U.S. lawmakers rang alarm bells about the troubled commercial real estate industry, which has been walloped by the credit crunch and an implosion of property values.

"The commercial real estate time bomb is ticking," Joint Economic Committee Chairman Carolyn Maloney, D-N.Y., said in opening remarks to a hearing before her panel Thursday.

U.S. Sen. Sam Brownback of Kansas, the panel's top Republican, said he was distressed about the situation the industry is facing.

Banks have yanked back on lending to developers of shopping malls, apartment complexes, hotels and office parks. Meanwhile, the securitization market - a key source of funding for the commercial real estate industry - has been in a deep freeze since last year.

The situation is fueling concerns that property developers won't be able to refinance roughly $400 billion in commercial real estate debt coming due this year.

General Growth Properties Inc. (GGWPQ), one of the largest U.S. shopping mall owners, filed for bankruptcy protection along with 158 of its properties in April, citing lack of financing.

A wave of defaults of commercial real estate loans would deal a blow to the already weakened economy and banking sector. The U.S. commercial real estate market is roughly $6.7 trillion in size and is underpinned by about $3.5 trillion of debt.

A panel of witnesses painted a dire picture for lawmakers. Property values have plunged 35%-45% in many markets as transactions have slowed to a crawl, Deutsche Bank Securities Inc. (DB) mortgage analyst Richard Parkus told lawmakers.

The market won't begin to recover until 2012, or even later, he said. "We believe the bottom is several years away," he added.

Plunging property values are further hampering developers' ability to refinance their debt or loan extensions, the industry said.

The Federal Reserve has taken steps to get lending flowing to the industry. On June 16, it announced it would accept as collateral new issuance of commercial mortgage-backed securities as part of its emergency program to thaw the securitization market. As early as next week, the Fed is expected to extend that to existing, or "legacy," CMBS already held by investors.

The industry welcomes these moves, but worries that the Fed program is set to expire at the end of this year.

The program aims to spark investor appetite for a range of asset-backed securities, now including CMBS. To the extent that CMBS investors are able to buy and sell the securities again, spreads will tighten, the Fed and the industry argue. That will allow financial institutions that make loans backing the CMBS to free up their balance sheets and make new loans to the industry or refinance existing debt.

U.S. Rep. Kevin Brady, R-Texas, criticized banking regulators for leaning too hard on banks to reduce their commercial real estate exposure.

In testimony before the panel, the associate director of the Fed's Division of Banking Supervision and Regulation, Jon D. Greenlee, said the central bank was trying to strike the right balance between ensuring credit flows to the sector while maintaining the safety and soundness of the banking system.

"It is important that supervisors remain balanced and not place unreasonable or artificial constraints on lenders that could hamper credit availability," he said.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com