According to this article in Der Spiegel, the German weekly newsmagazine, more than half of all commercial properties in the U.S. that carry mortgages are “under water”. Given that the typical commercial mortgage is 10 years, and that the interest costs are paid up front (quite different from home mortgages), most commercial buyers get a second loan to pay off the heavy interest costs of the first. These secondary mortgages are bundled and sold as derivatives — remember that nasty word from a short while back? 

Let’s take a very large housing development in New York City, for example. In 2006, Tishman Speyer bought Stuyvesant Town for a whopping $5.6 billion dollars, almost all of it borrowed. Well, one man’s borrowed money is another man’s investment. And this deal has some pretty big investors, like the State of California, the Church of England, and the Federal Republic of Germany. If Tishman Speyer seeks protection from its creditors, as seems likely, all those entities are going to be like former GM workers who watched their retirements vanish with their GM stock portfolios.

Now imagine if the Stuyvesant Town deal is the tip of the iceberg. Some of the other $5 trillion in commercial loans go bad. And you thought a couple hundred thousand private homes going under was bad? The sub-prime mortgage crash led directly to the current recession. If the commercial mortgage crash comes, and I sincerely hope it does NOT, the world will be in for a depression the likes of which we’ve never seen. And yes, it would be worse than the Great Depression, because the social safety nets that used to exist, such as the extended family and fraternal organizations, don’t exist any more. The government safety nets will be unsustainable burdens on the federal budget that won’t survive a crash.

Okay, now I’m scaring myself. I mean, I have money in the stock market and in my credit union. But if this scenario comes to pass, I’m pulling it all out and putting it under my pillow.