Commercial and Apartment Mortgage Delinquencies Down, Best Performing Loans During U.S. Recession

---

According to two reports released this week by the Mortgage Bankers Association (MBA), commercial and multifamily mortgage delinquency rates declined during the fourth quarter of 2011. Analysis of data from the Federal Deposit Insurance Corporation (FDIC) also shows that commercial and multifamily mortgages have fared better through the credit crunch and recession than any other major type of loan held by banks and thrifts.

During the fourth quarter, the 60+ day delinquency rate for loans held in life company portfolios fell 0.02 percentage points to 0.17 percent.  The 60+ day delinquency rate for multifamily loans held or insured by Freddie Mac fell 0.11 percentage points to 0.22 percent.  The 90+ day delinquency rate for loans held by FDIC-insured banks and thrifts fell 0.20 percent to 3.55 percent.  The 30+ day delinquency rate for loans held in commercial mortgage-backed securities (CMBS) fell 0.36 percentage points to 8.56 percent.  The 60+ day delinquency rate for multifamily loans held or insured by Fannie Mae increased 0.02 percentage points to 0.59 percent.  These and other figures come from MBA's Commercial Real Estate/Multifamily Finance Mortgage Delinquency Rates for Major Investor Groups report.

In a Research DataNote analyzing year-end data from the FDIC, MBA found that over the course of 2011, and throughout the credit crunch and recession, commercial and multifamily mortgages have had the lowest charge-off rates of any type of loan held by commercial banks and thrifts. In 2011, banks and thrifts charged off 0.84 percent of their balance of commercial mortgages and 0.74 percent of their multifamily mortgages, compared to charge-off rates of 1.22 percent and 1.24 percent respectively in 2010, and a 2011 charge-off rate of 1.55 percent for their total portfolios of loans and leases.

"Commercial and multifamily mortgage delinquency rates continue to stabilize and improve in parallel with the broader economy," said Jamie Woodwell, MBA's Vice President of Commercial Real Estate Research.  "And counter to what many have predicted, commercial mortgages have proved to be neither 'the next shoe to drop' nor a 'ticking time bomb' for the banking sector or the economy as a whole.  The data show that, to the contrary, commercial and multifamily mortgages have generally performed well for most investor groups and have been the best performing loans held by banks and thrifts through this recession."

DELINQUENCY RATES

At the end of the fourth quarter, the delinquency rate for commercial and multifamily mortgages held in life insurance company portfolios was 7.36 percentage points lower than the series high (7.53 percent, reached during the second quarter of 1992).  The rate for multifamily loans held by Freddie Mac was 6.59 percentage points lower than the series high (6.81 percent, reached in the fourth quarter of 1992) and the rate for multifamily loans held by Fannie Mae was 3.03 percentage points below the series high (3.62 percent, reached during the fourth quarter of 1991). The fourth quarter 2011 delinquency rate for commercial and multifamily mortgages held by banks and thrifts was 3.03 percentage points lower than the series high (6.58 percent, reached in the second quarter of 1991).  The rate for loans held in CMBS was 0.46 percentage points below the series high (9.02 percent, reached in the second quarter of 2011).

Construction and development loans are not included in the numbers presented here, but are included in many regulatory definitions of 'commercial real estate' despite the fact that they are often backed by single-family residential development projects rather than by office buildings, apartment buildings, shopping centers or other income-producing properties.  The FDIC delinquency rates for bank and thrift held mortgages reported here do include loans backed by owner-occupied commercial properties.

The MBA analysis looks at commercial/multifamily delinquency rates for five of the largest investor-groups: commercial banks and thrifts, CMBS, life insurance companies, Fannie Mae and Freddie Mac.  Together these groups hold more than 80 percent of commercial/multifamily mortgage debt outstanding.

The analysis incorporates the same measures used by each individual investor group to track the performance of their loans.  Because each investor group tracks delinquencies in its own way, delinquency rates are not comparable from one group to another.   Differences between the delinquency measures are detailed in Appendix A of the report.

BANK LOAN PERFORMANCE

Over the course of 2011, and throughout the credit crunch and recession, commercial and multifamily mortgages have had the lowest charge-off rates of any type of loan held by commercial banks and thrifts. In 2011, banks and thrifts charged off 0.84 percent of their balance of commercial mortgages and 0.74 percent of their multifamily mortgages, compared to charge-off rates of 1.22 percent and 1.24 percent respectively in 2010.

By contrast they charged off 0.89 percent of their balance of commercial and industrial loans, approximately 1.43 percent of their one-four family residential loans, 1.25 percent of other (non-credit card) loans to individuals, 3.33 percent of their construction loans and 5.45 percent of their credit card loans. Commercial and multifamily charge-off rates tend not to rise as rapidly as other charge-off rates during the onset of a recession and tend not to decline as rapidly as others during the onset of a recovery.

In aggregate dollars, the charge-offs of commercial and multifamily mortgages by banks and thrifts also remained far below those of other loan types during the recession. Over the course of 2007, 2008, 2009 2010 and 2011, banks and thrifts charged off $181 billion of single-family mortgages, $178 billion of credit card loans, $88 billion of commercial and industrial loans, $81 billion of construction loans and $65 billion of other loans to individuals. By contrast, over the same period, they had to charge-off only $35 billion in commercial mortgages and $8 billion in multifamily mortgages.