Financial Crisis - Big Mortgage, small value

The last post was about American commercial real estate investors packing, folding, and moving house from their traditional investment back-office - Europe. Now, let’s take a glance at why these investors found no backers and shut operations.

To start off with rhetoric… did you good folks know that U.S. banks are holding about $1.7 trillion of mortgages backed by commercial property that is fast losing value? 1.7 TRILLION DOLLARS! For realtors and investors alike, this is certainly not good news.

According to new report by Deutsche Bank AG, as property value declines and scarce credit continue to drive commercial property developers and investors into default, total lifetime losses on banks’ $1 trillion “core” commercial-mortgage holdings, or those backed by income-producing properties, would reach between 11.6% and 15.3%, or $115 billion and $150 billion. Those expected losses would be at least as large as those on loans originated and bundled into commercial-mortgage-backed securities, from 2005 and 2008, a period of cheap and reckless credit, Deutsche Bank estimates.

Are you scared yet? Well, we all should be. What’s worrisome is the fact that this is not an area-centric issue. The repercussions of the American investor with an empty pocket could have a domino effect in the office space industry world over, the kind of which is unfathomable, and in a not-a-pretty-picture way.

Not that so far the problem is only restricted to the US. But yet it’s only ‘US puppet countries’ that are hit as of now. But if the dominos do tumble, then we’re talking about carnage as far as the Middle-East and Central Asia.