Commercial mortgage lending rises

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Commercial mortgage lending rose 35 percent in the first three months of the year, at a time when defaults on commercial loans are on the rise, recent surveys show.

The Mortgage Bankers Association of America (MBAA) surveyed 48 mortgage banking firms, which reported lending $18.9 billion in mortgages from January through March, compared with $14 billion during the same period last year.

Economists said the increase is surprising, given the slow economy, war in Iraq and weakness in the commercial real estate market. But the Federal Reserve's overnight bank-lending rate is at a 41-year low of 1.25 percent, and commercial property owners are taking advantage of it, the MBAA said.

"When interest rates are low, it's just like a homeowner refinancing," said John Freund, senior director of research at MBAA.

While commercial mortgage lending is rising, so too are defaults on many of the most common commercial loans.

Fitch Ratings, a New York-based financial research firm, said last week that the rate of defaults on commercial mortgage-backed security (CMBS) loans rose from 1.8 percent in 2001 to 2.73 percent last year.

CMBS loans are investment vehicles, like stocks, that investors can buy and thereby indirectly lend money to a business. The MBAA says in the first quarter the amount of CMBS loans issued rose 86 percent to $6.8 billion, up from $3.7 billion during the first quarter of 2002. CMBS loans make up 36 percent of the loans made by mortgage bankers surveyed by the MBAA.

Fitch Ratings reported 311 defaults on CMBS loans last year, more than one-third of all defaults on those types of loans in the last decade. Fitch predicted that defaults will continue and reach 3.75 percent by year's end.

Fitch blames the defaults largely on the hotel industry. A drop in travel after September 11 helped push CMBS defaults on hotel loans up 65 percent last year to 207, from 125 in 2001.

Fitch said it expects more defaults in the hotel sector as older and poorly performing hotels find lenders unwilling to help them refinance.

Despite rising defaults on hotel loans, the mortgage bankers surveyed by the MBAA made more than $1 billion in loans to hotels and motels during the first quarter of this year, up from $82 million during the first quarter of 2002.

Meanwhile, Fitch reported that defaults on CMBS office loans doubled in 2002, as office buildings in most cities face double-digit vacancy rates from a lack of new tenants.

Fitch said defaults will continue because the economic recovery has been slow.

"Fitch does not anticipate defaults will stabilize until a recovery gains momentum, which could be more than a year away," the group said.