About $929 billion worth of commercial real estate loans are due to come due this year, according to the Mortgage Bankers Association, up from the $659 billion the association had previously projected.
Why did the estimate change so dramatically?
Yahoo Finance's David Hollerith explains in the video above.
For more expert insights and the latest market trends, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Stephanie Mikulic
Video Transcript
[AUDIO LOGO]
Akiko Fujita: The regional banking sector is off to a tough start to 2024. The Regional Bank ETF (ticker: KRE) is down about 10% this year on worries about commercial real estate. And now that pile of loans coming due for that real estate is only getting bigger. To learn more, I'm David Hollerith with Yahoo Finance. David.
David Hollerith: Akiko, CRE has been a concern for real estate investors and bank investors for much of last year, and concerns about this weakening have obviously intensified a bit in recent weeks. Some big names on Wall Street and policymakers have also been addressing the issue.
So what's going on here is that there's about $929 billion in CRE loans maturing this year, this is according to the Mortgage Bankers Association, and what's unusual here is that this is 28% higher than originally projected.
So what's happening here is basically how banks have been able to avoid CRE losses at this time is that they've been able to defer or adjust loan repayments with borrowers. In many cases, this appears to be a tried-and-true strategy that banks have used. This is known as a “fake extension,” so to speak. The deal here is that the bank can continue to adjust the same loan by making some additional agreement or having the borrower pay the same interest rate as the current loan that's expiring.
And this is clearly a point where the banks lose money. By not letting borrowers refinance, the banks miss out on profits, but obviously they avoid writing down their loans and they protect their balance sheets. And in the worst case scenario, they cause borrowers to default. So in a sense, that's how the banks were able to protect themselves from losses from the inflation in real estate values that we saw in the commercial mortgage-backed securities market.
Akiko Fujita: David, you mentioned “pretend” and “extension.” That is, how long can banks continue to extend the maturity of loans?
David Hollerith: Right, so that's the big question here. What's happened exactly this year is that many of the loans that were supposed to come due last year have been deferred. The question is, how long can banks and their borrowers continue to defer those payments?
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And this ultimately depends on where the regulators stand. Our understanding is that as long as borrowers can continue to make their current payments, things are good and they don't necessarily need to write down their loans. But it depends on the borrowers and the overall state of the economy and what loans are coming due. I mean, banks generally have about half of the loans coming due this year.
And of that total, 12% of these loans relate to multifamily, about 25% of the maturing loans relate to office space, and about 38% relate to hotels. So it's important to see what the cash flows of borrowers are going to be over the next year.