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Commercial Mortgage Crisis Set To Explode

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By MATT APUZZO

The Associated Press

Published: November 28, 2008

WASHINGTON - The full scope of the housing meltdown isn't clear and already there are ominous signs of a new crisis, one that could shutter malls, hotels and storefronts nationwide.

Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are at work on commercial properties, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure.

Hotels in Tucson, Ariz., and Hilton Head, S.C., are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, say analysts from Fitch Ratings Ltd., which evaluates companies' credit.

"We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

However, many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

"It's a toxic drug and nobody knows how bad it's going to be," said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.

Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

Retailers paying rent that was expected to cover mortgage payments are closing. When those $20 billion in mortgages come due next year - 2010 and 2011 totals are projected to be even higher - many property owners won't have the money.

The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won't write mortgages as long as investors won't purchase them.

"Credit markets have seized up," corporate securities lawyer Michael Gambro said. "People are not willing to take risks. They're not buying anything."

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