Commercial Mortgage Slump

Even as companies struggle to lure customers during these harsh economic times, they may be forced to scale back plans for ordering year-end inventory or improving their facilities. A new scarcity of loans at affordable mortgage rates is putting the brakes on businesses expanding their businesses.

While the nation undergoes a tumultuous economic year, banks and other lenders are taking severe steps to offset their unprecedented losses. Banks make money by lending money, and when they're afraid to lend-or don't have enough financial resources to do so-it's a sign of worsening problems and an unhealthy economy with an uncertain future. Now, companies around the U.S. are noticing that mortgage rates for commercial purchases are going up, too. As a result, otherwise healthy businesses-which are a vital part of the solution to the country's economic troubles-are being starved of the capital they need to stimulate the economy.

High mortgage rates; low lending numbers

The decline in commercial loans in recent months amounts to approximately $150 billion. To put that into perspective, the widely touted economic stimulus package implemented by the government earlier this year, which included checks mailed to taxpayers, was valued at $170 billion. If the loss of commercial loans attributed to stricter underwriting and prohibitive mortgage rates is factored in, the U.S. reaps only a net gain of $20 billion after the stimulus package. That's certainly not enough to jumpstart this battered and bruised economy.

Federal Reserve statistics indicate that the decline in commercial loans is the sharpest since the post 9/11 recession of 2001. Symptoms of the commercial credit crunch are showing up as businesses postpone previous expansion plans, cancel orders for durable goods, lay off workers, and streamline operations to constricted levels. The disturbing news is that some of these companies have excellent credit and growth prospects, but they're confronting an unhealthy lending industry reluctant to make loans at reasonable mortgage rates.

Banks overreacting

Based on survey data compiled by the Federal Reserve, the majority of banks are tightening their purse strings through tougher underwriting standards and loan requirements. Nearly 75 percent are also raising fees or mortgage rates. The only bright side to the troubling trend is that commercial real estate is now selling at a discount to actual value, and may represent strong potential for upside appreciation. But buyers need to figure out where to get the necessary financing to take advantage of the situation.

While banks sort out their internal problems, the financial markets aren't going to pause and wait for them to get their accounts in order. The Fed, for example, will probably begin to raise underlying interest rates, for example, at the soonest possible sign that doing so won't undercut other efforts to save the economy. That's because until rates rise, the dollar will remain weak, and prices for imports such as oil will continue to inflict pain on both businesses and consumers. By the time banks are ready to lend with enthusiasm, mortgage rates may be approaching double digits.