Bank's Losses Increase in Commercial Real Estate

Posted by Staff writer on May 02, 2016 09:45 AM EDT
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Luxury Homes In San Francisco Average $2.7 Millionmore big
Caption:SAN FRANCISCO - MAY 26: A row of luxury homes are seen near the Golden Gate Bridge May 26, 2005 in the Sea Cliff neighborhood of San Francisco, California. According to a study released Wednesday by San Francisco's First Republic Bank, the average luxury home in the San Francisco Bay Area, which is defined as homes with values above the $1 million, rose nearly 6 percent between the fourth quarter of 2004 and the first quarter of 2005 to an average of $2.7 million, up $329,000 from one year ago. (Photo : Justin Sullivan/Getty Images)

The declared losses of banks on loans for commercial real estate had reportedly risen in the last three months of 2015. This was confirmed by data collated by financial information firm Sageworks, as reported on

The fourth quarter CRE loss rates, which is the annualized charges as a percentage of average loan balances, is now being reviewed by regulators recently. This is part of the oversight on financial institutions' activities that are related to commercial real estate loans. The oversight was instituted to prevent the market crash recently experienced by the real estate market.

According to Sageworks Senior Risk Management Consultant Rob Ashbaugh, "Charge-off rates are not horrible compared to what they were 10 years ago. When you do commercial real estate lending, it's all about lending to cash flow - do the borrowers have the cash flow to cover it, or if you're into construction, do you have the tenants in place? Cash flow's pretty good right now, and that's why CRE is sort of taking off."

Unfortunately, a report from says otherwise. In an interview with Dr. Michael Hudson, author of the book "Killing the Host",  he said that in North America and in Europe, about 80 percent of mortgage loans are against real estate. This results according to Hudson, in a debt leverage economy.

While there are savings made in this debt leveraged economy, he added, "Most savings are lent out to borrowers as debt." This has lead to Wall Street economy taking over the economy and is draining it.

He said, "But Wall Street is interjecting itself into the economy, so that instead of the circular flow between producers and consumers, you more and more of the flow diverted to pay interest, insurance and rent. It all ends up with the financial sector, most of which is owned by the 1 percent."

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