The next banking crisis: Commercial mortgages

07/20/2009 4:49 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Heard enough bad news about failing residential mortgages to last you a couple of lifetimes?

Tired of headlines about huge losses at Citigroup and Bank of America?

Cheer up. The subprime, alt-A, and prime home mortgage meltdowns are about to be blown off the front page—by the meltdown in commercial mortgages. Commercial mortgages held by U.S. banks have been failing at the fastest rate in 20 years, according to the Wall Street Journal. Losses on loans to finance commercial real estate could hit $30 billion this year.

And you won’t have to hear more about problems at the huge banks that have dominated the crisis so far. The damage from commercial mortgages is worse, as a percentage of loans made, at regional and local banks. How much worse? Well, with three big regional banks, Zions Bancorporation (ZION), Regions Financial (RF), and KeyCorp (KEY) report earnings on July 20, 21, and 22, respectively, investors are about to find out.

And if the news out of Zions, the first to report, is any indication investors aren’t going to be happy about what they hear. The bank reported net loan and lease charge offs of $348 million or 3.4% of annualized average loans for the second quarter. That’s up from 1.5% in the first quarter.

At $14.5 billion Zions portfolio of commercial loans is the smallest of the three regional banks. About 38%, or $36.8 billion, of Regions Financials total loan portfolio was in commercial real estate and construction loans at the end of the first quarter. KeyCorp had 25% or $18.3 billion in commercial and construction loans.

Commercial real estate prices have tumbled 30% from their 2007 peak and market watchers expect prices will fall to 40% to 50% of that peak before the decline is over.

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