Bailout oversight panel warns of wave of commercial real estate foreclosures

The special panel set up by Congress to monitor the $700-billion bailout fund is raising new warnings about the economic impact of a wave of expected commercial real estate foreclosures.

In its monthly report, to be released Thursday, the Congressional Oversight Panel for the Troubled Asset Relief Program predicted those failures could threaten a still-struggling financial system. The panel is not alone in sounding the alarm about commercial real estate troubles. But in its job as overseer of the bailout fund, the panel urged the Treasury Department and banking regulators to develop a plan to address the problem before it hits full-force starting next year.

?The government cannot and should not rescue every bad loan or keep every bank afloat, but neither can it turn a blind eye to bank failures and their impact on communities,? the panel?s chairwoman, Elizabeth Warren, told reporters ahead of the report's release. ?The report is designed in part to wave a red flag to signal there is a serious problem coming and it will hit an already weakened financial system.?

The report noted that between 2010 and 2014, about $1.4 trillion in commercial real estate loans will come to the end of their terms. Almost half of those are now under water, the result of a drop of more than 40% in commercial property values since 2007.

Losses from those loans could hit $300 billion, and would severely affect many community banks. Regulators have identified nearly 3,000 small banks -- about 37% of all U.S. financial institutions, as having high concentrations of commercial real estate loans on their books.

The oversight panel warned that without a coordinated government response, many of those banks could fail.

?If hundreds more community banks go under, the effect could be to dump sand in the gears of our economic recovery,? Warren said.

The panel suggests several ways to address the problem, including injecting more TARP money into some of those banks, a government program to buy up some of the bad assets or creation of a guarantee fund to losses from the loans.

The important point, Warren said, is for government officials to start working on a solution now before a crisis develops.

?Never again should America be in a position where the Secretary of the Treasury comes in to Congress and says 'Give me $700 billion or the economy will disappear by Monday,' ? she said.

-- Jim Puzzanghera

Photo: Elizabeth Warren. Credit: Andrew Harrer / Bloomberg News