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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

failed and were taken over by the Federal Deposit Insurance Commission, the com-
mercial landlords overnight lost major bank tenants and the long-term leases that

went with them. In California, at least  banks have failed since . 
Almost half of commercial real estate loans were underwater as of February ,
meaning the loans were larger than the market value of the property. Commercial real
estate loans are especially concentrated among the holdings of community and re-
gional banks. Some commercial mortgages were also securitized, and by August

, the delinquency rate on these packaged mortgages neared —the highest in
the history of the industry and an ominous sign for real estate a full two years after the

height of the financial storm. At the end of , the default rate had been .. 
Near the end of , it was not at all clear when or even if the commercial real
estate market had hit bottom. Green Street Advisors of Newport Beach, California,
which tracks real estate investment trusts, believed that it reached its nadir in mid-
. About half of the decline between  and  has been recovered, accord-
ing to Mike Kirby, Green Street’s director of research. “Nevertheless,” Kirby added,

“values remain roughly  shy of their peak.” That’s one perspective. On the other
side, Moody’s Investors Service, whose REAL Commercial Property Price Index
tracks sales of commercial buildings, says it is too early to make a call. Moody’s de-
tected some signs of a pickup in the spring and fall of , and Managing Director
Nick Levidy said, “We expect commercial real estate prices to remain choppy until

transaction volumes pick up.” The largest commercial real estate loan losses are pro-
jected for  and beyond, according to a report issued by the Congressional Over-

sight Panel. And, looking forward, nearly  billion in commercial real estate
debt will come due from  through . 

GOVERNMENT: “STATES STRUGGLED TO CLOSE SHORTFALLS”
State and local government finances

The recession devastated not only many companies and their workers but also state
and local governments that saw their tax revenue fall—just when people who had lost
their jobs, or were in bankruptcy or foreclosure proceedings, were demanding more
services. Those services included Medicaid, unemployment compensation, and wel-
fare, in addition to local assistance for mental health care, for children, and for the
homeless. “At least  states struggled to close shortfalls when adopting budgets for
the current fiscal year,” recently reported the Center on Budget and Policy Priorities,
a Washington think tank. 
“A critical aspect of our situation in Sacramento and . . . throughout the state is
that these increased demands for services are occurring at a time that resources . . .
are being dramatically reduced,” Bruce Wagstaff, the agency administrator with
Sacramento’s Countywide Services Agency, explained to the Commission. 
Unlike the federal government, almost every state is constitutionally required to
produce a balanced budget, so running a deficit is not an option. Sujit CanagaRetna,
a senior fiscal analyst with the Council of State Governments, told the FCIC that the