In the normal course of an economic cycle – to the degree that economic cycles are normal – credit quality weakens as the economy slows. People lose their jobs. Bills do not get paid on time. Businesses slow down making payments as cash flow and profits erode. When a slowdown deteriorates into a recession, these trends begin to trip up businesses that are floundering and some creditors experience big losses. Sometimes those creditors fail.

There have been recessions triggered by a widespread deterioration in credit. The Great Financial Crisis of 2008 is the most recent example. While the overextension of residential mortgage credit in the mid-2000s was likely to cause a recession at some point, it was the magnification of the mortgage problems by Wall Street that tripped the global financial breakers.

Regulations imposed following the 2008 financial crisis are meant to prevent or limit systemic damage from credit weakness in a few sectors of the economy. In recent months, there have been several announcements that raised eyebrows about the extent to which major losses in commercial real estate or an increase in business bankruptcies could ripple out into the larger financial system. Those concerns are magnified by the increased access to private equity debt, which is largely unregulated.

Wall Street has barely registered any concern about the first signs that credit is deteriorating. Big banks have been taking write-offs on loans to little banks and private equity. Consumer credit is mostly maxed out. Commercial real estate defaults are rising, as is subprime mortgage delinquency. Banks continue to extend mature loans on properties worth less than the outstanding balance. There is little or no mention of credit problems from the Federal Reserve Bank or the Trump administration.

Perhaps the lack of concern is merited. But, for those with fresh memories of the Great Financial Crisis, there is an eerie similarity to 2007 in today’s environment.

At the October 16, 2025, earnings call for JP Morgan Chase, CEO Jamie Dimon raised a red flag while announcing a $170 million loss on a loan to bankrupt First Brands. Noting that First Brands had gone under with nearly $10 billion in loans, most of which were made by non-bank private debt funds, Dimon remarked, “…I probably shouldn’t say this, but when you see one cockroach, there are probably more.”

The ”cockroaches” Dimon referenced were the first signs of significant credit problems in the U.S. economy. While alarmists are drawing parallels to the global financial crisis of 2008, there is little evidence that rising bankruptcies and the losses in commercial real estate are about to spark another financial crisis. The weakness of the U.S. economy is tipping more companies into losses, however, and it is worth remembering that alarms about subprime mortgage defaults in 2006-2007 were also easily dismissed as being too isolated to cause concern. By September 2008, those isolated losses became systemic.

What triggered Dimon’s warning, and a similar warning from Goldman Sachs CEO David Solomon, were two recent bankruptcies. Both companies, TriColor and First Brands, were in the automobile supply chain and both were heavily financed by private lenders. TriColor’s demise was triggered by charges that it had used the same collateral with multiple private lenders. First Brands was discovered to have $2 billion in off balance sheet loans for which the proceeds were unaccounted. In addition to JP Morgan, Barclays had $150 million in loans to First Brands and Fifth Third had $200 million.

As these defaults were rippling through the financial markets, Eagle Bank announced more than $100 million in write-downs because of its commercial real estate portfolio losses. That followed on the heels of similar announcements from Zion Bank and Western Alliance Bank, both of which had relatively high exposure to commercial real estate in their portfolios.

These losses at small regional banks appear to be increasing as time goes on without a significant reduction in long-term interest rates. As banks lose patience with extending loans that have matured on properties that are worth less than the outstanding debt, or are forced to write those loans off, concern grows about the strength of private real estate debt funds, which made riskier loans.

The share of commercial real estate debt that was held by private lenders has steadily increased since the mid-2010s, to 13 percent of the outstanding loans. Following the sharp increase in interest rates in 2022, conventional lenders found private debt funds to be valuable liquidity partners. Private lenders purchased mortgages that exceeded the debt service coverage or loan-to-value ratios of conventional lenders. Private debt funds also discovered that fundraising for real estate was easier. Moody’s reported in July that 19 percent of all private fundraising was for real estate debt in the first half of 2025.

Moody’s analysis of private lending in commercial real estate is that private debt funds will refinance $1 trillion of the $9 trillion in commercial mortgages that will turn in the next five years in the U.S. and Europe. That means private debt is increasing its share of the market at a time when commercial real estate credit quality is weaker.

