US banks warned on housing market risks

US banks warned on housing market risks

By Stacy-Marie Ishmael in New York

Published: February 1 2008 02:11 | Last updated: February 1 2008 02:11

Deterioration of the commercial real-estate market will lead to rising losses and bank failures in the near future, a leading US banking regulator said on Thursday.

The remarks by John Dugan, the comptroller of the currency, reflect growing concern among regulators about the health of US banks, already struggling with the downturn in the domestic housing market.

“We’re entering a stage of the commercial real-estate credit cycle where problems have started to surface and losses have started to increase,’’ Mr Dugan said in a speech in Florida.

The crisis in the US housing market has had a knock-on effect on commercial property, he said.

Falling house prices and the tightening of lending standards had cut demand for new homes – in turn, causing a near collapse in residential construction.

As prospective buyers abandoned planned purchases of homes from developers, commercial borrowers were having a harder time meeting loan repayments. Moreover, any material slowdown in economic activity – which many economists are predicting – would add to the stress in this and other areas of the commercial real-estate (CRE) market.

Mr Dugan expected a rise in bank failures, since many community institutions had significant exposure to this now-declining market and would face rising delinquencies and loan defaults. “CRE concentrations [have risen] significantly in many banks, even as the quality of risk management practices lagged,” he said.

Mr Dugan said that many banks had failed to adjust their lending practices and risk management procedures, despite previous warnings from regulators.

His department would adopt an extremely “pro-active” approach in dealing with deficiencies. “There will be more frequent interaction between supervisors and banks with concentrations in CRE loans that are declining in quality,” he said. “There will be more criticised assets; increases to loan loss reserves; and more problem banks. And yes, there will be an increase in bank failures.”

● Global investment in commercial property is forecast to fall 17 per cent this year as the continuing financing crisis in the sector drags the market from record levels last year, writes Daniel Thomas in London.

The tail end of a spectacular bull run for commercial property before the summer helped to take investment to an all-time high of $930bn in 2007, a 29 per cent rise on 2006, according to research from Cushman & Wakefield, the global property agent.

But trading volumes slowed by 12.5 per cent in the second half of the year as problems in the global debt markets began to weigh on the deals, and this trend is forecast to continue into 2008. With debt markets still frozen and commercial-property sentiment more uncertain in many areas of the world, the global total for 2008 is expected to be about $770bn – a fall of 17 per cent.