A crash of the commercial mortgage market could be imminent due to loans that are set to mature on properties that have lost a significant amount of value. This is according to the San Francisco Federal Reserve president who warns of potential price drops in the neighborhood of 30-40%.
As the industry looks for signs the housing sector is beginning to stabilize, the threat of a crash in the commercial mortgage market grows, according to San Francisco Federal Reserve president Janet Yellen.
Speaking this week at a bankers convention in Idaho, Yellen said while there are signs that the economic growth is beginning to return — house price declines are abating, consumer spending is stabilizing and new unemployment is lessening — the recovery will be painfully slow and the Fed believes commercial real estate is the economy’s next vulnerable spot.
The problem, Yellen said, is maturing loans for commercial properties that lost significant value. “Borrowers seeking to refinance will be expected to provide additional equity and to have underwriting and pricing adjusted to reflect current market conditions,” Yellen said. “In some cases, borrowers won’t have the resources to refinance loans.”