The residential housing market has deteriorated sharply this year, and Wall Street had banked on the commercial real estate loans, investments and exchange traded funds (ETFs) keeping their ground.

Recently, bankers have reason to believe that the overall commercial property market could set off more write-downs in the coming quarter in addition to the losses incurred on the distressed mortgage security holdings.

Louise Story for The New York Times reports that banks are actually scrambling to dispose of these loans made to hotels, office developments and retail strips before problems start to arrive.

Lehman Brothers has the largest exposure to this market at $40 billion, along with a commercial real estate portfolio. Deutsche Bank holds around $25.1 billion, and Morgan Stanley at $22.1 billion, with Citigroup at $19.1 billion in commercial-backed mortgage securities.

Before the credit squeeze, financial companies bundled commercial mortgages into securities in much the same way they packaged home loans and private equity debt. A prolonged economic downturn could lead many commercial property owners struggling to pay their mortgages…and you see where this could go, don’t you?

• iShares FTSE NAREIT Industrial/Office Index (FIO), down 7% year-to-date
• iShares FTSE NAREIT Retail Index (RTL), down 7.1% year-to-date
• First Trust S&P REIT (FRI), down 3.2% year-to-date
• Dow Jones Wilshire REIT (RWR), down 4.4% year-to-date
• Vanguard REIT Index (VNQ), down 1.4% year-to-date

Tags: FIO, FRI, Real Estate, REITs, RTL, RWR, VNQ