By Hui-yong Yu
Dec. 1 (Bloomberg) -- The commercial mortgage default rate on loans held by U.S. banks more than doubled to 3.4 percent in the third quarter as vacancies rose and rents declined, Real Estate Econometrics LLC said.
Defaults climbed from 1.37 percent a year earlier and from 2.88 percent in the second quarter, the New York-based property research firm said today in a report. Default rates in the first three quarters of 2009 have been the highest since 1993, the firm said.
“Mortgages originated in 2006 and 2007 are experiencing the most significant shortfalls in current cash flow relative to current debt-service obligations,” Sam Chandan, chief economist of the firm, said in the report.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., and Comptroller of the Currency John Dugan told Congress in October that souring commercial real estate loans pose the biggest threat to the U.S. banking industry. Non-performing commercial property loans caused a majority of bank failures this year, said Chip MacDonald, a partner specializing in financial services at Atlanta-based law firm Jones Day.
Federal Reserve Chairman Ben S. Bernanke said in a Nov. 16 speech that “the fallout” for banks from commercial real estate could slow the nation’s economic recovery.
Defaults on bank-owned commercial property mortgages posted the biggest quarterly jump from the previous quarter in six years of FDIC data analyzed by Real Estate Econometrics, the company said.
Lenders working with property owners may be able to keep the default rate to 4 percent for the fourth quarter, Chandan said.
The firm reduced its fourth-quarter default estimate from 4.1 percent, and pared back its forecast for 2010 to 5.2 percent from 5.3 percent. In 2011, Chandan estimates that 5.3 percent of bank-held commercial property loans will be in default, less than the 5.4 percent previously forecast.
To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net
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