ELIZABETH WARREN:
By the end of this year commercial real estate will have dropped in value between 40 and 50 percent from its peak a few years back.
ALISON STEWART:
You first brought up the commercial loan issue back in, I think it was January. To Secretary Geithner, you did it again in June. Do you believe they’ve been playing enough attention, Geithner, and the administration, to this particular issue?
ELIZABETH WARREN:
We have not seen a strong response from Treasury.
ALISON STEWART:
He has said that TARP’s got it, TARP’s got the commercial loans. It’s going to be OK.
ELIZABETH WARREN:
I hope he is right. I would feel better if we saw more action, we saw some plans in place to deal with the 2,988 banks that are concentrated in commercial real estate.
ALISON STEWART:
Doesn’t sound like you think he’s right, though–
ELIZABETH WARREN:
It is our job in oversight not to say, “Oh good, let’s relax.” Our job in oversight is to push on the notions that these are problems, and show us what you’re doing here. We did it on behalf of the American people.
ALISON STEWART:
The Wall Street Journal last week echoed your concerns about commercial real estate loans. And they reported that nearly two thirds of the loans that are going to mature between now and 2014 are going to be under water.
ELIZABETH WARREN:
Well, unfortunately, the community banks are the ones who are more deeply concentrated in commercial real estate. It’s not the Wall Street banks. They got heavily concentrated, most of them during the peak, during the boom.
They look out there and they know what those loans are worth, what the odds are in many cases, that the owner of the commercial real estate will just walk away.
Just say, “I can’t refinance it, I’ll let it go. I can’t bring a million dollars to the table to do this.” And so they’re worried about saving the bank. And I can’t blame them.
On the other hand, I can sure look at what the economic effect is on communities, on growth overall on our wider economy. And it is not good.
So what we’ve got is we’ve got a spiral that continues downward. Commercial real estate drags down the bank’s balance sheet, that means that banks are less likely to lend to small businesses, which means there are fewer tenants for the commercial real estate, I think you see how this one goes.
ALISON STEWART:
So are we going to see small cities with just giant skyscrapers that are empty?
ELIZABETH WARREN:
Well–
ALISON STEWART:
Store fronts that are empty?
ELIZABETH WARREN:
Quite frankly, we are going to see some of that. See-through buildings, where the building has already been built, but there are no tenants in it, so you can see from one set of windows all the way over to the other. There will be some of that. There will also be some other adjustments that will be made.
In some cases the mortgage lender will repossess the property and is able to sell it to someone else and get it off their books. Another possibility that in some ways is far more troubling is that the financial institution will say, “Oh, we think maybe that property is, um, maybe still worth $2 million. After all, you’re making your payments, and so how about if you, the borrower, and we, the lender, hold hands and pretend–”
ALISON STEWART:
Is this Extend and Pretend?
ELIZABETH WARREN:
This is Extend and Pretend, that’s exactly right. What it really means is we will pretend that this property is still valued where it was back in boom times, and we will simply extend your outstanding mortgage on this property so that you keep paying.
In other words, the loan appears to all the world on the books at a high value and fully performing, when the underlying economic reality is that it’s worth a whole lot less, and the odds that it will end up in collapse and default, ultimately in foreclosure, are very high.
ALISON STEWART:
Isn’t the idea, though, to give people more time? To give these institutions more time to come up with the money, perhaps hope against hope the economy gets better?
ELIZABETH WARREN:
Well, that’s the question. And you just put it in the right word, it’s hope against hope. Here’s a problem with it, the longer you pretend, the longer it takes to get the market back to where supply and demand match each other.
The longer it takes to get the right price back on the commercial real estate, attract in the businesses, get the rents in the right place, and get this economy back up and booming.
ELIZABETH WARREN:
Everyone would like the world always to be in bubble times. But that doesn’t happen. What we have to do to have a secure financial system and frankly an economy that functions well, is we’ve got to be right back down where supply meets demand. And then the role of finance is to come in and help people make purchases at that point.
That means there are a lot of losses in commercial real estate that just– I don’t know how else to say it except quite bluntly, they just have to be acknowledged. And you’ve got it write down, and that is where many banks are deeply resistant. Because if they write down enough of those mortgages, it will become apparent that they are no longer solvent.
ALISON STEWART:
From your experience, is it possible for someone who is not a D.C. insider, and not a Wall Street insider, to really help catalyze change?
ELIZABETH WARREN:
I don’t know. I don’t know anything except to try. And, it’s certainly the case that many, many people have told me that it is not possible. And if you’re not an insider in one of those two worlds of power, Wall Street, or Washington D.C. then don’t waste your time. I just refuse to give up.
