It’s one thing to know that there is an elephant in the room, but it’s a totally different situation when no one is willing to vocalize that there is an elephant in the room or talk about the problem that it is causing. This may well be the situation with many banking institutions at present. In spite of the government’s attempts to buy time for the recovery process by promoting their supposed re-gained health and vitality, the stark truth is that business at your local bank may get much worse before it gets better.The assumption that the economy will soon recover and that house prices will soon stop dropping is the thin ice upon which too many of the big banks are wistfully skating. To add to these questionable predictions is the fact that since the passing of the new changes in accounting rules, banks are able to disguise their increased risks in a way that is more difficult to see. Masking huge debt comforts investors who might be less inclined to loan money if they knew the truth.So, why are lending institutions accruing more crippling debt than they are willing to talk about? The harsh reality is that while banks have already lost billions of dollars in defaulted residential mortgages, more than 1.4 trillion dollars in commercial real estate loans will be coming due in the next 4 years. As of December, 2009, this represented over $203 billion in at-risk assets. At present, at least 50% of these loans are already “underwater,” worth less now than the money owed on them. Granted, the majority of these loans were acquired at the height of the real estate bubble, and commercial properties across the board have suffered a 35% drop in value since the peak in October, 2007. The fact remains that the majority of banks with over 25% of their total debt load in commercial interests will be hit hardest if current warning predictions prove accurate. Because commercial loans are always larger than private or residential mortgages, the weight of these failed accounts may actually sink the ship, in this case, smaller community banks.Banks are unwilling for investors to understand just how many troubled commercial real estate properties are on their books because it is a frightening picture, at best. Not able to recoup the value of repossessed properties because of the current strict loan guidelines and overall property devaluation, many lending institutions now practice “conscious balance sheet management” to try to paint a much more optimistic picture than the facts would indicate. Showing the increasingly high levels of risk is certain to scare off already hesitant investors, and without fresh infusions of capital, where would the banks be today? More importantly, where will the banks be tomorrow? Will someone please mention the elephant in the room before he tears the whole place apart.
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