US Commercial Mortgage Default Rate at a 16 Year High

According to Real Estate Econometrics,  a property research firm, the total balance of delinquent and defaulted commercial mortgages in the July to September time frame in the US has jumped by 14 percent to $50.3 billion. During the 3Q09, the commercial default rate rose from 2.88 percent to 3.4 percent, the highest level since 1993 when the default rate was 4.1 percent.

The national default rate for commercial real estate mortgages has now risen 63 basis points from 2.25 percent since the beginning of 2009 and doubled over the past year. Moreover the 52 basis point increase in the third quarter is the largest one-quarter increase since quarterly data became available in 2003. The rising default rate is more bad news for already stressed banks, which hold more than 80 percent of the maturities due on commercial real estate debt over the next two years.

"The dramatic decline in real economic activity and labour markets since last September has undercut property fundamentals, increasing the number of recently originated loans that are at risk for delinquency and default because of cash flows falling short of principal and interest obligations," said Sam Chandan, chief economist at Real Estate Econometrics.

Real Estate Econometrics sees the default rate for commercial real estate mortgages held by depository institutions hitting 4.0 percent in the fourth quarter of 2009, about 5.2 percent by the end of 2010, and peaking at 5.3 percent in 2011.

Last week, the FDIC published its quarterly banking profile.  While the  FDIC noted that indicators of asset quality continued to deteriorate during the third quarter, the pace of deterioration slowed for the second consecutive quarter. That's the good news. The bad new is this:

The number of institutions on the FDIC's "Problem List" rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the "Problem List," up from 416 on June 30. This is the largest number of "problem" institutions since December 31, 1993, when there were 575 institutions on the list. Total assets of "problem" institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.

Moreover, the FDIC's Deposit Insurance Fund (DIF) balance went negative back at the end of September. This we already knew but the quarterly banking profile shed more light on just how bleak the situation is.

As projected in September, the FDIC's Deposit Insurance Fund (DIF) balance - or the net worth of the fund - fell below zero for the first time since the third quarter of 1992. The fund balance of negative $8.2 billion as of September already reflects a $38.9 billion contingent loss reserve that has been set aside to cover estimated losses over the next year. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings over the next year. Combining the fund balance with this contingent loss reserve shows total DIF reserves with a positive balance of $30.7 billion.

Chairman Bair distinguished the DIF's reserves from the FDIC's cash resources, which stood at $23.3 billion of cash and marketable securities. To further bolster the DIF's cash position, the FDIC Board approved a measure on November 12th to require insured institutions to prepay three years worth of deposit insurance premiums - about $45 billion - at the end of 2009. "This measure will provide the FDIC with the funds needed to carry on with the task of resolving failed institutions in 2010, but without accelerating the impact of assessments on the industry's earnings and capital," Chairman Bair said.

The DIF will receive an injection when FDIC gets the additional $45 billion at the end of this year. That's not a "special assessment," it's the next three years' regular assessments being collected up front. The question is that $45 billion enough?

Tags: Commercial Real Estate, US Asset Pricing, US Economy (all tags)

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