Mortgage Informer

The default rate for commercial property mortgages held by U.S. banks more than doubled in the fourth quarter and may reach a peak of 5.4 percent at the end of next year, according to Real Capital Analytics Inc.

The default rate for loans on office, retail, hotel and industrial properties surged to 3.8 percent from 1.6 percent a year earlier, the New York-based real estate research firm said yesterday in a report. The default rate for loans on apartment buildings climbed to 4.4 percent from 1.8 percent.

“The level of distress continues to rise irrespective of improving economic trends,” Sam Chandan, Real Capital’s global chief economist, said in a telephone interview.

The U.S. jobless rate declined to 9.7 percent in January from 10 percent in December, after hitting a 26-year high of 10.1 percent in October. Unemployment and tighter credit are hurting commercial property values, which fell 29 percent in December from a year earlier and are down 41 percent from the October 2007 peak, according to the Moody’s/REAL Commercial Property Price Index released Feb. 22.

U.S. banks with $100 million to $1 billion in assets hold 25 percent of commercial property loans outstanding and 15 percent of apartment loans, Real Capital data show. The biggest banks, those with more than $10 billion in assets, hold about half of commercial loans and two-thirds of apartment loans.

“With the concentration of commercial mortgages in small and community banks, there is a potential spillover that will impinge on their ability to make loans to small businesses and families,” Chandan said.

Almost $1.1 trillion in commercial loans and $211 billion in apartment loans were held by U.S. banks on Dec. 31, according to Real Capital.

Smaller Banks

The Congressional Oversight Panel on the financial system bailouts said in a Feb. 10 report that “the ultimate impact of the commercial real estate whole loan problem will fall disproportionately on smaller regional and community banks” that have higher concentrations of such loans.

“Some community banks seemed to have abandoned, or never really practiced, sound risk management” by lending too much on real estate in their local markets, David A. Hendler, New York- based analyst for CreditSights Inc., said in a Feb. 22 note.

The commercial default rate rose from 3.4 percent in the third quarter, representing an increase of $4.5 billion in defaulted loans in the period, according to Real Capital. The rate will reach 5.1 percent at the end of this year, the research firm said.

The apartment default rate rose from 3.6 percent in the third quarter. The jump reflected a $1.6 billion increase in defaulted loans. Apartment defaults will peak at 5.3 percent at the end of 2010, said Real Capital, which based its analysis on bank filings and data from the Federal Deposit Insurance Corp

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Tags: Mortgage, Mortgage Rates