Property Value Uncertainty Pushes Commercial, Multifamily Mortgage Delinquency Rates Upward

Commercial and multifamily mortgage delinquencies increased in the second quarter of 2023, according to the Mortgage Bankers Association’s (MBA) latest Commercial/Multifamily Delinquency Report.

“Delinquency rates on loans backed by commercial real estate properties rose during the second quarter for most capital sources,” said Jamie Woodwell, MBA’s Head of Commercial Real Estate Research. “Although the uptick in delinquency rates was expected, they remain at the lower end of historical ranges. Higher and volatile interest rates, uncertainty about property values, and stresses in some property markets have increased pressure on some loans and properties.”

MBA’s analysis of commercial/multifamily delinquency rates looked at five of the largest investor-groups: commercial banks and thrifts, commercial mortgage-backed securities (CMBS), life insurance companies, and Fannie Mae and Freddie Mac. Together, these groups hold more than 80% of commercial/multifamily mortgage debt outstanding. MBA’s analysis incorporates the measures used by each individual investor group to track the performance of their loans. Because each investor group tracks delinquencies in its own way, delinquency rates are not comparable from one group to another. As an example, Fannie Mae reports loans receiving payment forbearance as delinquent, while Freddie Mac excludes those loans if the borrower is in compliance with the forbearance agreement.

Based on the unpaid principal balance (UPB) of loans, delinquency rates for each group at the end of the second quarter of 2023 were as follows:

• Banks and thrifts (90 or more days delinquent or in non-accrual): 0.66%, an increase of 0.09 percentage points from the first quarter of 2023
• Life company portfolios (60 or more days delinquent): 0.14%, a decrease of 0.07 percentage points from the first quarter of 2023
• Fannie Mae (60 or more days delinquent): 0.37%, an increase of 0.02 percentage points from the first quarter of 2023
• Freddie Mac (60 or more days delinquent): 0.21%, an increase of 0.08 percentage points from the first quarter of 2023
• CMBS (30 or more days delinquent or in REO): 3.82%, an increase of 0.82 percentage points from the first quarter of 2023.

MBA notes that construction and development loans are generally not included in the numbers presented in this report, but are included in many regulatory definitions of “commercial real estate” despite the fact they are often backed by single-family residential development projects rather than by office buildings, apartment buildings, shopping centers, or other income-producing properties.

In the Federal Reserve Board's latest Financial Stability Report for October 2023, aggregate commercial real estate prices measured in inflation-adjusted terms continued declining through August 2023, as capitalization rates at the time of the property purchase—which measure the annual income of commercial properties relative to their prices—have increased modestly from recent historically low levels, but have not increased as much as real Treasury yields, suggesting that prices remain high relative to rental income.

Commercial real estate valuations were elevated for the office sector, where fundamentals are especially weak for offices in central business districts, as vacancy rates increased further and rent growth was declining since the Fed’s May report.

"Not all commercial mortgage loans are facing the same pressures,” added Woodwell. “Loans backed by properties, and property types with stable cash flows, are experiencing different prospects than those that may have seen declines in incomes. Additionally, long-term loans are experiencing less of a change in interest rates than those with shorter terms or adjustable rates. We expect these differences to continue to play out in coming quarters.”

According to Intercontinental Exchange Inc. (ICE) data (formerly Black Knight), the national mortgage delinquency rate rose to 3.29% in September 2023, up 12 basis points from August, and up 13 basis points year-over-year, marking only the second—and largest—annual increase in the past 2.5 years. And despite the rise in delinquencies, ICE reports the delinquency rate is still 71 points below September 2019, before the pandemic. Loans that were at least 30 days overdue rose by 5.1% (or 48,800 loans), which marks the fourth month of consecutive rises while the 60-day delinquent population extended its own streak of increases by rising 3% (or 8,700 loans) marking six months of increases.