Mortgages from 2006 and 2007 emerge as problem loans.

The rate of commercial real estate loan defaults is expected to increase this year, promising to eat away at bank balance sheets and further dampen the commercial mortgage-backed bond market, which has seen no new issuance since last June.

The rate of defaults in 2009 will rise in line with or higher than the fourth quarter of 2008 and the first three months of this year, according to Fitch Ratings.

Among the commercial mortgage loans tracked by Fitch, 50% of the defaults occurred in the fourth quarter alone. At the end of the year the cumulative default rate rose by 58 basis points to 3.29% from 2.71% in 2007.

“Defaults by combined balance in those two quarters alone are 30% higher than the entire year of defaults in 2008,” the credit rating agency said.

Multifamily loans are the source of much of the trouble. Last year, they accounted for 32.8% of the new defaults. “The multifamily cumulative default rate ranks third behind only healthcare and hotels, but first among the three traditional property types,” Fitch said.

Other problems came from loans for commercial properties with retailers, a segment of the U.S. economy that is struggling because consumer spending on goods and services has plummeted. Retail loans had the highest amount of defaults in the fourth quarter of 2008.

The rating agency said the retail and multifamily sectors will see the most defaults by the end of 2009.

Loans underwritten in 2006 had the highest amount of new defaults. Problems were also seen with mortgages from 2007 and 1998. The increase in problem loans is tied to aggressive underwriting, higher leveraged loans and falling real estate values, Fitch said.



Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.