Chris Dodd Demands Commercial Loan Modifications

February 22, 2010 Ben S. Bernanke Chairman Board of the Governors of the Federal Reserve System 20th Street and Constitution [...]]]>

Chris Dodd Demands Commercial Loan Modifications

February 22, 2010
Ben S. Bernanke
Chairman
Board of the Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Dear Chairman Bernanke:

I write to express my concern about the state of the commercial real estate (CRE) market and the potential impact on the financial system and the greater economy.

Recent reports and testimony indicate that while the economy is showing signs of stabilizing, the CRE market continues to face significant challenges. The Congressional Research Service, for example, reported last month that commercial mortgage defaults and losses are at unusually high and increasing levels. According to the report, delinquency rates for commercial mortgages climbed from 4% at the end of the third quarter of 2009 to more than 6% in January 2010.

I understand that you have been raising concerns about the CRE market as well. Indeed, in a speech before the Economic Club of New York in November 2009, you stated that “poor fundamentals have caused a sharp deterioration in the credit quality of CRE loans” and that these “pressures may be particularly acute at smaller regional and community banks.”

Others also have expressed concerns. At a hearing last month before the Congressional Oversight Panel (COP), a Federal Reserve official testified that “Federal Reserve examiners are reporting a sharp deterioration in the credit performance of [CRE] loans in banks’ portfolios and loans in commercial mortgage-backed securities,” and warned that more than $500 billion of CRE loans will mature each year over the next few years. This point was reinforced in an oversight report published by the COP this month, which stated that nearly half of CRE loans at present are “underwater” and that the largest “loan losses are projected for 2011 and beyond.”

In response to the growing concerns, I understand that last October the Federal Reserve and other agencies on the Federal Financial Institutions Examination Council released a policy statement on prudent commercial real estate loan workouts to “assist examiners in evaluating institutions’ efforts to renew or restructure loans to creditworthy CRE borrowers.” I appreciate your efforts to coordinate action in addressing this critical issue and ask that you keep me informed as to your progress. While it may still be relatively early in the process, I would like you to provide an update on how this guidance is helping to stabilize the CRE market. In addition, I would like an explanation of how the Federal Reserve has addressed the CRE issue so far, and what additional steps you plan to take.

I believe that the weakness in the CRE market requires prompt and robust responses from the regulators to guard against harmful effects on financial institutions and the economy. I urge you to redouble your efforts to provide appropriate oversight of this vital component of our economy, and look forward to working with you to bring much needed stability to the CRE market.

Sincerely,

CHRIS DODD
Chairman