The Federal Reserve is set to purchase its final round of existing commercial mortgages today, according to Dow Jones, marking the end of this part of the Term Asset-Backed Securities Loan Facility, or TALF, and raising questions over whether the commercial market is strong enough to go it alone. Although by some experts’ accounts the Fed has played a relatively small role in this sector, Darrell Wheeler, head of commercial mortgages with Amherst Securities, said that the program lifted market morale. “TALF provided psychological support for the market,” Wheeler said. “It served its purpose at the time it was needed.”

The Congressional Oversight Panel said in a report released today that it is “deeply concerned” that a pending wave of commercial real estate loan failures could threaten the nation’s fiscal stability, but that “no single cause” can be identified in the commercial mortgage crisis (see full report here). Loans made during the peak of the commercial market bear the highest risk of default, according to the report, while almost half of the commercial real estate loans expected to reach maturity between 2010 and 2014 are currently underwater. All told, about $1.4 trillion worth of commercial real estate mortgages will hit the end of their terms during that four-year period. Although 2010 may remain somewhat calm, the report claims, 2011 and the subsequent years could be brutal for commercial lenders with expected losses for banks ranging from $200 billion to $300 billion. TRD [more]

The W Hotel

The W Hotel Union Square is facing imminent default, according to a recent monthly report of 30-day-plus delinquencies for all commercial properties by Barclays Capital. The hotel is serving as collateral for a $115 million W New York-Union Square loan, the report shows. The loan has been transferred to a special servicer, being classified for imminent default. Barclays Capital’s report shows that 30-day-plus delinquencies for all commercial properties jumped 5.5 percent in October. The CMBS remittance report shows that the worst performing commercial mortgage category was hotels, which hit a record-high delinquency rate of 10.7 percent among loans that originated in 2007.

From the November issue: The new tax rules handed down by the Treasury Department in mid-September are prompting more lenders to employ already-popular “extend and pretend” and “delay and pray” strategies. These darkly comic catchphrases, of course, are used to describe the practice of extending the maturity on troubled loans rather than working out a deal that would reveal just how little the debt is now worth. Those who follow commercial real estate say the federal government’s new regulations — which were designed to help facilitate the modification process for troubled securitized loans — give loan servicers greater leeway to extend loans. Attorneys and advisors with experience working on troubled loans say they have seen a big increase in “extend and pretend” transactions this year across various asset classes. They forecast more such deals, thanks to two favorable trends — the new accounting rules and low interest rates. “Our view is that this condition [of rampant extensions] is going to continue for a while — the alternative is for lenders to decide they have to recognize losses,” said Paul Fried, managing director at advisory firm Traxi.

Daniel Tishman, CEO of Tishman Construction, joined CNBC this morning to discuss the possible pending commercial real estate crisis. Tishman said that he was glad to hear Larry Summers, director of the National Economic Council, call attention to the tenuous commercial market over the weekend, calling Summers’ comments “a bit refreshing.” Tishman said that in 2007, $3.7 trillion in commercial mortgages were initiated and that as those come due, the market could face big trouble. “That $3.7 trillion worth of commercial mortgage money is going to have to be refinanced and the capacity just isn’t there,” Tishman said.

A recent report from research firm Real Estate Econometrics shows that commercial mortgage defaults have a long way to go before bottoming out. The number of mortgage defaults could peak in the next two years, the report says, and that high level of commercial distress could sustain through 2013. “That’s a situation that will grow more serious over the course of the next year or more,” Econometrics President Sam Chandan said. His group forecasts as many as 5.2 percent of commercial and 5.5 percent of multi-family mortgages will default in fourth-quarter 2010.

Commercial loan defaults are increasing even as residential
foreclosures begin to slow. A recent report from Real Estate
Econometrics found that the default rate on commercial mortgages rose
to 2.25 percent in the first quarter of 2009, up from 1.62 percent in
the fourth quarter of 2008, the biggest quarterly jump since 2003. Sam
Chandan, president of Real Estate Econometrics, said he expects the
default rate to hit 4.1 percent by the end of this year and rise to a
peak of 5.3 percent in the fourth quarter of 2011. That could mean
foreclosure for nearly $200 billion of the close to $3.5 trillion in
commercial properties around the country. [more]