Capmark's Possible Bankruptcy Could Signal New Wave of Losses For Banks

Sept. 4 (Bloomberg) -- Capmark Financial Group Inc.’s possible collapse may signal a new wave of real estate losses for banks -- this one tied to business property -- that could push the year’s tally of failures past 100.

Capmark, ranked among the largest U.S. commercial real estate lenders by Moody’s Investors Service, posted a $1.6 billion quarterly loss on Sept. 2 and said it might go bankrupt. The Horsham, Pennsylvania-based company struggled as the default rate on commercial mortgages held by U.S. banks more than doubled to the highest since 1994.

“We haven’t really experienced the full extent of the distress,” said Sam Chandan, chief economist at property research firm Real Estate Econometrics LLC in New York. “When you look at community banks and some smaller regional banks, they tend to have a far greater concentration in terms of their exposure to commercial real estate.”

Lenders are still reeling from residential real estate losses that helped push U.S. bank failures to 84 so far this year. The tally included Colonial BancGroup Inc., the sixth- largest failure in the history of the Federal Deposit Insurance Corp. The total may rise later today because the agency customarily announces the week’s shutdowns on Fridays.

Bank failures last topped 100 in 1992, when at least 179 were seized, according to FDIC data. Chairman Sheila Bair has said more collapses are likely, and the agency’s list of “problem banks” stands at 416, the most in 15 years.

Commercial Holdings

Capmark’s holdings include a banking unit based in Salt Lake City with $11.1 billion in assets and a “well- capitalized” ranking from its regulators, according to the bank’s Web site. Deposits stood at $8.4 billion on June 30, according to the company’s quarterly statement.

U.S. banks hold about $1.087 trillion of commercial property loans, almost 15 percent of their loans and leases, according to Real Estate Econometrics. Stress tests conducted by regulators in May found that the largest U.S. financial firms could face losses of $53 billion tied to commercial real estate.

Late payments on a commercial loan two years ago typically were cured with no damage to the lender, Chandan said. Now, amid the worst economic slump since the Great Depression, bankers are finding late payments are more likely to signal an actual loss is brewing, he said.

Risks are heightened for property owners who need to refinance because property values have dropped, said Terry McEvoy, an analyst with Oppenheimer & Co. in Portland, Maine. That makes it harder for owners to get new loans covering their original debt.

‘Red Flags’

“We’re still in the early stages of the commercial real estate cycle and things will get worse before they get better,” McEvoy said.

Losses at Capmark “would raise that red flag” about commercial real estate for more lenders, said Kevin Fitzsimmons, an analyst with New York-based Sandler O’Neill & Partners LP.

Capmark was a unit of Detroit-based GMAC LLC until 2006, and current owners include funds run by Goldman Sachs Group Inc. and KKR & Co. The company originated more than $10 billion in loans last year, according to Moody’s, and 97 percent of the total loan portfolio was first-lien commercial mortgages, Capmark said in its Sept. 2 earnings statement.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aBHPF1BALUQw

 

"Red flags" is an understatement.

Commercial is getting hammered and default rates on some pretty leveraged (and now extremely underwater) properties is going to explode.

In 2000, 5.2% of commercial mortgage originations were 0% down adjustables, and by 2005 58.1% were.

Think about that for a second. More than half of commercial real estate mortgages in the near peak year of 2005, on bubble 'valued' commercial properties that have since plunged in value, were no money down, ARM mortgages.

Now, loan to value ratios are way, way up, rents are down and falling, and the default rate YoY so far has doubled.

Don't think things are even in the 2nd inning yet. They aren't.

Look out below.