Commerical Real Estate Delinquencies Double in 90 Days

From Calculated Risk: Commercial Delinquencies Double in past 90 Days
Delinquencies on mortgages for hotels, shopping malls and office buildings were sharply higher in the fourth quarter. New data from Deutsche Bank show that delinquencies on commercial mortgages packaged and sold as bonds (commercial-mortgage-backed securities, or CMBS), which represent nearly a third of the commercial real-estate debt market, nearly doubled during the past three months, to about 1.2%.

The delinquency rate will likely hit 3% by the end of 2009, its highest point in more than a decade. This is not only a problem for CMBS, but many banks and thrifts have excessive exposure to CRE loans: soured commercial mortgages on banks' books jumped to 2.2% as of the third quarter in 2008, from 1.5% at the end of 2007. The research firm estimates that the rate could rise to 2.6% in the fourth quarter of 2008. Banks and thrifts would suffer in a commercial-real-estate downturn because they own nearly 50% of all commercial mortgages outstanding. As of Sept. 30, 2008, some 1,400 commercial banks and savings institutions had more than 300% of their Tier 1 capital in commercial mortgages.

Back in April 2008: Setting aside the 100 largest banks, the shares of commercial real estate loans in bank loan portfolios nearly doubled over the past 10 years and is approaching 50%. The portfolio share at these banks of residential mortgages and other consumer loans, which are more readily securitized, fell by 20% over the same period.

This is a key point that we've been discussing for a few years - most small to mid-sized institutions were not overexposed to the housing bubble because those loans were mostly securitized. Therefore the housing bust led directly to relatively few bank failures over the last couple of years (although some larger banks like WaMu, Wachovia and National City were heavily exposed to residential loans).

However, many small to mid-sized banks have a heavy concentration in commercial real estate (CRE) loans, and also in construction & development (C&D) loans. Now that CRE is weakening - and the C&D loans are coming due - there will probably be a sharp increase in bank failures over the next couple of years. 100s of small bank failures over the next couple of years is expected due to excessive CRE loan concentrations.