Commercial Mortgage Delinquency Rates Rise a Third Month in a Row

Commercial mortgage delinquencies in the third quarter of 2023 not unexpectedly increased for the third consecutive month, according to the Mortgage Bankers Association’s latest Commercial Delinquency Report.

Jamie Woodwell, MBA’s Head of Commercial Real Estate Research, said in prepared remarks that every major capital source saw delinquency rates rise, driven by higher interest rates, changes in some property market fundamentals, and uncertainty about property values.

“CRE market activity remains muted, further complicating the situation,” Woodwell said.

Data from MBA’s survey released earlier in the quarter show wide differences in mortgage performance by property type.

“Deal vintage, term, market, and a host of other factors also play into which loans are facing pressure,” Woodwell said. “These differences are likely to remain important in the year ahead.”

Based on the unpaid principal balance (UPB) of loans, delinquency rates for banks and thrifts (90 or more days delinquent or in non-accrual) in Q3 are 0.85 percent, an increase of 0.18 percentage points from Q2 2023.

The life company portfolios (60 or more days delinquent) had rates of 0.32 percent, an increase of 0.18 percentage points from Q2 2023.

For Fannie Mae loans (60 or more days delinquent), their rate was 0.54 percent, an increase of 0.17 percentage points from Q2 2023.

With Freddie Mac, its loans 60 or more days delinquent were at 0.24 percent, an increase of 0.03 percentage points from Q2 2023.

CMBS loans delinquent by 30 days or more or in REO were 4.26 percent, an increase of 0.44 percentage points from Q2 2023.

Th report paints a grim picture of the state of CRE capital markets, but the reality could be even worse, says Selina I. Parelskin, CEO and Founder of Beacon Default Management. She points out to GlobeSt.com that although construction and development loans are included in these numbers, this list does not include private lenders and debt funds.

“Some of these use their own bank lines and have lent many tens of billions of dollars on high leverage multifamily syndicated loans, where the sponsor has a very small amount at risk compared to their investors and lenders,” she said.

“The borrowers and investors have lost all equity, the debt fund will not receive full repayment of their loans, and their underlying warehouse or credit facility will take a loss. Many of these funds are on track to lose money on their loans.”

Parelskin said that many funds have more than 25% of their loans in either maturity or payment default.

“Most debt funds disregarded inflation concerns and assumed that cap rates and interest rates would continue to stay at historically low levels,” she said. “Going-in underwriting was up to 80% loan to cost and the equivalent of 3.25% cap rates on in-place income.”

On the bank side, many bankers are diligently attempting to modify their troubled debt, Parelskin said.

“But from our conversations, we believe the commercial mortgage delinquency rates will see a significant rise by the end of Q1 2024,” she said.

Ivan Kustic, Vice President of MetroGroup Realty Finance, tells GlobeSt.com that MBA’s report is consistent with what his firm is seeing as originators and providers of these mortgages.

“Banks and thrifts for the most part requiring recourse are on the lower side, Fannie, and Freddie because of their charge to be in the multifamily arena as such a well-performing asset, is on the low side,” Kustic said.

He said the life insurance companies with conservative underwriting and lower loan-to-value ratios are always consistently low in delinquencies.

CMBS at 4.26% with more liberal underwriting and aggressive loan to values are substantially higher than the other four lending groups, according to Kustic.

“Therefore, when we see stress in the real estate market, the lenders that have been most aggressive in underwriting standards are going to see delinquencies slightly higher than the other four lending groups,” he said.