(Credit: Sandy Huffaker/Getty Images
Commercial developers are facing between $160 - $400 billion in loan defaults next year if they can't find banks to refinance them. Unlike home loans, loans for shopping centers and office buildings have big payments at the end of the term. Instead of paying off the loan, developers typically refinance. If funding isn't available, the banks must foreclose. To avoid this, developers are asking the Fed to guarantee that they will buy the refinanced loans from banks on the secondary market. The Fed's purchase would be guaranteed by part of the
$700 billion TARP fund to do this.
What It Means to You
It seems like every business is asking the government for a handout. However, the commercial developers are simply looking for a loan guarantee, not a bailout of bad decisions. Since banks are not lending, the Federal Reserve and the Treasury are acting in their capacity as bank of last resort. However, the government cannot replace the entire banking sector forever. The government is hoping to keep lending going long enough until confidence is restored in the financial sector. Until then, the Fed will keep buying loans, and keep commercial real estate operating.
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Comments
Unfortunately, the proposed guarantee of these loans for commercial developers would certainly lead to losses for the Treasury and U.S. taxpayer. The real estate asset bubble was significant in commercial real estate sector and we are in the midst of a re-pricing of these assets.
Many developers and current owners over paid for these properties based on over-inflated rental forecasts. This situation is regrettable for these owners, but it is not uncommon in the cyclical world of commercial real estate and I find it hard to justify why the U.S. taxpayer should shore up inflated commercial property values.
There will be buyers for these distressed properties, though it will have to be at a lower price, which will be good for the overall economy.