Mermelstein: Govt. Can Manage Soft Landing for Impending CRE Loan Problem

By: Anu Kher, Online News Editor, Multi-Housing News

Edward Mermelstein is a real estate attorney and founder of Edward A. Mermelstein & Associates. He helps foreign and US entities find and purchase real estate in the US and abroad. He is also the founder of Mermelstein Development – a subdivision of his firm engaging in the acquisition, ownerships, investment, management and development of residential, commercial, and mixed-use properties.

Mermelstein spoke with MHN Online News Editor Anu Kher about the commercial property loans crisis in the U.S., its impact on banks and lending institutions and how the government can deflate the bubble before it bursts.

MHN: What is the problem facing commercial property loans and will be it be as big as the single family mortgage crisis?

Mermelstein: No one has a full grasp of how big this is going to be. It depends on the government and the lenders. Right now lenders are holding on to non-performing notes that today are worth only 50 to 80 percent of what they were when loaned against the property. Instead of starting the foreclosure process, lenders are extending notes, which is causing an artificial condition. There are trillions of dollars on lenders’ books but they are actually worth only 50 percent of that. The government is not forcing lenders to mark the notes down.

MHN: What is causing this?

Mermelstein: Commercial property values are in a free-fall, vacancy rates are soaring, and refinancing is no longer an option.

MHN: When is the bomb expected to go off?

Mermelstein: The bubble could either burst or deflate gradually over time, depending on how the government regulates the lenders’ books. Unfortunately, nothing can be done from the investor and owner side to alleviate this situation. The lender cannot go on extending the notes indefinitely. Eventually the house of cards will crumble.

MHN: How many banks are likely to fail due to this problem? And how will this affect the overall economy?

Mermelstein: Right now the government is artificially keeping several banks afloat. But in the next few years, about 1,000 lending institutions are expected to fail. They cannot be allowed to fail all at once, because this will cause a major loss of confidence in the banking system, which is not good for the overall economy.

MHN: What percentage of these problem loans are multifamily?

Mermelstein: While I don’t have this figure with me, this is more of a problem for the office, retail and hotel sector. The multifamily sector is in much better shape because there is liquidity in that sector due to the agencies and some lenders as well.

MHN: What can be done to prevent a disaster from happening?

Mermelstein: My concern is the rate at which banks will be going under. As long as the closings are controlled by the government, we should be okay. It depends on whether, going forward, the non-performing notes will increase at a rate that can be controlled?

MHN: When do you think recovery will take place?

Mermelstein: There is some increase in the returns that investment banks and trading firms are now seeing. So the freefall will stop in the next six to eight months. But in terms of a recovery, I think it’s going to take at least another six to eight years.

MHN: What happens to the properties with the non-performing loans?

Mermelstein: Most lenders are extending these loans, or are starting the foreclosure procedure. In a place like New York, it takes about one to two years to fully recover the asset but the lender is just accelerating the final outcome. Lenders discounting what’s on their books by 10 to 15 percent on a quarterly basis, because they won’t be able to take the loss all at once.