Wednesday, September 9, 2009

Defaults on Banks’ Commercial Mortgages Seen Rising Above 5%

By Hui-yong Yu, Bloomberg

Sept. 9 (Bloomberg) -- The default rate on commercial mortgages held by U.S. banks will rise to 5.4 percent 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 percent this year and 5.3 percent next year before peaking at 5.4 percent in 2011, the New York- based firm said. Previously, it estimated rates of 4.1 percent this year, 5.2 percent next year and 5.3 percent 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 the bank doesn’t 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 percent of outstanding balances from 1.18 percent a year earlier, according to the firm.

Commercial mortgages labeled as “non-accrual” more than doubled last quarter to $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,” Chandan said.

Residential Defaults

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 percent last quarter, the highest since the firm began tracking the data in 1992, an increase from 3.85 percent at the end of 2008, according to the firm’s analysis of Federal Deposit Insurance Corp. data.

Overdue commercial property loans reached 4.6 percent in 1992 during the savings and loan crisis, when the U.S. 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 $1.087 trillion of in the second quarter from $1.077 trillion in the previous three months. That’s almost 15 percent 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 $700 billion U.S. market for securities backed by commercial mortgages.

The CMBS market accounts for about one-fifth of the nation’s $3.4 trillion in commercial real estate debt, according to the Real Estate Roundtable. Defaults and late payments on loans bundled into CMBS could surpass 7 percent by the end of this year, research firm Reis Inc. said on July 30.

To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net
Last Updated: September 8, 2009 23:30 EDT