Black Knight’s November report highlights a troubling 6.88% month-over-month rise in mortgage delinquencies, a sharp increase that draws attention when compared to historical data. In November 2006, the delinquency rate was 4.25%, excluding foreclosures. By November 2024, the rate has slightly improved to 4.22%, but the recent surge is worrisome.
The delinquency trend isn’t confined to residential mortgages. Commercial Mortgage-Backed Securities (CMBS) are facing a significant uptick, with the overall CMBS delinquency rate climbing to 6.40%. This increase is most pronounced in the office, multifamily, and lodging sectors, particularly the office sector, where delinquency rates have exceeded 10%. The office property downturn is starting to show its effects on regional banks, with many struggling to manage the wave of distressed commercial real estate (CRE) loans. In fact, modifications, which are typically sought by landlords trying to delay payments and extend loan terms, have risen sharply as a result of growing distress. Regional banks, in particular, are feeling the squeeze, especially since they often offered lower down payments than larger banks in the years preceding the 2022 interest rate hikes. With office and apartment complex values plummeting by at least 20% since the peak, smaller lenders now face a thinner buffer before taking losses.
At the same time, larger banks, which are subject to stress tests and rigorous regulatory scrutiny, have been more proactive in setting aside reserves to cover bad loans. In contrast, smaller banks have been slower to adjust, contributing to the underperformance of their stock prices. The KBW Regional Banking Index has risen just 17% this year, compared to a 30% increase for the KBW Nasdaq Global Bank Index.
Looking ahead, the $500 billion in CRE mortgages set to mature in the next year represents a significant risk. A substantial portion of these loans are expected to default, potentially triggering fire sales that could further depress commercial real estate prices. According to finance expert Rebel Cole, the increasing defaults and subsequent losses could have a deep and lasting impact on the commercial real estate market.
The sharp increase in delinquency rates, combined with the growing distress in CRE loans, signals deepening vulnerabilities in both the residential and commercial real estate sectors. Banks, particularly regional lenders, must address these challenges quickly to avoid further destabilization.
https://twitter.com/m3_melody/status/1867670599050703330
$CMBS delinquency rates are spiking, but still banks refrain from making adequate provisions for expected credit losses on this or other type of assets that are showing similar signs of distress.
This is why I stressed in the podcast below how keeping an eye on $JPM is… https://t.co/sFO3HyRh4W pic.twitter.com/Rn0RgMXkTw
— JustDario 🏊♂️ (@DarioCpx) December 15, 2024
Sources:
https://finance.yahoo.com/news/office-property-meltdown-starting-surface-184728438.html