Commercial real estate (CRE) loans in bank portfolios are showing stress related to the economic downturn and signs that some borrowers are already expecting to default on their mortgages. The overall delinquency rate increased 65% from 0.36% to 0.59%, which is a material increase but generally within the expected range given the current economic conditions.
The current delinquency rate stands at the highest level since the recovery period after the last recession but still well below the 9% delinquency rate for CRE loans at the peak of the financial crisis. However, there are signals in the data that some borrowers may be strategically defaulting on their loans which could feed a wave of foreclosures in the coming four to six quarters.
Loans with maturity dates in the next five quarters have delinquency rates materially higher than the overall portfolio. Within this population, the delinquency rate for large balance loans is significantly higher than for smaller loans. Larger borrowers are typically more sophisticated and less likely to be encumbered by recourse or guarantees making strategic default a more rational decision.
While there are some borrowers who no longer have the ability to make payments, the gap in the delinquency rate relative to the broader portfolio is indicative that many of these borrowers decided that because of current circumstances, they will be unable to extend or refinance their existing loan at maturity and therefore have opted to stop making payments in advance of their maturity date.