Foreclosures on a hopping spree from residential units to commercial real estate
The crisis in the housing market made its debut with foreclosures in residential units – primarily with those who had sub-prime mortgages. These mortgages were granted without checking on the financial capability of the loan taker and thus when the interest spiraled they began to default. It was a cascade of foreclosures like nine pins that triggered the greatest foreclosure crisis in the history of America.
With the economy being interlinked it did not remain confined to sub-prime mortgages but when the economy in general came to be hit, those with prime mortgages also began to tumble. The sub-prime mortgage collapse had set off a chain reaction because of its staggering numbers. The construction industry was hit and this led to an entire network of ancillary units from interior decorators to plumbers and electricians and furniture shops to down shutters. Restaurants and tourism began to suffer. Massive unemployment set in and this led to more people with prime mortgages, without jobs to support them, defaulting.
It was inevitable that the commercial real estate would not remain immune from the foreclosure mayhem. It is the ordinary man who goes to the shops and malls, who travel and buy. But without jobs they can no longer spend. It is the consumers that set the ball of the economy rolling.
Looming large ahead are commercial foreclosures. On Thursday 11th February a watchdog panel set up by the Congress said that increasing losses in the real estate market could put at risk the entire banking system and is placing brakes on the fragile recovery.
Commercial property loans amounting to $1.4 trillion would have to be refinanced within the forthcoming four years noted the panel. Over half of these loans have gone underwater – the value of the mortgaged units having become less than the loan amount.
The estimated loss from these units could range from $200 billion to $300 billion. It would pose a threat to 3,000 small and middling banks that have a top-heavy share of assets in real estate properties on their books.
The report of the panel is waving a red flag of warning to the White House as well as to the Congress that the condition of the real estate market is poised to worsen. The chairperson of the panel, Elizabeth Warren said, “We’re at a point where even as TARP is ramping down another major challenge in our economy is ramping up. We need to start now, before the system is on the brink of collapse to figure out a plan.”
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