Commercial real estate foreclosures are expected to cause a new wave of bank failures, according some analysts. The FDIC closed 25 banks last year and 92, so far, this year.  The pace is picking up and, for many analysts, commercial real estate is likely to be the next challenge facing banks.

Put simply, the problem for banks is bad loans. Institutions have been hit by one type of problem loan after another, says Keefe, Bruyette & Woods (KBW) analyst Frederick Cannon. First, it was bad residential real estate loans, including the notorious subprime mortgages. The biggest bank failure of the crisis occurred on Sept. 25, 2008, when the FDIC closed down Washington Mutual and arranged for it to be bought by JPMorgan Chase (JPM). Another big failure was on July 11, 2008, when the FDIC, at a cost of $10.7 billion, took over IndyMac, a specialist in risky, so-called Alt-A residential loans.

Mortgage problems persist, but banks specializing in loans to developers have been hit hard in 2009. KBW data show that, of banks that have failed since 2007, an average of 28.8% of loans outstanding were construction loans, compared to 9.8% for the industry as a whole. At Corus, which failed on Sept. 11, 88% of its lending was construction loans. “This year is dominated by construction lenders,” Cannon says.
Good for the Survivors

The next problem for banks is likely to be commercial real estate and other commercial and industrial loans, Cannon says. A healthy banking industry is a key ingredient to an economic recovery. Small businesses especially rely on bank financing, which has been hard to get recently.

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