Banks and other lenders grapple with rising defaults
Commercial mortgage delinquency rates rose in the first quarter as loans matured amid higher interest rates and uncertain property values, according to new data from the Mortgage Bankers Association.
“Commercial mortgage delinquency rates continued to increase during the first three months of 2024,” said Jamie Woodwell, head of commercial real estate research at MBA. “The increase was seen across most capital sources, pointing to the challenges caused by loans that are maturing amid higher interest rates, uncertain property values, and questions about some properties’ fundamentals.”
The MBA quarterly analysis tracks delinquencies for five major investor groups holding over 80% of outstanding commercial mortgage debt - banks, life insurance firms, mortgage-backed securities, and government agencies.
The first quarter delinquency rates were:
- Banks (90+ days late or nonaccrual): 1.03%, up 0.09 percentage points
- Life companies (60+ days): 0.52%, up 0.16 points
- Fannie Mae (60+ days): 0.44%, down 0.02 points
- Freddie Mac (60+ days): 0.34%, up 0.06 points
- Mortgage-backed securities (30+ days or REO): 4.35%, up 0.05 points
The increases highlighted the strains on commercial borrowers from the cumulative effects of interest rate hikes over the past year, combined with risks like higher capitalization rates pressuring property valuations.
Woodwell noted the delinquency increase at banks was driven by more loans being designated as “nonaccrual”, where full repayment is uncertain though payments may be current.
Read more: Commercial and multifamily mortgage balances set to mature in 2024
While loans maturing into today’s higher rate environment face challenges, Woodwell said designating certain loans as nonaccrual allows banks to reserve appropriately against potential future losses.
“It is important to recognize that different capital sources track delinquencies in different ways – and with good reason,” he said in the report. “The increases in such loans, and the associated net-charge-offs at large banks, can be seen as evidence of the institutions working to get ahead of potential future defaults.”
MBA noted that these delinquency rates aren’t directly comparable across groups due to differences in tracking methodologies. However, the overall trend indicates a growing challenge for the commercial real estate sector as it navigates a complex economic landscape.
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