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By: Brittany Dunn 01/13/2010
The anticipated surge in commercial mortgage defaults this year could wipe out profits at a number of U.S. banks, according to a research study published Tuesday by SMR Research Corporation. However, SMR said this problem is not likely to morph into a true crisis that would endanger U.S. or global financial systems.
“The saving grace for the financial system is that most really large U.S. banks are modestly exposed,” said Stuart A. Feldstein, president of SMR.
The study found highly delinquent commercial mortgages were only 0.1 percent of Citigroup’s assets. JP Morgan Chase also appears to be “walled off” from the dilemma, and exposure at Bank of America is only slightly higher. Therefore, none of the nation’s largest banks risk failure due to commercial defaults, SMR said.
The outlook isn’t as positive for medium-sized and smaller banks, though. At small banks with less than $1 billion of assets, commercial mortgages were 32.5 percent of total assets, according to the study. This level of dependence is six-fold higher than at big banks with $50 billion or more of assets, SMR said.
Highly delinquent commercial mortgages equaled 3 percent or more of 154 bank’s total assets, as of September 30, 2009. SMR said banks earn profits of only about 1 percent of assets in a reasonably good year, so many of these institutions will be hard-pressed to make any money in 2010. The company predicts some banks may even become insolvent.
The 90-day-plus delinquency rate on all commercial mortgages, including multi-family apartment building loans and commercial construction loans, increased at a notable rate in 2009. On September 30, it reached 5.59 percent, up from 3.51 percent just six months earlier. In addition, the vacancy rate on apartment buildings reached its highest level since 1965, and vacancy rates were also high at shopping centers and office buildings. According to SMR’s study, the total commercial mortgage loan market was $3.4 trillion at the end of the third quarter in 2009.
Despite these gloomy statistics, SMR said there are still reasons to be cautiously optimistic about the future. The study said the early-stage delinquency rate on commercial mortgages appears to have peaked in the first quarter of 2009, and overall delinquency and write-offs on commercial mortgages were still below levels seen in the last commercial lending crisis in 1991.
“If the economic recovery continues apace, the new commercial mortgage crisis may peak in 2010 and improve in 2011,” Feldstein said.
Kurtz Auction is the region’s leading real estate auction firm – serving Mid-America and the Southeast since 1945.
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