http://www.bloomberg.com/apps/news?pid=20601087&sid=aAXgbJTzHp4M Commercial Real Estate Is a âTime Bomb,â Maloney Says (Update2) Share | Email | Print | A A A By Dawn Kopecki July 9 (Bloomberg) -- The $3.5 trillion commercial real estate market is a ticking âtime bombâ that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said. About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and âdoing nothing is not an option,â Maloney, a New York Democrat, said at a committee hearing today. This âlooming crisisâ may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said. The response by banks to this âgrowing threat has been slow and inadequate,â said James Helsel, a partner at RSR Realtors in Harrisburg, Pennsylvania, and treasurer for the National Association of Realtors. âThe lack of liquidity and banksâ reluctance to extend lending are also becoming apparent in the increasing level of delinquent properties.â There were 5,315 commercial properties in default, foreclosure or bankruptcy at the end of June, more than twice the number at the end of last year, with hotels and retail among the most âproblematic,â Real Capital Analytics Inc. said in a report yesterday. Losses on commercial mortgage-backed securities, or CMBS, will total 9 percent to 12 percent of the market, or as much as $90 billion, said Richard Parkus, a research analyst for Deutsche Bank Securities in New York. Bottom Not Near The bottom is several years away, and it will be at least 2012 before there is âpalpable improvementâ in the commercial real estate market, Parkus told lawmakers at the hearing. âItâs hard to imagine fundamentals improving in an environment where we are beginning to see massive increases in defaults.â The largest concentration of distressed properties is in New York City, Helsel said. Las Vegas, Los Angeles, Detroit, Phoenix, Chicago, Dallas and Boston also have high distress rates, he said. A tightening in issuance of CMBS, which used to account for about 30 percent of financing, has exacerbated problems, Jon D. Greenlee, the Federal Reserveâs associate director for banking supervision and regulation, said in prepared testimony today. A disproportionately high number of small and medium-sized banks have âsizable exposureâ to commercial real estate loans, and delinquency rates at around 7 percent in the first quarter are almost double from a year ago, he said. âMarket participants anticipate these rates will climb higher by the end of this year, driven not only by negative fundamentals but also borrowersâ difficulty in rolling-over maturing debt,â Greenlee said. âIn addition, the decline in CMBS has generated significant stresses on the balance sheets of institutions that must mark these securities to market.â Fed Programs The Federal Reserve has expanded its Term Asset-Backed Securities Loan Facility, or TALF, to new and existing commercial mortgage backed securities to jump start the market. Maloney said the Public Private Investment Program, or PPIP, may also help with the problem as officials release more details of its potential use. Maloney said the TALF program expires at the end of this year, which may short cut its effectiveness âjust as it begins to ramp up.â She also said that uncertainty about the future of the PPIP has kept many investors âon the sidelines, so thereâs some urgency to the Treasury providing additional clarity about the program.â To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net. Last Updated: July 9, 2009 12:14 EDT