Life insurance companies, another main source of financing for commercial real estate, have also increased their exposure to private debt. According to research by Bloomberg AI, U.S. life insurance companies placed nearly one-third of their $5.6 trillion in assets in private debt funds. That compares to 22 percent in 2015. Insurance companies have long-duration liabilities that match well to the long-term nature of private lending. The higher yields from private debt repayment, typically above nine percent, are attractive and offer diversification from lower-yielding, low-risk assets.

Private debt funds are a systemic risk to the extent to which the funders - insurance companies, pension funds, and 401-K funds in 2026 – have invested in them. Private lenders accurately assert that they can offer better rates than regulated financial institutions, and their higher appetite for risk allows them to finance emerging companies that have trouble checking the boxes that conventional lenders demand. So long as the private lenders remain diligent in their underwriting, operating in slightly riskier waters is good for the overall economy by providing capital to innovative businesses; however, the great risk today is similar to the risk in 2007. If there is more investment capital than prudent underwriting can justify, private lenders feel pressure to find deals. That can lead to investing in opportunities – companies or real estate deals – that are outside the underwriting standards. Portfolios end up with riskier loans than intended.

When the quality of credit declines, whether because of economic decline or bad underwriting, that additional risk from the rapid growth of private lending is magnified by the derivative financial products that private lenders have created. Like in conventional residential and commercial mortgage lending, private debt is sliced and repackaged with other loans of all kinds to create new financial products. Most private lenders, and Wall Street banks, are also investors in these more complex and unregulated investments. It is the derivative exposure to bankruptcy and default that can turn credit weakness into credit crisis.

It is instructive that some of the first alarm bells about the private debt market are coming from public debt competitors, major Wall Street banks, that are explaining losses during quarterly earnings calls. It is a reminder that private debt is not an exclusive, limited investment vehicle for private wealth. There is enough cross-investment between the conventional and alternative credit sectors that a significant economic decline would cause systemic losses. For the time being, the red flags being raised by Wall Street in October should get your attention.

Two local mortgage brokers who are paying attention are not yet worried that weakness will give way to crisis because of commercial real estate defaults.

“On the real estate side, I'm not worried. We estimate that 2025 will have about $400 billion in volume and the norm, from say 2014 to 2019, was about $500 billion. Transaction volume is still 20 percent below what I would consider normal and reasonable,” says Mark Popovich, senior managing director and Pittsburgh co-office head for JLL Capital Markets. “Unlike in 2008, when they were syndicating commercial and residential loans because the rating agencies had no idea what they were underwriting, we have very conservative underwriting discipline now.”

“I feel like this conversation could have been had a year and a half ago. I don't think that this is 2007-2008 level of distress,” agrees Bryan McCann, senior vice president, capital markets at Colliers Pittsburgh. “Even though there are more deals coming back to the bank, lending is also fairly liquid. To me that means there are no systemic issues, just pockets of issues.” 

“From 2017 to 2020 you could be a terrible operator, and you made money because of low interest rates. People would give you money because you had a track record. Those days are long gone,” McCann continues.

McCann and Popovich point to the real estate market correction on the supply side as a further buffer against a downward spiral in the financial markets. Higher construction and borrowing costs have chilled new development since mid-2022, both nationally and in Western PA.

“With construction costs being where they are, especially in Pittsburgh, it is limiting supply growth. That's not the case as much in the high growth markets, but those markets, like Miami and Austin, will grow themselves out of even a crash,” Popovich says. “We haven't had a new office building or hotel built in Pittsburgh in six years. There has been very little industrial development over the past three years. Retail is difficult to do here because of our topography. From peak construction times, in almost every category, we're off between 20 and 40 percent in deliveries. That's a huge protection against a bubble.”

“Supply has already dried up. We went from a record number of deliveries to having the least number of deliveries in a few years,” says McCann. “Maybe it's foolish optimism on my part, but it feels like we're in the latter stages of the down cycle looking to go positive. We're not at the beginning stages of the cycle where this is the tip of the iceberg.”

