Fitch press release ( emphasis added):

Fitch Announces Expanded Review of U.S. Bank Commercial Real Estate Exposure
18 Aug 2009 10:43 AM (EDT) Fitch Ratings-New York-18 August 2009: The performance metrics of commercial real estate (CRE), an area with a significant risk exposure for the majority of Fitch’s U.S. bank universe, continues to deteriorate at an unprecedented pace. While CRE loans, excluding the more problematic construction and development portfolios, represent more than 125% of total equity for the 20 largest banks rated by Fitch, the risk is even higher for banks with less than $20 billion in assets, as average CRE exposure represents more than 200% of total equity for these institutions.

Given the degree of deterioration, and the substantial exposure of many U.S. banking and thrift institutions to CRE, Fitch has recently launched an information survey aimed at obtaining more granular data on the CRE portfolios of the institutions it rates. Fitch intends to use this information to enhance its insight on the size and performance of particular segments of banks’ CRE portfolios. This will allow Fitch to frame areas of specific concern across the industry, conduct various stress tests, and assess if ratings changes are needed to reflect what will likely be continued deterioration in asset quality.

As reported last week by Fitch’s commercial mortgage backed security (CMBS) group, CMBS loan delinquencies surpassed 3% in July and are expected to increase more than 60% by year end to at least 5%. Further, roll rates from 30 to 60 days have increased to over 50% in 2009 and resolutions continue to slow. “The same factors that are placing pressure on CMBS transactions are increasing pressure on the performance of bank and thrift-held CRE portfolios” according to Thomas Abruzzo, Managing Director and co-head of Fitch’s North America Financial Institutions group.

The stress is clearly not confined to CMBS activity. In commenting on the U.S. bank universe, Abruzzo went on to state, “large banking companies have seen levels of early-stage delinquencies, more severe delinquencies and non-accrual loans, as well as charge-offs increase markedly across their CRE and construction and development portfolios. While the 10%+ of construction and development loans in non-accrual is greatly attributed to residential construction activity, the 5% of the CRE book in non-accrual status evidences more widespread problems.”

Fitch currently assigns Negative Outlooks to nearly half of the 20 largest U.S. bank and thrift institutions it rates. As Fitch has indicated in its recent bank rating actions, a major concern contributing to these Negative Outlooks is the potential for further deterioration in the institutions’ loan portfolios with a specific focus on CRE exposures.

“While the relative size of the CRE portfolio is smaller for some of the very large banks Fitch rates, the recent performance trends, expectations for continued economic weakness and the uncertain availability of the CMBS market increases the concern regarding CRE exposure and makes it a likely rating driver as we look out over the next few quarters,” stated James Moss, Managing Director and co-head of Fitch’s North America Financial Institutions group.

As part of Fitch’s expanded analysis it has sent surveys to more than 75 Fitch-rated U.S. bank and thrift institutions requesting additional detail on the institution’s exposure to CRE, covering both the banks’ loan and investment portfolios. Among the uniform information requested is: collateral type, geography, internal risk rating, and performance. Fitch also requested additional detail on each bank’s largest exposures and watch credits. Fitch has asked that this information be provided by the middle of September.

Once in receipt of this information the data will be compiled and Fitch will begin to provide commentary at an industry level on areas of exposure in order to provide investors with a better sense of where the significant risk exposures are. Fitch will conduct various stress tests to gauge a bank’s ability to withstand incremental deterioration. Results of these scenarios will be highlighted in any rating actions Fitch determines to be warranted.

Fitch’s current bank and thrift ratings already incorporate further CRE portfolio stress, and many rating actions in the last couple of years have been driven in part by problematic exposures to CRE, particularly the residential construction sector. Fitch believes current indicators point to the potential for continued deterioration to surpass Fitch’s current expectations. The analysis of the additional data will assist in highlighting which, if any, institution’s portfolios are particularly vulnerable to an extended period of stress.

Contact: James Moss +1-312-368-3213, Chicago; or Thomas Abruzzo +1-212-908-0793 and Christopher Wolfe +1-212-908-0771, New York.

Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, ‘www.fitchratings.com’. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.

24/7 Wall Street posts on the commercial real estate “land mine” banks have yet to deal with:

“The Financial Times recently reported on data about commercial real estate from Fitch, one of the three large credit ratings agencies. The paper wrote that “Fitch said properties were increasingly financed with no money down or even with loans for more than 100 per cent of a property’s value as owners borrowed greater amounts upfront to pay interest costs, betting that cash flows would improve quickly enough for the property to be self-sustaining.”

This means that what people did on a small scale with home mortgages they did on a larger scale with buildings and malls. General Growth has about $27 billion in debt. It is too early to say how much of that can be recouped though asset sales, but with commercial real estate defaults growing, all of the excess inventory will cause prices to drop, perhaps precipitously.”

Of course credit cards problems are just beginning too and residential has not bottomed either.

Phillip Moore’s article in Euromoney describes many investors and much money (from both UK and US investors) allocated to snapping up distressed commercial real estate debt.  What’s interesting to us is the indications in the article that it’s the banks that are unwilling to sell – that is preventing the investments – NOT a need for federal financing…

“There are three principal reasons explaining why, to date, so much of the cash that was earmarked for investment in commercial real estate debt remains “hors de combat”. The first is that in spite of the precipitous falls in values in the commercial property market over the past year, the general consensus appears to be that values still have further to drop.

Another reason explaining why there appears to be a disequilibrium between supply and demand in the commercial real estate debt market is that in spite of the bleak outlook for values, there is still a reluctance among European banks to offload their holdings, or even to acknowledge how distressed their exposure has become.

“There has been a widespread misconception that as commercial and investment banks looked to restructure their balance sheets they would start by marking their real estate books to a more realistic valuation and then look to sell significant volumes of those assets at those prices,” says Cairn Capital’s Henriques. “We have seen very little of that happening, largely because the markdowns the banks are being quoted on their debt valuations are such that they regard the benefits of selling them as somewhat ambiguous. The capital write-downs they would have to take from such a strategy are such that they would erode most if not all of the capital relief they would generate by selling. So while we are confident that there will be opportunities to acquire bank debt, it won’t be the avalanche that some people were expecting at the tail end of last year.”

We think the debt will not be available for the investors to “snap up” until the banks are willing to take what is offered. Granted, the Geithner plan makes overbidding easier, but to bridge the yawning gap that exists now, is going to make the plan very difficult to implement.

Hat tip to Zero Hedge.

New York, March 19, 2009 — Commercial real estate prices as measured by Moody’s/REAL Commercial Property Price Indices (CPPI) decreased in January by 5.5% from the previous month. The January decline was the largest in the history of the index, which has followed commercial real estate prices since December 2000.

Prices are now down 19.1% from a year ago and 15.4% lower than they were two years ago. They have declined 21.0% from their peak in October 2007. Prices have nominally returned to the levels they were in the spring of 2005, says Moody’s.