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Listen up! Listen up to what Fed Chairman Bernanke has to say about commercial real estate. He said that the market for securities backed by commercial mortgages had "completely shut down." This is a serious if not devastating statement. Can we infer that the market for credit default swaps (CDSs) has shut down? If so we are at the brink of a new financial situation.
Mr Bernanke also stated that continued deterioration in commercial property with defaults rising sharply would present a "difficult" challenge for the economy. Prices for commercial real estate have fallen 35% since the market's peak.
Widespread defaults on commercial mortgages pose a serious threat to our banks, particularly regional banks that have made substantial loans on commercial property.
We already know that Morgan Stanley (NYSE: MS) and Wells Fargo & Co. (NYSE: WFC) have taken big hits in the commercial market. Colm Kelleher, chief financial officer at Morgan Stanley says: "We have not seen the light at the end of the commercial real estate tunnel yet." Morgan Stanley already took a $700 million write-down on its commercial portfolio.
Wells Fargo saw nonperforming commercial loans jump 69% from 4.5 billion dollars to $7.6 billion in the second quarter.
What does all this mean? For one thing the $6.7 trillion commercial real estate market, which accounts to 10% of GDP, could be the next bombshell to explode.
Do you believe that commercial real estate defaults will cause another crisis?
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