The most recent Commercial Delinquency Report from the Mortgage Bankers Association shows that, for the third consecutive month, there was an unanticipated increase in commercial mortgage delinquencies in the third quarter of 2023.
In prepared remarks, Jamie Woodwell, MBA’s Head of Commercial Real Estate Research, stated that rising interest rates, shifts in certain aspects of the real estate market, and uncertainty around property valuations were the main causes of an increase in delinquency rates across all major capital sources.
According to Woodwell, “CRE market activity remains muted, further complicating the situation.”
Mortgage performance varies significantly depending on the type of property, according to data from the MBA survey that was made public earlier this quarter.
According to Woodwell, a wide range of factors, including deal vintage, term, and market conditions, also influence which loans are under pressure. These distinctions are probably going to stay significant in the upcoming year.
Delinquency rates for banks and thrifts (90 days or more past due or non-accrual) based on the unpaid principal balance (UPB) of loans are 0.85% in Q3, up 0.18 percentage points from Q2 2023.
With 60 days or more past due, the life company portfolios had rates of 0.32 percent, up 0.18 percentage points from Q2 2023.
The rate for Fannie Mae loans (60 days or more past due) was 0.54 percent, up 0.17 percentage points from Q2 2023.
Loans from Freddie Mac that were 60 days or more past due had a 0.24 percent default rate, up 0.03 percentage points from Q2 2023.
The percentage of CMBS loans in REO or 30 days or more past due was 4.26 percent, up 0.44 percentage points from Q2 2023.
According to Selina I. Parelskin, CEO and founder of Beacon Default Management, the research presents a dire image of the status of the CRE capital markets, but the situation may well be considerably worse. She informs GlobeSt.com that while these figures include loans for building and development, private lenders and debt funds are not included in this list.
“A few of these 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,” the spokesperson stated. “Some of these use their own bank lines.”
The debt fund will not be paid back in full, the investors and borrowers have lost all of their equity, and the underlying warehouse or credit facility will suffer a loss. A large number of these funds are expected to experience loan losses.
According to Parelskin, almost 25% of the loans held by these funds are either matured or in default.
According to her, the majority of debt funds ignored inflation worries and believed that interest rates and cap rates would remain at historically low levels. Up to 80% loan to cost and the equivalent of 3.25% cap rates on in-place income were required at the time of going into underwriting.
According to Parelskin, a lot of bankers are working hard to adjust their problematic debt.
However, based on our discussions, we anticipate a notable increase in commercial mortgage delinquency rates by the end of Q1 2024, as the spokesperson stated.
Vice President of MetroGroup Realty Finance, Ivan Kustic, tells GlobeSt.com that the MBA data supports the originators and suppliers of these mortgages that his company is experiencing.
Banks and thrifts are generally on the lower end of the recourse spectrum, while Fannie and Freddie are on the lower end due to their reputation as highly performing multifamily assets, Kustic stated.
According to him, life insurance businesses that practice conservative underwriting and have lower loan-to-value ratios often have fewer delinquencies.
According to Kustic, the CMBS has a rate of 4.26%, which is significantly higher than the other four lending groupings. It also has more aggressive loan values and more liberal underwriting.
Thus, he explained, the lenders with the most aggressive underwriting standards will see slightly higher delinquencies than the other four lending groups when we see stress in the real estate market.
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