Economic “Time Bomb” Found In Mortgages Coming Due

There’s a ticking time bomb looming over the U.S. economy, and it’s coming from what would seem to be an unlikely source.

A Politico report from this week pointed out that over the next two years, almost $1.5 trillion in mortgages for the commercial real estate market are going to come due. This could be a huge issue for banks that hold these mortgages, as office building vacancies have skyrocketed in the last few years while interest rates continue to rise. 

All of this has driven down commercial property values. 

The big concern with this situation is that 70% of all commercial mortgages that are held by banks are at smaller and regional lenders, and not large financial institutions that might have an easier time writing down all those loans if need be.

It’s very possible that this doomsday scenario for the commercial real estate agency could have widespread effects on the economy at large, and it’s also possible this could all come to fruition in the middle of the 2024 presidential election.

The U.S. economy is already on edge, with many financial pundits believing that we are headed for a recession at some point in the near future. In times like these, the economy can become very vulnerable to any shock delivered to it. This is what happened a few months ago when three regional banks collapsed seemingly overnight.

Many of the top federal policymakers are very concerned about this potential looming crisis, though they are admitting there’s not much they could do to stop it from happening.

As Republican Senator John Kennedy from Louisiana said this week:

“Am I worried? The short answer is yes. The long answer is hell yes.

“I hope the Federal Reserve and the banking regulators are worried as well, and I hope they won’t be caught flat-footed like they were with the bank failures that we’ve had so far.”

In May, the Fed increased the benchmark interest rate for the 10th time in a row. This increase was “only” a quarter percentage point, which is much smaller than it has been at times. Even smaller bumps like that, though, create major ripples in lending, particularly with real estate and banks that hold mortgages.

Despite all of these concerns, Jerome Powell, the chair of the Fed, has downplayed the threat the commercial real estate market poses to the overall economy. He’s said that the U.S. banking system is “strong and resilient.”

Yet Martin Gruenberg, the chair of the FDIC, said at a press conference on May 31 that the commercial real estate industry does indeed present a major risk. He added that his agency was trying to urge all lenders to prioritize how they were managing the exposure they have in the sector.

Even Democrats are worried about what might happen. Senator Mark Warner of Virginia, for instance, told Politico:

“Right now, we have the double whammy of much higher interest rates and the commercial real estate market going through a shock post-COVID. So, I don’t think we can presume that … we’re going to be able to simply glide through [without a crash].

“I’m still trying to sort through some of the policy options. I have encouraged the White House, though, that we need to do some more intervention on these regional banks right away.”