FDIC Sees Early Signs of Stress Showing Up in CRE Lending

CoStar - Mark Heschmeyer - 14 December

Delinquencies Start to Tick Up on All Property Types

It could be that, after hitting 20-year lows, deliquency rates for bank loans on commercial real estate had no where to go but up. Or it could also be an early sign of stress in CRE lending starting to emerge. 

Either way, the Federal Deposit Insurance Corp. is closely monitoring late payments and other signes of deliquency among loans made by its bank members that are secured by nonfarm nonresidential properties (office, retail, industrial, hospitality, etc.) 

Loans past due from 30 to 89 days jumped up 11.5% in the third quarter from the previous quarter, according to the latest FDIC data. Also, such loans past due more than 90 days that have gone into default ticked up about 1%. 

In dollar figures, the increases are relatively small: a $341.1 million and a $10.7 million increase respectively. 

Multifamily-backed loans also showed some early cracks, as multifamily loans that were 30- to 89-days past due increased 4.3% in the third quarter from three months earlier, according to the FDIC data. 

The increases were somewhat offset by decreases in other delinquent and nonaccrual categories of CRE loans, but not enough to make up the increase. CRE delinquencies and nonaccrual loans ticked up by about three-tenths of a percent quarter to quarter. 

Although the delinquent loan increases were not large, the FDIC did note that they marked the first such increase since the recovery took hold. 

“The banking industry continues to operate in a challenging environment,” said FDIC Chairman Martin J. Gruenberg. “Low interest rates for an extended period have led some institutions to reach for yield, which has increased their exposure to interest-rate risk, liquidity risk, and credit risk. Current oil and gas prices continue to affect borrowers that depend on the energy sector and have had an adverse effect on asset quality. These challenges will only intensify as interest rates normalize," Gruenberg added.

Overall, loan deliquencies continued to drop in the third quarter among the largest and smallest banks. The nation’s largest banks with assets of more than $100 billion showed delinquency dropping 2.4% quarter to quarter. Banks with assets of less than $1 billion saw their CRE delinquencies go down 30.2%. 

However, banks with assets between $10 billion and $99 billion saw their CRE delinquencies increase 2.7%. 

In addition, the FDIC identified two of the Federal Reserve Districts accounting for the biggest share of increases in loan delinquencies. The percent of nonfarm nonresidential loans past due is slightly higher than the national average in the New York City district, where there has been speculation on overseas investors paying property at aggressive pricing, and in Dallas, which covers banks in the oil- and energy-weakened Houston market. 

Anecdotally, the delinquencies appear tied to handfuls of borrowers intent on renegotiating better refinancing arrangements. 

Kevin Cummings, president and CEO of Investors Bancorp in New Jersey (NASDAQ:ISBC), noted a slight uptick in delinquencies in their CRE portfolio in the 30 and 60-day bucket. 

“This increase relates to one relationship which we are closely monitoring, which consists of four loans for $21 million which are 30 days delinquent, and one loan for $9.7 million which are 60 days delinquent,” Cummings said. “I think he is just, well he is just a difficult person to deal with and negotiations are tough and he wants to refinance the loan and we don't want to give back on the prepayment.” 

Other banks reported similar problems with one-off deals. In general though, bankers continued to report healthy loan portfolios. 

MBS Delinquencies Also Ticking Higher

Other commercial and multifamily originators also are starting to see delinquency increases. 

U.S. CMBS delinquencies climbed higher last month, according to Fitch Ratings. Loan delinquencies rose four basis points (bps) in November to 3.29% from 3.25% a month earlier. Loans on retail, office, and industrial properties all saw delinquency increases and stood at 5.17%, 4.73% and 4.29% respectively. 

Multifamily CMBS delinquencies held steady at a very low 0.79%. However Fannie Mae reported that the number of its multifamily loan delinquencies increased in November over October, but the total dollar amount of delinquencies decreased.