By the end of 2010, about half of all commercial real estate mortgages will be underwater, said Elizabeth Warren, chair of the Congressional Oversight Panel, in an interview with CNBC.

“They are [mostly] concentrated in the midsized banks,” Warren said. “We now have 2,988 banks, mostly midsized, that have these dangerous concentrations in commercial real estate lending.”

As a result, the economy will face another “very serious problem” that will have to be resolved over the next three years, she said, adding that things are unlikely to return to normal in 2010.

Meanwhile, the U.S. Treasury Department pledged Monday to sell its 7.7 billion Citigroup Inc. shares this year, a step that further reduces the government’s influence on the banking giant.

Warren said she is having difficulty getting clarity on Citigroup’s business plans. “This is a cake that is still being baked,” she said.

Speaking about troubled mortgage lenders, Warren said it’s time for the government to “pull the plug” on Fannie Mae and Freddie Mac.

“I’m one of those people who never liked public-private partnerships to begin with. I think what they did was use public when public was useful and private when private was useful,” she said. “And I think we’ve got to rethink that whole thing.

“There is no implicit guarantee anymore. I don’t care how big you are; if you make serious enough mistakes, then your business can be entirely wiped out.”

Downtown New York towers empty as top office market falters

Lower Manhattan, where demand for office space began to surge three years after the 9/11 terrorist attacks, is about to lose its spot as the best-performing U.S. market, Bloomberg reported.

Vacancies may exceed 14 percent of the area’s 87 million square feet by late 2011, empty space that’s equivalent to four Empire State Buildings and the highest rate since 1997, according to property broker Cushman & Wakefield Inc.

That doesn’t include the 4.4 million square feet of offices in two towers now under construction at the World Trade Center site. Those are scheduled for completion in 2013.

“The amount of space that’s potentially going to come to the market will increase availabilities and put pressure on pricing,” said Kenneth McCarthy, Cushman’s head of New York- area research. “It will be quite a while before it can be absorbed.”

Lower Manhattan, dominated by financial firms, withstood the commercial property slump better than any other U.S. business district, with more than 90 percent of offices occupied at the end of last year even as the city lost 67,500 jobs in the 12 months through December. Now open space is rising faster than demand, as Goldman Sachs Group Inc. moves into its new downtown building, American International Group Inc. relocates its headquarters, and Bank of America Corp. shifts operations to its new tower in midtown.