problem real estate loans in Japan, J.P. Morgan & Co. has begun issuing nonrecourse loans for the purchase of troubled property portfolios. In the first such transaction in Japan, Morgan last month agreed to provide a Morgan Stanley Dean Witter & Co. real estate fund with a nonrecourse loan for the purchase of 1,200 condominiums from Daikyo Inc. Morgan executives would not disclose the amount of the loan, but market sources estimated it at $77 million. Morgan plans to securitize the loan and sell it off to investors. Executives added that the bank plans to issue more such loans to Japanese and other foreign real estate investors. Naoto Ichiki, vice president and head of Morgan's real estate investment banking group in Japan, said additional issues of nonrecourse loans to buy problem real estate will better define credit risks and help start a commercial mortgage-backed securities - or CMBS - market in Japan. "All lending for real estate until now has been full recourse," Mr. Ichiki noted. "You can't develop a CMBS market unless you have nonrecourse loans." Unlike conventional full-recourse loans, in which a borrower is required to repay the loan even if the collateral loses value, nonrecourse loans do not require the borrower to repay the difference between the loan and the current value of the collateral if he defaults. Because almost all real estate-related loans by Japanese banks were full-recourse, banks have found it virtually impossible to sell off problem real estate loans. Problem real estate loans have become a major headache for Japanese banks after a sharp crash in real estate prices in Japan. According to estimates compiled by the Tokyo office of the rating agency Fitch IBCA, prices for commercial real estate have fallen by more than 72% from their high in 1991 as a result of the long downturn in the Japanese economy. Residential real estate prices have fallen by almost 50%, and industrial real estate prices have dropped by nearly 42%. The downturn in real estate prices, combined with rising bankruptcies and financial difficulties among borrowers, has created a major problem for Japanese banks. According to general estimates, Japanese banks hold anywhere from $385 billion to up to $770 billion in nonperforming real estate loans. Some analysts say the Japanese banks could see more loans sour in the future. "Japan is stepping into a deflationary cycle, and this economy will get worse," predicted Reiko Toritani, director at Fitch IBCA in Tokyo. "Japanese banks won't be able to recover their bad loans for a long time to come." Leonard D. Van Drunen, vice president at J.P. Morgan Securities Asia Ltd., estimated that Japanese banks have so far sold off only about $7.7 billion in nonperforming real estate loans. "Very few banks have sold off more than a small percentage of their nonperforming loans," Mr. Van Drunen said. He predicted that up to $154 billion might be sold off over the next year or so. The two executives said the further issue of nonrecourse loans, combined with changes in banking and tax regulations and the arrival of real estate investment funds, could help solve the problem and pave the way for a U.S.-style real estate securities market.

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