The next shoe to drop in the ongoing financial crisis could be a rash of foreclosures in the commercial real estate market, the ramifications of which could be devastating nationwide, according to a report by the Congressional Oversight Panel.

“A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American,” the report reads.

Between now and 2014, $1.4 trillion in commercial mortgages are expected to come due. Many of those borrowers will face difficultly trying to refinance at the end of the mortgage’s terms, causing countless property owners to default, the report warns.

Nearly half of those property owners holding mortgages expected to come due in the next four years are already underwater – meaning they owe more on their mortgage than their property is currently worth.

A wave of commercial real estate default could disproportionately affect small and mid-sized banks, which tend to be more heavily invested in real estate and hold less assets to cover their losses in comparison with their larger counterparts. According to the report, nearly 3,000 of the nation’s banks are heavily invested in the commercial real estate market, with the vast majority of them being small and mid-sized banks.

A raft of foreclosures could send shockwaves through the already fragile economy. Small and mid-sized banks tend to be the primary financiers for small businesses in America. Those small businesses are the engine driving job creation and helping to lift the rest of the economy out of recession. If the commercial real estate market hit a downward spiral, it could send the rest of the economy into a tailspin as credit becomes nearly impossible to get and businesses respond to that by laying off employees.

“It is difficult to predict either the number of foreclosures to come or who will be most immediately affected,” the report says. “In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession.”

Over time, the report predicts that banks will suffer $300 billion in losses as a result of the coming commercial real estate bust. But, the pain experienced by banks may pale in comparison to what the American people may have to face.

“The coming trouble in commercial real estate could pose painful problems for the communities, small businesses, and American families already struggling to make ends meet in today’s exceptionally difficult economy,” the report says. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment.”

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