In the normal course of an economic cycle – to the degree that economic cycles are normal – credit quality weakens as the economy slows. People lose their jobs. Bills do not get paid on time. Businesses slow down making payments as cash flow and profits erode. When a slowdown deteriorates into a recession, these trends begin to trip up businesses that are floundering and some creditors experience big losses. Sometimes those creditors fail.

There have been recessions triggered by a widespread deterioration in credit. The Great Financial Crisis of 2008 is the most recent example. While the overextension of residential mortgage credit in the mid-2000s was likely to cause a recession at some point, it was the magnification of the mortgage problems by Wall Street that tripped the global financial breakers.

Regulations imposed following the 2008 financial crisis are meant to prevent or limit systemic damage from credit weakness in a few sectors of the economy. In recent months, there have been several announcements that raised eyebrows about the extent to which major losses in commercial real estate or an increase in business bankruptcies could ripple out into the larger financial system. Those concerns are magnified by the increased access to private equity debt, which is largely unregulated.

Wall Street has barely registered any concern about the first signs that credit is deteriorating. Big banks have been taking write-offs on loans to little banks and private equity. Consumer credit is mostly maxed out. Commercial real estate defaults are rising, as is subprime mortgage delinquency. Banks continue to extend mature loans on properties worth less than the outstanding balance. There is little or no mention of credit problems from the Federal Reserve Bank or the Trump administration.

Perhaps the lack of concern is merited. But, for those with fresh memories of the Great Financial Crisis, there is an eerie similarity to 2007 in today’s environment.

At the October 16, 2025, earnings call for JP Morgan Chase, CEO Jamie Dimon raised a red flag while announcing a $170 million loss on a loan to bankrupt First Brands. Noting that First Brands had gone under with nearly $10 billion in loans, most of which were made by non-bank private debt funds, Dimon remarked, “…I probably shouldn’t say this, but when you see one cockroach, there are probably more.”

The ”cockroaches” Dimon referenced were the first signs of significant credit problems in the U.S. economy. While alarmists are drawing parallels to the global financial crisis of 2008, there is little evidence that rising bankruptcies and the losses in commercial real estate are about to spark another financial crisis. The weakness of the U.S. economy is tipping more companies into losses, however, and it is worth remembering that alarms about subprime mortgage defaults in 2006-2007 were also easily dismissed as being too isolated to cause concern. By September 2008, those isolated losses became systemic.

What triggered Dimon’s warning, and a similar warning from Goldman Sachs CEO David Solomon, were two recent bankruptcies. Both companies, TriColor and First Brands, were in the automobile supply chain and both were heavily financed by private lenders. TriColor’s demise was triggered by charges that it had used the same collateral with multiple private lenders. First Brands was discovered to have $2 billion in off balance sheet loans for which the proceeds were unaccounted. In addition to JP Morgan, Barclays had $150 million in loans to First Brands and Fifth Third had $200 million.

As these defaults were rippling through the financial markets, Eagle Bank announced more than $100 million in write-downs because of its commercial real estate portfolio losses. That followed on the heels of similar announcements from Zion Bank and Western Alliance Bank, both of which had relatively high exposure to commercial real estate in their portfolios.

These losses at small regional banks appear to be increasing as time goes on without a significant reduction in long-term interest rates. As banks lose patience with extending loans that have matured on properties that are worth less than the outstanding debt, or are forced to write those loans off, concern grows about the strength of private real estate debt funds, which made riskier loans.

The share of commercial real estate debt that was held by private lenders has steadily increased since the mid-2010s, to 13 percent of the outstanding loans. Following the sharp increase in interest rates in 2022, conventional lenders found private debt funds to be valuable liquidity partners. Private lenders purchased mortgages that exceeded the debt service coverage or loan-to-value ratios of conventional lenders. Private debt funds also discovered that fundraising for real estate was easier. Moody’s reported in July that 19 percent of all private fundraising was for real estate debt in the first half of 2025.

Moody’s analysis of private lending in commercial real estate is that private debt funds will refinance $1 trillion of the $9 trillion in commercial mortgages that will turn in the next five years in the U.S. and Europe. That means private debt is increasing its share of the market at a time when commercial real estate credit quality is weaker.

