Community Banks Hurting on Commercial Defaults

The delinquency rate on commercial mortgage-backed securities hit a record 9.62% in April, according to a report by Trepp, a firm that tracks commercial real estate and banking data.  Analysts expect that to rise above 10% by year end. On the bright side, that forecast marks a slight improvement over prior estimates that called for defaults to top 12%. 

The bulk of the rising delinquencies are falling squarely on the shoulders of small and regional banks, forcing dozens to close.  Thirteen banks failed in April, with nearly all them heavily exposed to commercial real estate. It’s a familiar pattern that U.S. regulators say they’ve been observing for several months. 

Small to regional banks — defined as banks holding less than $100 billion in assets — have $784 billion in commercial real estate loans on their books, according to the Independent Community Bankers Association of America.  That’s about 71% of the total market.   At the height of the bubble, small-to-midsized banks underwrote more than $200 billion in risky land and construction loans, where the collateral on the loan wasn’t office space but vacant land or incomplete construction sites.

Among the 13 banks shut down last month, commercial real estate loans made up 79% of their non-performing loans, defined as loans in default or close to default. Non-performing residential real estate loans made up only 15% of those loan portfolios.