Fearing Losses, Banks Are Quietly Dumping Real Estate Loans

🌈 Abstract

The article discusses the distress in the commercial real estate market, particularly the struggles of landlords to pay back loans on office buildings. Some Wall Street banks are trying to offload their portfolios of commercial real estate loans to avoid losses as landlords default on mortgages.

🙋 Q&A

[01] The distress in the commercial real estate market

1. What are the key factors contributing to the distress in the commercial real estate market?

• High interest rates making it harder to refinance loans
• Low occupancy rates for office buildings due to the pandemic

2. How are banks responding to the distress in the commercial real estate market?

• Banks are trying to offload their portfolios of commercial real estate loans to cut their losses
• Banks are moving away from the "extend and pretend" strategy of giving struggling property owners more time to find rent-paying tenants

3. What is the current state of commercial real estate loan delinquencies?

• Commercial real estate loan delinquencies have not yet reached crisis levels, but are still a concern
• Delinquencies peaked at 10.5% in 2010 after the financial crisis, and are currently around 1.17% of all loans held by banks

4. Which banks are most affected by the commercial real estate loan issues?

• Regional and community banks, especially those with less than $10 billion in assets, hold a large portion of commercial real estate loans and are more vulnerable

[02] Banks offloading commercial real estate loans

1. What are some examples of banks offloading commercial real estate loans?

• Deutsche Bank and Aareal Bank sold the delinquent mortgage on the Argonaut office complex in New York to George Soros's family office
• Goldman Sachs sold loans it held on a portfolio of troubled office buildings in New York, San Francisco, and Boston
• CIBC completed a sale of $300 million of mortgages on a collection of office buildings around the country

2. What are the motivations for banks to offload these loans?

• Banks want to reduce their exposure to commercial real estate loans, especially office buildings, to avoid potential losses
• Regulators and investors are putting pressure on banks to reduce their commercial real estate loan portfolios

3. How are the loan sales structured to minimize losses for buyers?

• Some deals involve selling only the higher-rated portions of loans, spreading the risk among multiple buyers
• Banks are also quietly giving borrowers time to find buyers for properties, even at a substantial discount, to avoid foreclosure

4. What is the outlook for the commercial real estate loan market?

• Hundreds of billions in office building loans are coming due in the next two years, and banks are expected to continue offloading these loans
• Investors see an opportunity to buy discounted loans, with the potential for the loans to be worth more if the industry recovers, or to take possession of the buildings at a discounted price in a foreclosure