About half of the country's commercial real estate mortgages will be "underwater" by the end of 2010, meaning the value of the assets will be less than what's owed on them, says Elizabeth Warren, a Harvard law professor and chairman of the Congressional Oversight Panel of the Troubled Asset Relief Program.
That's bad news for the economy and small and midsize banks, which will need up to three years to work out the problems, Warren says.
“We now have 2,988 banks — mostly midsize, that have these dangerous concentrations in commercial real estate lending,” Warren told CNBC.
Warren's commission has said hundreds of banks could fail if economic conditions and tighter lending standards prevent borrowers from refinancing.
Treasury Secretary Timothy Geithner has said he is also keeping an eye on the sector. “Commercial real estate's still going to be a problem for the country,” Geithner tells CNBC.
“But we can manage through this process.”
Some, however, say the many worries are overblown.
Hugh Kelly, a New York University real estate professor, says an improving economy and eventual job creation will soften a crash.
“I think forecasts of a crash are navigating out of a rear-view mirror of a recession that is over,” says Kelly, according to the Palm Beach Post.
“Demand for use of commercial space remains weak and absorption is negative, but we're growing in terms of consumption.”
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