Fed president says loan losses from commercial real estate will be ‘manageable’

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Print this page Paula C. Squires

Defaults on commercial real estate loans will contribute to more bank failures, but overall they won’t threaten the banking industry as a whole, Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond said today. 

“The magnitude of the deterioration seems consistent with past recessions. It looks like a manageable problem,” Lacker said during a press conference after an economic workshop at the Richmond bank.

Community and regional banks will take the biggest hits, he said, “because that’s their bread and butter.” 

Federal Reserve data showed banks holding $1.7 trillion in commercial real estate loans at the end of the third quarter. Defaults are expected to increase in 2010 as the first of $300 billion worth of commercial-backed security loans come up for refinancing at a time when real estate values have dropped.  Lacker said he doesn’t think government intervention is warranted to stave off the commercial defaults.

In fact, the bank president called for less government involvement in the housing industry.  Looking back on the financial crisis, he said, “Government policies that encouraged leveraged investment in housing, those I think contributed to excessive investment in housing.”

Asked about criticism of the role that the government and the Federal Reserve may have played in the crisis, Lacker responded, “The last two years, the way the turmoil has played out, the perception of the guarantee of the liability of large financial institutions played a central role. To the extent that that’s laid at the door of policy makers, I would accept that critique.”

Moving forward, he said government-sponsored enterprises such as mortgage finance giants Fannie Mae and Freddie Mac have outlived their usefulness. “… We need to consider weaning ourselves off of subsidies for housing and subsidies for housing finance,” said Lacker. “I think we should work to a point maybe a decade hence when we don’t need government-sponsored enterprises.” 

Lacker was optimistic about what seems to be the beginning of an economic recovery. In 2010, he expects growth in the 2.5 to 3 percent range. “Inflation should remain where it is now, at 1.5 percent.” However, he added that it may take some time for employment levels to return to normal. 


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