Low Charge-Off Rates in Commercial Mortgages Despite Rising Delinquencies
Commercial and multifamily mortgages bear the lowest charge-off rates of all loans held by banks and thrifts. This is despite an on-going trend of growing delinquencies in commercial real estate markets where the mortgages are "wrapped" into commercial mortgage backed securities (CMBS). Delinquency of 30+ days among commercial and multifamily mortgages was lower than the average for all loans and leases held by banks and thrifts by the end of 2009, according to the Mortgage Bankers Association's (MBA) latest survey of commercial and multifamily mortgage performance (download here). Commercial mortgages, at 5.06% delinquent, and multifamily mortgages at 5.64% delinquent, fared better than the overall average of 7.3% among all bank and thrift loans. Single-family mortgages, on the other hand, bore a 12.49% delinquency rate, MBA found. Although delinquency continued to grow among commercial and multifamily mortgages (illustrated below), the rate of charge-offs -- when banks and thrifts recognize these loans as unable to be collected and remove the outstanding balances from their balance sheets -- was lowest among these loans during 2009 than any loan type. In 2009, banks and thrifts charged off 0.8% of their balance of commercial mortgages and 1.1% of their multifamily mortgages. These rates compare with 1.7% of residential mortgages, 2.4% of home equity loans, 3% of non-credit-card consumer loans, 5.4% of construction loans and 9.1% of credit card loans. "Commercial and multifamily mortgages provide security to their lenders in that a) even when under stress the commercial property continues to provide some level of income to help pay its debt service, except in the most extreme situations, and b) for every loan there is a real, tangible asset pledged as collateral should the loan become delinquent," the MBA said in its latest report. "For these reasons, commercial and multifamily mortgages have historically not experienced the same rate of losses as most other types of loans." The delinquency rate of commercial mortgages within securitization continues to rise. Commercial mortgage-backed securities (CMBS) originated in 2005 drove a 29 bp increase in delinquencies to 6.29% at the end of February, according to the Fitch Ratings delinquency index of 2,505 loans totaling $28.5bn. Behind the overall increase were office properties, which grew 45bps to 3.5% delinquent, and multifamily properties, which grew 64bps to 8.97% delinquent. Five-year loans accounted for 30% of new delinquencies, including the four largest newly delinquent loans - ranging from $65m to $112m. Three of the four largest newly delinquencies are past their 2010 maturity dates and are now in the "non-performing matured loans" category. "Five-year loans originated in 2005 will continue to have difficulty refinancing this year as liquidity remains limited," said Fitch managing director Mary MacNeill in a statement e-mailed to HousingWire. "In many cases, sponsors will have to either contribute additional equity in order to refinance their loans or look to the servicers for extensions and modifications." Write to Diana Golobay.