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Banks face crisis in bungled commercial mortgages

The nation's banks are looking at a robo-signing problem with commercial real estate which may dwarf the one for home mortgages, according to a new study.

Research by Harbinger Analytics Group shows the widespread use of inaccurate, fraudulent documents for land title underwriting of commercial real estate financing. According to the report:

This fraud is accomplished through inaccurate and incomplete filings of statutorily required records (commercial land title surveys detailing physical boundaries, encumbrances, encroachments, etc.) on commercial properties in California, many other western states and possibly throughout most of the United States.

Analysts expect 2012 to be a record-setting year for commercial real estate defaults. Last week delinquencies for office and retail loans hit their highest-ever levels, according to Fitch Ratings. The value of all delinquent commercial loans is now $57.7 billion, according to Trepp, LLC. Also, while the national office vacancy rate has come down it is still very high: It hit 17.6 percent in the fourth quarter, down from 18.5 percent a year earlier, according to Jones Lang LaSalle.

The usual solution for defaults is for the mortgage owner to foreclose and take ownership of the property. But, just as in the residential real estate market, lenders' shoddy paperwork could make it difficult to prove ownership. In the cases studied by Harbinger, the problems are because banks accepted the work of land surveyors who "have committed actual and/or constructive fraud by knowingly failing to conduct accurate boundary surveys and/or failing to file the statutorily required documentation in public records."

Just as with residential real estate, commercial real estate mortgages were bundled and re-sold by lenders as securities. Holders of those securities, already reeling from the glut of empty office space, will be hit even harder if it turns out they have no claim to the properties. They would likely sue the lenders for falsely representing the properties. Mortgage holders in these cases may also turn to their title insurance to cover any losses. It is uncertain if the title insurance companies have the resources to withstand massive claims on expensive commercial properties.

Two weeks ago the nation's five largest banks reached a settlement with attorneys general from 49 states over illegal home foreclosure practices. The banks still face billions of dollars in civil lawsuits around this.

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