Unspoken Risk of Second Mortgage Meltdown: Today's Outrage

NEW YORK (TheStreet) -- Here we go again with all the regulatory silence and wishful thinking by banks that preceded the first mortgage meltdown. Meltdown part II could be in the making as defaults rise in the commercial real estate sector.

Behind closed doors, U.S. banking regulators appear to be "girding for a rerun" of the mortgage losses that nearly crippled the financial markets last year, according to a report in the Wall Street Journal citing an unpublished Federal Reserve report.

The Fed report concludes that U.S. banks are slow to take losses on their commercial real estate loans , the Journal reports, adding that the documents it obtained do not represent the Fed's formal position. The point is ratified by a review of regulatory filings by the Journal, which found that banks with heavy exposure to commercial property loans set aside only 38 cents in reserves for every $1 in bad loans in the second quarter.

I don't know what's worse, the banks skimping on reserves and holding off on reporting losses in hope of a revival or the Fed for knowing about the problem and trying to keep it a secret. Someone at the Fed must feel the same way because the report somehow found its way to the media.

To illustrate the risk, Capmark Financial is singled out by the Journal as having only 11 cents in reserves for every $1 in bad loans in the second quarter. Capmark, you may recall, was previously part of General Motors' GMAC lending arm before being taken over by an investor group that includes Kohlberg Kravis Roberts and Goldman Sachs (GS Quote).

Last month, Capmark acknowledged that it is teetering on bankruptcy and accepted a rescue deal from a group led by Warren Buffett. Capmark is a pretty good a barometer of the commercial property mortgage industry since it is among the top servicers of U.S. commercial real estate loans and the biggest for property in the rest of the world, according to the Mortgage Bankers Association.