The Economy

Fed: The Next Mortgage Crisis

A new mortgage crisis may be looming, but look for it in the office park, not the cul-de-sac. In a presentation to banking regulators last month, the Federal Reserve said that U.S. banks “will be slow to recognize the severity of the loss [on commercial mortgages]–just as they were in residential.” In a speech on Monday, New York Fed President Bill Dudley said, “More pain likely lies ahead for this sector and for those banks with heavy commercial real estate exposures.” The Wall Street Journal backs up these assertions with some data: Banks with heavy exposure to such loans set aside just 38 cents in reserves during the second quarter for every $1 in bad loans. In the beginning of 2007, they set aside $1.58 in reserves for every $1 in bad loans.