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Loan Defaults Could Top 5% in 2010

NEW YORK CITY-REEcon's Chandan says federal policy interventions have yet to stem the increase in distress among bank-held portfolios.

By Cody Lyon | Updated on December 01, 2009

NEW YORK CITY-Real Estate Econometrics says an analysis of FDIC data shows that the national default rate for commercial real estate mortgages held by depository institutions rose from 2.88% in the second quarter of 2009 to 3.4% in the third quarter. During that same period, multifamily mortgage defaults increased by 44 basis points, rising from 3.14% to 3.58%. And it’s a trend that’s expected to continue for two more years.

By Q4 of this year, commercial mortgage defaults are expected to rise to 4%, nosing up further to 5.2% by the end of 2010, and then finally topping out at 5.3% in 2011. The report says that by ’11 and 2012, the larger share of commercial mortgages originated at the peak of the asset cycle in 2006 and 2007 will mature. Ultimately, that means those mortgages will require balance adjustments in larger numbers as a consequence of high loan-to-value ratios and weak debt service coverage that fails to meet prevailing criteria.

Simply put, Sam Chandan, president and chief economist at REEcon, tells GlobeSt.com, “We continue to observe increases in default rates, consistent with projections from one year ago.” And Chandan says that in part, at least so far, policy interventions have not stemmed the increase in distress among bank-held portfolios.

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