The combined default rate on banks' commercial and multifamily mortgage loans fell to 3.75% in the third quarter, down 19 basis points (bps) from the previous quarter's 3.94% default rate and down 67 bps from the cyclical peak of 4.42% recorded in the third quarter of 2010, according to new data released by New York-based Chandan Economics.
The related dollar volume of multifamily and commercial real estate (CRE) loans in delinquency and default declined by $2.4 billion during the third quarter to $59 billion, which is $15.4 billion below its first quarter 2010 peak of $74.4 billion. The default rate on construction loans fell by 47 bps during the third quarter, but remains high at 14.57%.
Chandan Economics warns that the ‘management of distress remains a serious challenge, particularly in smaller markets where property values and lending by banks and commercial mortgage-backed securities conduits have been slow to recover. As a result, banks are still not resolving real estate owned (REO) as quickly as loans are being transferred onto their balance sheets.’
Chandan Economics found that banks' CRE REO increased to $13.5 billion in the third quarter, a new cyclical high. Between nonperforming balances and REO, there is $72.4 billion in distressed multifamily and CRE loans in the domestic banking system as of the third quarter. With the inclusion of construction loans, that total rises to over $110 billion.
Furthermore, Chandan Economics warns that the nation's smaller financial institutions ‘face some of the most significant challenges in managing distress. The portfolios of these institutions are more heavily weighted to the secondary and tertiary markets where pricing has been slower to recover. Refinancing in these markets remains difficult, even for properties with stable cashflow, because of an absence of lenders seeking to expand their commercial real estate balance sheets. As a result, CRE REO held by banks with less than $1 billion in net loans and lease is on par with the largest institutions.’