Life insurance companies, another main source of financing for commercial real estate, have also increased their exposure to private debt. According to research by Bloomberg AI, U.S. life insurance companies placed nearly one-third of their $5.6 trillion in assets in private debt funds. That compares to 22 percent in 2015. Insurance companies have long-duration liabilities that match well to the long-term nature of private lending. The higher yields from private debt repayment, typically above nine percent, are attractive and offer diversification from lower-yielding, low-risk assets.

Private debt funds are a systemic risk to the extent to which the funders - insurance companies, pension funds, and 401-K funds in 2026 – have invested in them. Private lenders accurately assert that they can offer better rates than regulated financial institutions, and their higher appetite for risk allows them to finance emerging companies that have trouble checking the boxes that conventional lenders demand. So long as the private lenders remain diligent in their underwriting, operating in slightly riskier waters is good for the overall economy by providing capital to innovative businesses; however, the great risk today is similar to the risk in 2007. If there is more investment capital than prudent underwriting can justify, private lenders feel pressure to find deals. That can lead to investing in opportunities – companies or real estate deals – that are outside the underwriting standards. Portfolios end up with riskier loans than intended.

When the quality of credit declines, whether because of economic decline or bad underwriting, that additional risk from the rapid growth of private lending is magnified by the derivative financial products that private lenders have created. Like in conventional residential and commercial mortgage lending, private debt is sliced and repackaged with other loans of all kinds to create new financial products. Most private lenders, and Wall Street banks, are also investors in these more complex and unregulated investments. It is the derivative exposure to bankruptcy and default that can turn credit weakness into credit crisis.

It is instructive that some of the first alarm bells about the private debt market are coming from public debt competitors, major Wall Street banks, that are explaining losses during quarterly earnings calls. It is a reminder that private debt is not an exclusive, limited investment vehicle for private wealth. There is enough cross-investment between the conventional and alternative credit sectors that a significant economic decline would cause systemic losses. For the time being, the red flags being raised by Wall Street in October should get your attention.

Two local mortgage brokers who are paying attention are not yet worried that weakness will give way to crisis because of commercial real estate defaults.

“On the real estate side, I'm not worried. We estimate that 2025 will have about $400 billion in volume and the norm, from say 2014 to 2019, was about $500 billion. Transaction volume is still 20 percent below what I would consider normal and reasonable,” says Mark Popovich, senior managing director and Pittsburgh co-office head for JLL Capital Markets. “Unlike in 2008, when they were syndicating commercial and residential loans because the rating agencies had no idea what they were underwriting, we have very conservative underwriting discipline now.”

“I feel like this conversation could have been had a year and a half ago. I don't think that this is 2007-2008 level of distress,” agrees Bryan McCann, senior vice president, capital markets at Colliers Pittsburgh. “Even though there are more deals coming back to the bank, lending is also fairly liquid. To me that means there are no systemic issues, just pockets of issues.” 

“From 2017 to 2020 you could be a terrible operator, and you made money because of low interest rates. People would give you money because you had a track record. Those days are long gone,” McCann continues.

McCann and Popovich point to the real estate market correction on the supply side as a further buffer against a downward spiral in the financial markets. Higher construction and borrowing costs have chilled new development since mid-2022, both nationally and in Western PA.

“With construction costs being where they are, especially in Pittsburgh, it is limiting supply growth. That's not the case as much in the high growth markets, but those markets, like Miami and Austin, will grow themselves out of even a crash,” Popovich says. “We haven't had a new office building or hotel built in Pittsburgh in six years. There has been very little industrial development over the past three years. Retail is difficult to do here because of our topography. From peak construction times, in almost every category, we're off between 20 and 40 percent in deliveries. That's a huge protection against a bubble.”

“Supply has already dried up. We went from a record number of deliveries to having the least number of deliveries in a few years,” says McCann. “Maybe it's foolish optimism on my part, but it feels like we're in the latter stages of the down cycle looking to go positive. We're not at the beginning stages of the cycle where this is the tip of the iceberg.”