This week, the Federal Reserve released its periodic Beige Book on the economy’s fitness and judged the residential real estate a vote of confidence. But predictions of a new round of commercial real estate defaults — and recent actions by the Fed against two Midwestern banks heavily invested in CRE — have analysts worried that the government could be on the verge of an overreach. According to the Fed’s Tuesday report — which polls contacts from the institution’s 12 regional district banks — commercial rents are dropping below levels that can support mortgages; vacancies and shadow inventories are increasing; and demand for new construction and existing space remains “weak.” And at a business luncheon Thursday, Atlanta Reserve Bank Chairman Dennis Lockhart expressed concern over the flagging commercial mortgage sector, where persistent retail problems are compounding the credit and housing crises. Those reports came on the heels of news last week that the Fed was imposing restrictions on two “bankers’ banks” in Nebraska and Missouri over concerns about their exposure to failing commercial real-estate assets. Nebraska Bankers’ Bank of Lincoln and Midwest Independent Bank of Jefferson City, which have roughly $400 million in assets taken together, provide lending services to nearly 600 banks in the region, helping the banks leverage themselves beyond their own capital limits for investment purposes. Nebraska and Midwest, which are owned by Midwest Independent Bancshares of Jefferson City, Missouri, aroused suspicions over their lending standards and business practices, John Munn, director of Nebraska’s Department of Banking and Finance, told USA Today Thursday.

Across the nation, many community banks of the sort that Nebraska and Midwest lend to are shuttering as defaults mount on their commercial mortgage portfolios. The FDIC has expressed similar concerns about banks on its “troubled” institutions list, which has swelled by more than one-third in recent months. The extra scrutiny by Fed and FDIC authorities, however, has raised alarm bells among players in the CRE sector. “The Federal Reserve’s and FDIC’s first job is to worry about the soundness of the banks,” said Ron D’Vari, CEO of NewOak Capital, an advisory and capital markets firm, “but unfortunately their restrictive actions during credit contagion pose more problems by further restricting availability of credit to a large segment of the market.” D’Vari said bankers’ banks like Nebraska and Midwest serve critical purposes for small banks in a tight credit market, such as the one brought on in the current recession. “With both community banks and banker’s bank under pressure, the credit availability for refinancing existing CRE loans coming due gets more scarce,” he said. That could cause a dangerous spiral, further drying up the well of investment, building and commerce just when the Midwestern economy needs it the most, he said. “Bankers’ banks typically have less diversified and larger balance loan portfolios than a typical bank, so they naturally have a bigger downside risk in times like this,” he said, but that didn’t mean the free market should be tampered with.