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When the FDIC declares a failed bank and takes over operation of that bank, it takes on the burdens of servicing loans and other responsibilities. Right now, with 26 banks failed so far this year (as of March 6), and 702 banks on a list of “problem banks” that the FDIC keeps, there are concerns about what could happen. As a result, the FDIC is trying to recover what it can by auctioning off loan portfolios.

While this might seem like a good idea in terms of maximizing recovery of lost loans, there are some concerns about what might be triggered, due to the fact that a substantial chunk of the assets up for auction are commercial real estate assets. There are concerns that writedowns across the country may result from this, which could be especially devastating, reports BusinessWeek:

“This whole thing is a mess waiting to happen across the country,” said Geoffrey Miller, a professor of securities law at New York University and director of the Center for the Study of Central Banks and Financial Institutions.

“Unlike the subprime mortgage problems, which hit mostly bigger financial institutions, the commercial real estate crisis is going to hit mostly smaller and regional banks,” Miller said. “It was common for them to make these loans and buy participations. It’s a systemic problem that the FDIC has to deal with.”

Many believe that commercial real estate is the next crisis to hit an economy already struggling from the weight of recent crises. With consumer spending remaining relatively low, new construction slow, and businesses increasingly unable to make their mortgage and lease payments, there are very real concerns that commercial real estate may be the next to blow.

We will have to see what happens as a result of the auction. The FDIC is trying to drum up interest in these assets, trying to make the sell to a variety of potential investors, including public retirement funds. The FDIC wants public retirement funds to invest in failed lenders. And, while that could provide the potential for high returns, I wonder if people are still a little edgy about this types of assets in their portfolios.