Federal Reserve bracing for commercial fallout as U.S. banks act slowly to take on losses

U.S. banks with heavy exposure to commercial property loans have been setting aside only 38 cents in reserves for every $1 in bad commercial real estate loans, according to an unpublished Federal Reserve report obtained by the Wall Street Journal. Considering that defaults on commercial loans are on the rise — Real Estate Econometrics predicts that the default rate will rise to 4.2 percent by the end of this year from 2.88 percent in the third quarter — this is bad news. One particularly worrisome example is the struggling firm Capmark Financial, one of the most prominent commercial mortgage servicers in the country, which last month said it was on the verge of bankruptcy. The company has only 11 cents for every $1 in bad loans, the Journal said.