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NEW YORK CITY-Commercial real estate loans in default at FDIC-insured institutions increased to 1.6%, or $1.07 billion, in Q4 2008 from 1.36% the prior quarter, according to a report FDIC issued on Thursday. Dr. Sam Chandan, president and chief economist at Real Estate Economics, tells GlobeSt.com that data from the FDIC report mirrors default rate projections made by his organization earlier this month, when CREE projected a Q4 default rate of 1.8%. He notes that compared to the default rate in other sectors, commercial real estate isn’t faring so badly.

“There are other sectors on bank balance sheets where we see the delinquency and default rates increasing at a faster pace than what we see for the commercial mortgages,” Chandan says. Nonetheless, he notes that the loan default rate for commercial real estate is nearly double the year-end 2007 tally of 0.81%.

Chandan says his firm’s outlook for the next few years remains unchanged: a 3.9% default rate at the end of 2009, 4.7% at the end of 2010 and finally peaking at 4.8% in 2011, with an eventual decline to 4.2% over the course of 2012.

FDIC’s quarterly banking report said that insured banks and thrifts in the United States lost $26.2 billion in Q4 and that its troubled bank list had increased by 47% during the same period. Perhaps the grimmest news was that during the course of 2008, 25 insured institutions with $372 billion in assets failed. The FDIC announcement had the rapid and dramatic effect of driving down what had been a rising Dow, by 88 points in the final minutes of trading.

Reiterating an earlier view, CREE says the challenges facing commercial real estate lenders and borrowers warrant increased attention from policy makers and private market participants. “The projected increase in commercial mortgage defaults presents risks to the stability of some financial institutions,” Chandan tells GlobesSt.com “It behooves us to proactively address the potential for this instability before the problems become un-manageable.”

He says the issue the real estate industry faces is a paucity of credit. He adds that one section of the financial stability plan called the consumer and business lending initiative expands TALF to include CMBS.

Chandan says provisions in TALF will encourage lending, but don’t meet the standard of sufficient condition to spark loan issuance. He says there are other regulatory and policy issues in the program that need to be addressed.

“Whether you are looking at the securitized market or the capacity of banks to lend, there is the potential for shortfall in the availability of credit, relative to the demand for credit, that results from required re-financings,” says Chandan. “That, in balance, will ultimately drive delinquency and default rates.”

Also in the FDIC statement was news that its insurance fund declined in Q4 by $16 billion or more importantly, its reserve ratio fell from 0.76% to 0.4% at year’s end. When the reserve ratio falls below 1.15%, the agency is required to establish and implement a plan to restore the ratio. Usually, that money is raised by charging banks an insurance premium assessment, which is then used to fund FDIC resources. In response to the new low, the FDIC announced Thursday that it plans to double the fees it charges to banks in order to replenish the fund.

Looking back, the FDIC said as recently as March 2008 that its reserve ratio would be 1.32% in 2009. Banks too were optimistic, saying in a 2007 American Banking Association statement that the FDIC would see a 1.25% ratio “well before year-end 2008.”

Despite the apparent lack of oversight by both parties, some, including Chandan, say this is no time to increase bank insurance premiums since the cost could impede lending, thus contributing to an even longer slowdown.

“On one hand, the deterioration in the deposit insurance fund, the depth, is certainly of concern,” Chandan says. He adds that an increase in the premium charged by the FDIC that is tightly tied to the risky-ness of the underlying assets is certainly appropriate.

But Chandan cautions that steps to replenish the fund should not come at the expense of potential sound lending by financial institutions. “The FDIC should not seek to rebalance the fund in the short term in a way that further discourages sound lending practices,” he says.

In the end, Chandan says that once things do stabilize and banks begin to see profits, there will probably be a new thinking about risk and insurance premiums and banks will pay more than they have in the past. “Part and parcel, there will be a regulatory regime that does not allow for the risky loans seen in this economic cycle.”

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