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Sunday, October 25, 2009

Capmark To File For Chapter 11

One of the nation's leading commercial lenders is filing for Chapter 11.

One of the nation's largest commercial-real-estate lenders filed for bankruptcy protection in Delaware, the latest sign that problems in that market are far from over.

Capmark Financial Group Inc. has been one of the biggest lenders to U.S. investors and developers of office towers, strip malls, hotels and other commercial properties. An independent company that used to be the commercial lending unit of GMAC LLC, a financing affiliate of General Motors Co., it has been in financial straits for months and warned in September that it might have to file for Chapter 11 reorganization.

This business story should be important to everyone because it portends the coming nightmare that is the commercial mortgage mess. Capmark recently reported a loss of more than $1 billion for the quarter. The company, which was originally formed as an offshoot of GMAC commercial unit, is the first visible casualty of the commercial mortgage collapse that's just beginning.

The president has begun talking about the problems within commercial mortgages though so far there's no substantive solutions. Fortunately, most banks have a varied enough portfolio to blunt whatever hit the commercial mortgage collapse will cause. Capmark specialized exclusively in commercial mortgages and most others like it will face the same fate.

In 2007, there were just below $500 billion in commercial mortgages underwritten, that number was cut about in half by 2008, and 2009 is on its way to close less than $100 billion. The problems only start there. Because most of these loans are so called balloon loans, loans where most of the payment comes due after a certain period, many loans will need to be refinanced or properties sold. Of course, in this market, both will be difficult. So, soon, the lenders, like Capmark, will begin to write down billions in bad loans. Capmark appears to be the first visible victim of this upcoming crisis but it won't be the last.

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