US banks warned on housing market risks

http://www.ft.com/cms/s/0/db2badd6-d05c-11dc-9309-0000779fd2ac.html?nclick_check=1

Financial Times
By Stacy-Marie Ishmael in New York
February 1 2008

Deterioration of the commercial real-estate market will lead to rising losses and bank failures in the near future, a leading US banking regulator said on Thursday. The remarks by John Dugan, the comptroller of the currency, reflect growing concern among regulators about the health of US banks, already “We’re entering a stage of the commercial real-estate credit cycle where problems have started to surface and losses have started to increase,’’ Mr Dugan said in a speech in Florida.

The crisis in the US housing market has had a knock-on effect on commercial property, he said. Falling house prices and the tightening of lending standards had cut demand for new homes – in turn, causing a near collapse in residential construction. As prospective buyers abandoned planned purchases of homes from developers, commercial borrowers were having a harder time meeting loan repayments. Moreover, any material slowdown in economic activity – which many economists are predicting – would add to the stress in this and other areas of the commercial real-estate (CRE) market.

Mr Dugan expected a rise in bank failures, since many community institutions had significant exposure to this now-declining market and would face rising delinquencies and loan defaults. “CRE concentrations [have risen] significantly in many banks, even as the quality of risk management practices lagged,” he said. Mr Dugan said that many banks had failed to adjust their lending practices and risk management procedures, despite previous warnings from regulators.