Real Estate Econometrics today released its third quarter trends update and projections for the performance of commercial real estate mortgages held by depository institutions.

The analysis found that the national default rate for commercial real estate mortgages held by depository institutions rose from 2.25% in 1Q09 to 2.88% in 2Q09. This increase is consistent with ReEconometrics' second quarter projections for the commercial mortgage default trajectory in 2009, which was published in June.

The balance of commercial mortgage loans 30 to 89 days past due fell by just under $2 billion between the first and second quarters, from $14.7 billion to $12.8 billion.

However, the balance in default, which includes mortgages 90 days or more past due and loans in non-accrual status, increased by $7.1 billion or 29.2 percent, to $31.3 billion.

Sam Chandan, president and chief economist of ReEconometrics, said that considerable attention has been focused on the challenges of the securitized mortgage market and the policy initiatives that are intended to support the reintroduction of CMBS as a source of liquidity. 

However, policy discussions have not properly addressed the implications of a fundamental lack of credit for the commercial sector from the banking sector.

“Historically, banks have played the dominant role as a source of credit facilitating commercial real estate investment activity,” he said. “Depository institutions were supplanted for a brief period in 2007, when the dynamics of the competitive market favored securitization as the preferred source of credit.

Although Chandan believes that some form of unsubsidized CMBS will ultimately play an important role in meeting the needs of the market, the normalization of credit conditions depends upon addressing banks’ challenges in modifying or otherwise managing their legacy portfolios.

"With this in mind, a policy bias that focuses on facilitated CMBS transactions to the exclusion of supporting banks’ role in the commercial real estate credit market will fail to achieve its intended outcome,” Chandan said.

ReEconometrics estimated that the default rate for bank-held commercial mortgage will rise to 4.2% by year-end 2009 and will peak in 2011. The largest losses will occur at regional and community banks, mainly due to higher concentrations in commercial real estate.

At 28.4%, commercial real estate concentrations are greatest among banks with $100 million and $1 billion in assets.


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