Now that most of the TARP money received by the major U.S. banks has been repaid and massive profits and huge bonuses are once more bringing smiles to the faces of American bankers, one might be tempted to conclude that the worst has now passed for the U.S. financial system.

IN PICTURES: Digging Out Of Debt In 8 Steps

However, there are now increasing signs that some more ill-placed bets from the past could once again gate-crash this little party, and quickly turn smiles into tears.

Bad Commercial Real Estate Loans Now Coming Home to Roost
According to a recent study issued by Foresight Analytics, a California-based real estate research firm, a tsunami of bad commercial real estate loans is set to hit the U.S. financial system over the next few years, with the mid-cap banks being most at risk of being swamped by the flood.

The numbers are pretty alarming. This year, about 36% of the $270 billion in commercial real estate loans maturing this year are underwater - a situation where the mortgage balance exceeds the value of the underlying property. And things will get worse before they get better. By 2011, 49% of the maturing loans will be underwater, rising to 63% in 2012 and 61% in 2013, before cresting at 57% in 2014.

Between 2010 and 2014, a whopping $770 billion in maturing commercial real estate loans are expected to be underwater. The situation is so grim that even long-time players in the commercial real estate game are predicting that we are facing something akin to a "lost decade" for the U.S. commercial real estate market.

Tech Is a Wreck
Current realities seem to confirm such pessimism. U.S. commercial property prices have plunged more than 40% on average from their October 2007 peak, commercial landlords are facing 20% vacancy rates, and the default rate on commercial mortgages doubled during the third quarter of 2009. Even areas of presumed growth like Silicon Valley, home of the still-booming U.S. tech sector, remains a commercial realtor's nightmare: property values have been cut in half, and foreclosures are expected to double in 2010.

Mid-Cap Banks Most at Risk
While many of the major money-center banks will get to take their full measures of pain as these bad mortgages mature, the real pain is likely to be felt by many of the mid-sized regional banks that saw this form of lending as their ticket to growth. A partial list would include such names as Comerica (NYSE:CMA), Zions Bancorporation (Nasdaq:ZION), Huntington Bancshares (Nasdaq:HBAN) and Fifth Third Bancorp (Nasdaq:FITB), all of which have seen jumps in share price in recent days in response to bullish analyst pronouncements declaring that commercial real estate values have hit rock bottom. If this optimism turns out to be a tad premature, then some rapid reversals in share values will be in order.

The Bottom Line
Just when you think it's safe to be back in the water, this is when Jaws usually makes his appearance. And with so much blood in the water, you can bet that a feeding frenzy of the worst kind could be in the offing. Whatever happens in the commercial real estate market, current signs suggest that it won't be pretty.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Investing Basics

    4 Iconic Financial Companies That No Longer Exist

    Learn how poor management, frauds, scandals or mergers wiped out some of the most recognizable brands in the finance industry in the United States.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
Trading Center