big enough to address the size of the problem, industry analysts said.

One Fed program to revive lending took aim at the problem. But this effort faltered in June, failing to attract much interest in the issuance of new commercial real estate loans. The central bank said yesterday that the program sparked only $5.4 billion in new loans of any kind last month, less than half the previous month's total.

Another government effort to buy mortgages, including commercial loans, off the books of banks has been shelved because of a lack of interest from industry. A companion plan to buy toxic bank assets, some of which back commercial loans, is being downsized for similar reasons.