Commercial mortgage defaults to rise

Source : Business Times – 10 Sep 2009

The default rate on commercial mortgages held by US banks will rise to 5.4 per cent in 2011, the highest since at least 1992, as banks anticipate more losses amid falling rents, according to Real Estate Econometrics LLC.

The property research firm increased its projected default rates for 2009 to 2011 amid declining occupancies and incomes at hotels, shopping malls and office buildings.

Defaults will rise to 4.2 per cent this year and 5.3 per cent next year before peaking at 5.4 per cent in 2011, the New York-based firm said.

Previously, it estimated rates of 4.1 per cent this year, 5.2 per cent next year and 5.3 per cent in 2011.

‘The higher default rate reflects a larger number of loans moving from delinquency to non-accrual status,’ said Sam Chandan, president and chief economist of Real Estate Econometrics, in a statement. Loans moved to non-accrual status signify that the bank does not expect to be paid back in full.

The default rate more than doubled in the second quarter. Loans that were 90 days or more past due climbed to 2.88 per cent of outstanding balances from 1.18 per cent a year earlier, according to the firm.

Commercial mortgages labelled as ‘non-accrual’ more than doubled last quarter to US$27.76 billion, according to Real Estate Econometrics. Balances for delinquent loans, those that were 30 to 89 days past due, fell.

‘This shift corresponds with banks working to identify and mitigate losses associated with problem loans earlier in the delinquency period, and an increase in the share of delinquent loans that will require modification or foreclosure,’ Mr Chandan said.

Defaults in residential loans also rose in the second quarter, according to Real Estate Econometrics.

Defaults for bank-held home loans, excluding apartments, climbed to 5.52 per cent last quarter, the highest since the firm began tracking the data in 1992, an increase from 3.85 per cent at the end of 2008, according to the firm’s analysis of Federal Deposit Insurance Corp data.

Overdue commercial property loans reached 4.6 per cent in 1992 during the savings and loan crisis, when the US created the Resolution Trust Corp to sell off real estate and non-performing mortgages held by insolvent lenders.

Bank holdings of commercial property loans rose to US$1.087 trillion in the second quarter from US$1.077 trillion in the previous three months. That is almost 15 per cent of all loans and leases held by banks, Real Estate Econometrics said. Defaults are rising both for lenders that hold commercial mortgages and for bondholders in the US$700 billion US market for securities backed by commercial mortgages.