Below article is from Bloomberg. Just a different view for viewers' interesting reading.
Capmark Distress May Signal Bank Failures Topping 100 (Update2)
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By Linda Shen
Sept. 4 (Bloomberg) -- Capmark Financial Group Inc.¡¯s possible collapse may signal a new wave of real estate losses for banks -- this one tied to business property -- that could push the year¡¯s tally of failures past 100.
Capmark, ranked among the largest U.S. commercial real estate lenders by Moody¡¯s Investors Service, posted a $1.6 billion quarterly loss on Sept. 2 and said it might go bankrupt. The Horsham, Pennsylvania-based company struggled as the default rate on commercial mortgages held by U.S. banks more than doubled to the highest since 1994.
¡°We haven¡¯t really experienced the full extent of the distress,¡± said Sam Chandan, chief economist at property research firm Real Estate Econometrics LLC in New York. ¡°When you look at community banks and some smaller regional banks, they tend to have a far greater concentration in terms of their exposure to commercial real estate.¡±
Lenders are still reeling from residential real estate losses that helped push U.S. bank failures to 84 so far this year. The tally included Colonial BancGroup Inc., the sixth- largest failure in the history of the Federal Deposit Insurance Corp. The total may rise later today because the agency customarily announces the week¡¯s shutdowns on Fridays.
Bank failures last topped 100 in 1992, when at least 179 were seized, according to FDIC data. Chairman Sheila Bair has said more collapses are likely, and the agency¡¯s list of ¡°problem banks¡± stands at 416, the most in 15 years.
Commercial Holdings
Capmark¡¯s holdings include a banking unit based in Salt Lake City with $11.1 billion in assets and a ¡°well- capitalized¡± ranking from its regulators, according to the bank¡¯s Web site. Deposits stood at $8.4 billion on June 30, according to the company¡¯s quarterly statement.
U.S. banks hold about $1.087 trillion of commercial property loans, almost 15 percent of their loans and leases, according to Real Estate Econometrics. Stress tests conducted by regulators in May found that the largest U.S. financial firms could face losses of $53 billion tied to commercial real estate.
Late payments on a commercial loan two years ago typically were cured with no damage to the lender, Chandan said. Now, amid the worst economic slump since the Great Depression, bankers are finding late payments are more likely to signal an actual loss is brewing, he said.
Risks are heightened for property owners who need to refinance because property values have dropped, said Terry McEvoy, an analyst with Oppenheimer & Co. in Portland, Maine. That makes it harder for owners to get new loans covering their original debt.
¡®Red Flags¡¯
¡°We¡¯re still in the early stages of the commercial real estate cycle and things will get worse before they get better,¡± McEvoy said.
Losses at Capmark ¡°would raise that red flag¡± about commercial real estate for more lenders, said Kevin Fitzsimmons, an analyst with New York-based Sandler O¡¯Neill & Partners LP.
Capmark was a unit of Detroit-based GMAC LLC until 2006, and current owners include funds run by Goldman Sachs Group Inc. and KKR & Co. The company originated more than $10 billion in loans last year, according to Moody¡¯s, and 97 percent of the total loan portfolio was first-lien commercial mortgages, Capmark said in its Sept. 2 earnings statement.
Assets originated by Capmark that are no longer collecting interest more than doubled to 7.6 percent of total assets as of June 30 from the end of 2008, after accounting for reserves, the company said. Capmark posted losses in North America, Asia and European units during the quarter and raised the provision for bad loans to $345.8 million from $10.4 million. The FDIC plans to impose curbs on operations at Capmark Bank and demand a plan for boosting capital and liquidity, the company said.
Buffett¡¯s Offer
Restructuring efforts may include filing for bankruptcy or the contribution of assets into the Capmark Bank unit, the lender said. The company struck a deal with Warren Buffett¡¯s Berkshire Hathaway Inc. and Leucadia National Corp. to sell its loan servicing and mortgage units for as much as $490 million.
Capmark today had its debt rating cut by Moody¡¯s to C because the asset sale and declining value of its remaining units increase the odds that creditors won¡¯t get paid. A call to Capmark spokeswoman Joyce Patterson wasn¡¯t immediately returned.
The nation¡¯s small- and medium-sized banks may be most vulnerable because their loans are concentrated in commercial mortgages, said Thomas Atteberry, who manages $3.5 billion at First Pacific Advisors LLC in Los Angeles. Commercial mortgages equal about 41 percent of their total loan portfolio, Atteberry said, citing data from Montreal-based BCA Research Inc.
The fund manager said he¡¯s avoiding debt issued by smaller banks because ¡°a lot of what you are basing your investment on is that someone will bail you out.¡±
CER Price at posting:
13.0¢ Sentiment: Hold Disclosure: Held
