When Financial Crises Collide: Housing, Commercial Property Busts Feed on One Another

Sign of the times: For the first time in four years, the office vacancy rate in certain parts of the country stopped soaring recently... because those spaces are being taken over by workers who offer personal bankruptcy and loan-modification services.

Just as giant financial firms interconnect, so do giant financial crises. Credit woes seep first into the banking sector, then slam into the broader economy before doubling back to curtail lending. Bubble pops bubble, a veritable multiverse of economic pain.

Foreclosures in the U.S. are rising. So are lenders' losses on commercial real estate, with the FDIC reporting that charge-offs in the sector shot up 131 percent in the fourth quarter of 2009.

Where do the causes of these problems intersect? Irrational exuberance, lax underwriting, securitization, leverage, weak government regulation, unemployment. Even more closely correlated are their effects -- plunging real estate prices, massive bank writedowns, diminished productivity, unemployment.

Between 2010 and 2014, $1.4 trillion in commercial real estate loans is coming due. Nearly half of those loans are already "underwater." Bank losses could reach $300 billion. Particularly vulnerable are small and midsize institutions, which specialize in lending to local businesses.

Harvard law professor Elizabeth Warren, head of the federal Congressional Oversight Panel, recently suggested that 3,000 community banks are at risk as a result of the coming commercial-property wipeout, with hundreds in danger of going bust. Said the group in a report last month:

There appears to be a consensus, strongly supported by current data, that commercial real estate markets will suffer substantial difficulties for a number of years. Those difficulties can weigh heavily on depository institutions, particularly midsize and community banks that hold a greater amount of commercial real estate mortgages relative to total size than larger institutions, and have â€"- especially in the case of community banks â€"- far less margin for error.