Word of another wave of mortgage-related pain added to investor unease Monday after a top Fed official warned that American real estate troubles will go commercial this year. Nearly all asset classes took a hit for the day, with only the dollar showing appreciable gains.
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said he was concerned that U.S. banks remain "pretty heavily exposed" to commercial real estate. "It is the one domestic factor that keeps me up at night," he said.
So far, the U.S. mortgage morass has been largely confined to the residential part of the market, but delinquencies on commercial real estate loans and mortgage-backed securities are expected to increase as businesses suffer the effects of a slowing economy. If 2007 and 2008 can be thought of as the peak of residential real estate issues, Lockhart told the Association for Financial Professionals after a speech, then "it is possible to think of 2009 as the year of commercial real estate."
Commercial values have fallen 16.0% from their peak in October 2007, according to the Moody's ratings agency, which expects further declines over the next 12 to 24 months with delinquencie rising as macroeconomic pressures take a toll on property cash flows.
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