Universe of Commercial Mortgages Dips Again in 3Q to $3.43 Trillion

Universe of Commercial Mortgages Dips Again in 3Q to $3.43 Trillion

Thursday, 17 December 2009

Commercial Real Estate Direct Staff Report The universe of commercial mortgages outstanding in the United States continued to decline during the third quarter, falling by $28.3 billion, or 0.8 percent, to $3.43 trillion from the second quarter, according to analysis of Federal Reserve Board flow of funds data by the Mortgage Bankers Association. The decline in the size of the universe should be no surprise as lenders in general remained very skittish in terms of writing new loans and CMBS lenders, specifically, were still on the sidelines. With new origination levels down from previous periods, it's only natural that the volume of loans would decline as a result of run-offs facilitated by writedowns among investors holding loans. Only government entities, including Fannie Mae and Freddie Mac, and private pension funds saw an increase in the volume of mortgages they own. The two housing-finance agencies saw their share of the commercial mortgage pie increase to 5.7 percent from 5.6 percent in the second quarter. They held $197.4 billion of loans at the end of the third quarter, up 1.7 percent from the second quarter. In addition, mortgage pools issued by the two hold another $162.2 billion of loans, up from $160.1 billion a quarter earlier. Commercial banks saw the biggest dollar decline in the size of their mortgage holdings, to $1.53 trillion from $1.55 trillion. But that drop is due largely to a reduction in the amount of construction loans they hold, according to the trade group's analysis. Exclude those and their holdings actually increased by $6 billion. REITs saw the biggest percentage decline in their holdings. They ended the third quarter with $31.9 billion of loans, down 11.6 percent from the second quarter. The MBA has found that 48 percent of the commercial real estate loans held by the country's top 10 commercial real estate bank lenders were related to owner-occupied commercial properties. Those properties rely on some operating business, as opposed to rental income, for their cash flow. CMBS now holds $708.6 billion of mortgages, for a 20.6 percent share of the market. That's down from $718.1 billion and a 20.7 percent share. And life-insurance companies hold $310 billion of loans, down from $311.9 billion in the second quarter. Meanwhile government - state, federal, their agencies and bonds they issue - now hold $531.1 billion of loans for a whopping 15.5 percent share of the entire commercial mortgage universe. That's up from a 15 percent share in the second quarter. If you look at only multifamily loans, the government's share of the market is even greater. It holds $443.8 billion of loans, or 49 percent of the country's $911.66 billion of apartment loans outstanding. CMBS and other private-label securitization structures now hold $110.3 billion of apartment loans, or 12.1 percent of the universe, down from $112.1 billion or 12.3 percent in the second quarter. Banks hold $216.8 billion, or 23.8 percent of the total, just about unchanged from the second quarter. Comments? E-mail Orest Mandzy or call him at (215) 504-2860, Ext. 211.

Default Rate for Bank-Held Commercial Mortgages Increases

Default Rate for Bank-Held Commercial Mortgages Increases: Real Estate Econometrics

12/01/2009 By: Brittany Dunn

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In the most recent report by New York-based Real Estate Econometrics (reeconometrics), the property research firm updated its projections, predicting the default rate for bank-held commercial mortgages will rise to 4.0 percent by the end of 2009 and will peak in 2011. Due to higher concentrations in commercial real estate, the largest losses are expected to occur at regional and community banks with $100 million to $1 billion in assets.

Up from 2.88 percent during the second quarter, the national default rate for commercial real estate mortgages held by depository institutions increased to a 16-year high of 3.40 percent during the third quarter of 2009, according to reeconometrics’ analysis of data reported by regulated lenders and published by the FederalDeposit Insurance Corporation (FDIC). This 52 basis point rise in the default rate was the largest one-quarter increase since quarterly data became available in 2003. The total balance of defaulted commercial mortgages increased 14.0 percent, from $44.1 billion in the second quarter to $50.3 billion during this year’s third quarter.

During this same period, the multifamily mortgage default rate grew 44 basis points, increasing to 3.58 percent from 3.14 percent. During the past year, the default rate on multifamily mortgages has more than doubled, rising by 211 basis points from 1.47 percent in the third quarter of 2008. In the multifamily sector, the balance of delinquent and defaulted mortgages increased by 9.8 percent from $9.3 billion in the second quarter to $10.2 billion during the third quarter of 2009.

A variety of factors have contributed to the rise in commercial and multifamily delinquency and default rates, reeconometrics said. Rising vacancy rates, falling asking and effective rents, and rising operating expenses have created deterioration in property cash flow resulting in an increase in the number of borrowers that are unable to meet current principal and interest obligations. Additionally, the erosion of reserves available to cover shortfalls in debt service coverage and constraints on the availability of credit to support the refinancing of maturing mortgages have contributed to this rise in rates.

As a result of the large number of mortgages underwritten to aggressively-forecast prospective cash flow rather than to in-place cash flow during 2006 and 2007, mortgages originated during this period are experiencing the most significant shortfalls in current cash flow relative to current debt service obligations. These loans are unlikely to meet the aggressive cash flow projections embedded in their underwriting assumptions at the point of origination, driving the increase in the default rate into 2011 and 2012, the report said.

According to reeconometrics, banks with similar concentrations in commercial real estate may exhibit marked differences in delinquency and default rates. Through an analysis of loan performance at the 5,015 institutions with the largest exposures to commercial real estate, no statistically significant relationship between concentration and default rate were shown. However, the report found that default rates are higher for institutions in larger asset size groups. While institutions with $10 billion or more in assets have significantly lower commercial real estate concentrations, they also exhibit higher default rates at the mean and across the distribution. The median default rate at the largest institutions is 2.7 percent, as compared to 1.4 percent across the broader pool.

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