Commercial Mortgages Performing Better than Other Loans

The magnitude of the impact the commercial real estate (CRE) downturn will have on the nation’s fragile economy is a topic of intense debate among both industry experts and policymakers on Capitol Hill. One school of thoughtargues that bad CRE loans are the so-called “next shoe to drop” and losses over the next couple of years could send the nation into another tailspin recession. At the other end of the spectrum, analysts say the doomsday predictions are tenuous and the industry has the advantage of foresight and lessons learned from the housing crisis to successfully weather the storm.

New data released by the Mortgage Bankers Association (MBA) Tuesday seems to support the latter.

Based on an examination of loans and leases held by banks and thrifts as of the fourth quarter of 2009, MBA has concluded that commercial and multifamily mortgages continue to have the lowest charge-off rates of any loan type. What’s more, the findings show that the 30-plus day delinquency rates for CRE and multifamily loans are consistently lower than the average for all loans and leases held in these institutions’ portfolios.

According to the MBA’s latest Commercial/Multifamily Research DataNote, the delinquency rate for commercial mortgages held by the nation’s banks and thrifts stood at 5.06 percent at the end of last year, while multifamily mortgage delinquencies were at 5.65 percent. Both figures are well below the 7.30 percent delinquency rate of all bank and thrift loans, and a far cry from the 12.49 percent of single-family mortgages that were past due.

As with nearly every other type of loan, commercial and multifamily mortgages continue to see increases in loan delinquencies, but MBA’s findings show that their rate of deterioration is notably slower than residential mortgages and single-family construction loans.

Delinquency rates represent the share of loans with payments overdue, but charge-off rates represent a bank’s assessment of outstanding loan balances they don’t expect to get back.

MBA says commercial and multifamily mortgages provide security to their lenders that even when under stress most commercial properties will continue to provide some level of income to help pay the debt, and if the loan does become delinquent, there is a real, tangible asset pledged as collateral. The trade group says for these reasons, commercial and multifamily mortgages have historically not experienced the same rate of losses as most other types of loans.

Over the course of 2009, MBA found that commercial and multifamily mortgages had the lowest charge-off rates of any loan type at banks and thrifts. In 2009, these institutions charged off 0.8 percent of their balance of commercial mortgages and 1.1 percent of their multifamily mortgages. By contrast they charged off 1.7 percent of their balance of 1–4 family residential loans, 2.9 percent of their home equity loans, and 9.1 percent of their credit card loans.

In aggregate dollars, the charge-offs of commercial and multifamily mortgages also remain very low in relative terms. Based on MBA’s analysis, over the course of 2008 and 2009, banks and thrifts have charged off more than $83 billion in residential mortgages. By contrast, over the same period they have had to charge-off only $11 billion of commercial mortgages and $3 billion of multifamily mortgages.

According to MBA’s review, commercial mortgages – which it defines as income-producing properties such as office buildings, shopping malls, or warehouses – make up $1.1 trillion or 15 percent of banks’ total loan holdings. At $211 billion, multifamily mortgages account for three percent of bank-held loans and leases.

Over the course of the last year – even in the face of the recession, the credit crunch, and headlines about the lack of capital available for commercial real estate – MBA says commercial and multifamily mortgages are the only category of bank loans that saw growth.

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