Summary
The only good news is that most of the loans in question were not securitized and spread through the financial system as cash-equivalent.
The bad news is multi-faceted.
To expect REITs to be able to stop the fall, is to rely on a frayed shoe lace.
Analysis
The only good news is that most of the loans in question were not securitized and spread through the financial system as cash-equivalent. So we're much less likely to find German state pension funds writing down their assets to reflect a lack of marketability. The ratings monopoly won't be directly implicated. The mega-banks might be under the heel of the falling footgear, but not dead center as they were with houses. A sub-heading here is that most or all of these loans were either portfolio or, maybe, participated. Not being securitized their collectibility won't be affected by the Landmark decision or its sequels (http://www.kscourts.org/Cases-and-Opinions/opinions/supct/2009/20090828/98489.htm). Therefore, finally, loan losses are limited to the cost of foreclosing and reselling the properties securing them.
The bad news is multi-faceted. Start with FDIC. FDIC has both a management and funding problem arising from the rapid deterioration of smaller banks. This has apparently led to a policy of "extend and pretend" for loans which are current. Obviously banks which have marginal capital aren't going to be eager lenders, so one element of widespread economic recovery is in jeopardy. As an aside, 2006 guidance on commercial property lending wasn't exactly pro-active. The bubble was inflating pretty noticeably at that point. Nor can over a trillion dollars of maturing loans simply be ignored. At this point a substantial fraction of that is not secured by present property values . Probably the best point in this article is that loans originated before 2005 may still be reasonably well secured. The question remains whether we're dealing with a rollover shortfall of $250 billion or $750 billion. In either case, look at the megabanks, now subsidiaries of either the Fed or the Treasury to have a competitive advantage over the next two or three years. But this is not unmitigated good news for them, either. They will probably be imposed upon to absorb a good number of problematic regional banks. In the process, their returns will be diluted by the problems they have to digest. As a bonus, banking competition will be reduced.
To rely on REITs to stop the fall is to trust a frayed shoe lace. The article suggests that the additional capital to pay down mortgages can easily be raised through REITs. If true, I would hate to be the REIT investor. The term "dilutive" comes to mind. A lot of REIT performance this year has, again, been the ignorant, nonchalant, or naive chasing yield in a low interest rate environment. The term "hot money" comes to mind. While this has been a good window for smart money to exit commercial real estate, the market's appetite is likely to be limited as dilution hits dividends. The rising crescendo of negative comment on the sector won't help either.
