Defaults on U.S. Commercial Mortgages Held by Banks Rose in Third Quarter

Defaults on commercial property mortgages held by U.S. banks rose in the third quarter, extending a pattern begun in late 2006 when real estate prices were close to a peak, said Real Capital Analytics Inc.

About $604.1 million of loans on office buildings, malls, hotels and other commercial properties went into default in the three months ended Sept. 30, pushing the default rate to 4.36 percent of outstanding loan balances, from 3.41 percent a year earlier and 4.27 percent at midyear, the New York-based real estate research firm said. The record default rate was 4.55 percent in 1992, according to Real Capital.

“While the default rate continues to trend higher, the most recent increase is the second smallest in three years,” Sam Chandan, global chief economist at Real Capital, said in the report. “Even though new defaults are moderating, banks have considerable challenges in drawing down the pool of unresolved distress.”

The global credit crunch and plunge in property values have prevented borrowers from refinancing while job losses have reduced rental demand. Property prices are starting to recover in many markets, easing the strain on banks, Chandan said.

Defaults on apartment-building mortgages rose to a record 4.67 percent, from 3.6 percent a year earlier and 4.13 percent at midyear, as $1.2 billion of apartment mortgages went into default, Real Capital said. The previous high for apartment defaults was 4.63 percent in the first quarter.

Property Prices Rise

U.S. commercial property prices rose 4.3 percent in September from the previous month as demand rose for the best office buildings in such major markets as New York and Washington, Moody’s Investors Service said on Nov. 22. The Moody’s/REAL Commercial Property Price Index had fallen to an eight-year low in August.

Renewed sales of commercial mortgage-backed securities are helping banks clear loans from their books, Chandan said.

Banks reduced their commercial-mortgage holdings by $8.8 billion in the third quarter and by $18.5 billion so far this year, Real Capital said. Banks hold about $1.07 trillion of commercial mortgages and $215.8 billion of apartment mortgages.

A total of $46.8 billion of commercial mortgages and $10.1 billion of apartment mortgages are now in default, according to Real Capital. For a loan to be considered to be in default, it must be past due by 90 days or more or in non-accrual status, meaning the bank doesn’t expect to make a full recovery on it.

Real Capital bases its analysis on bank filings and data from the Federal Deposit Insurance Corp.

To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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