Multi-trillion-dollar problem may force FDIC to accept private capital help
The fallout from the commercial real estate market downturn is poised to trigger a wave of bank failures and forced mergers, warned Joshua Pack, co-chief executive officer of Fortress Investment Group.
Pack predicts a “multi-trillion-dollar problem” that will hit smaller banks, which aggressively increased commercial real estate lending during the pandemic, particularly hard.
Over $900 billion of loans on commercial and multifamily properties will need refinancing or property sales this year alone, Bloomberg reported, citing data from the Mortgage Bankers Association. This refinancing burden, combined with falling property values and elevated borrowing costs, creates a dangerous situation.
“You’re going to see more of this consolidation and/or liquidation of US banks,” Pack said. “A lot more eggs are going to get broken.”
The crisis won’t just hit banks. Pack estimates that roughly a trillion dollars of commercial mortgage-backed securities (CMBS) loans will mature by 2025. With properties losing value, many borrowers could find themselves owing more than their property is currently worth, potentially leading to defaults.
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“CMBS prices have been kind of bid up,” Pack observed. He predicted a sharp market reaction when investors see defaults spreading to higher-quality properties, leading to fundamental changes in CMBS underwriting practices.
Fortress is already capitalizing on the situation, acquiring performing office loans at steep discounts – between 50 and 69 cents on the dollar. Pack explained banks are selling at these prices to minimize losses, fearing further declines in property values.
However, Pack noted a reluctance from the Federal Deposit Insurance Corporation to sell to firms like Fortress. Given the scale of the crisis, Pack believes regulators will eventually have no choice but to involve private capital in solutions.
“The underlying stress here is just so big – it’s a multi-trillion-dollar problem,” he told Bloomberg. “[Regulators] will eventually get to a point where I think they’re just going to have to utilize private capital to help clean up the mess and to help recapitalize the system.”
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