Danger to banks from commercial mortgages still climbing

08/12/2009 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Delinquency rates for commercial mortgage-backed securities (CMBS)--that is commercial mortgage loans backed by office buildings, retail stores, hotels, and apartment buildings--that have been packaged into securities and then sold to investors--rose to 3.04% in July, according to Fitch Ratings. That's the highest level since Fitch began tracking this sector in 2001.

The loans that Fitch follows in this sector represent $480 billion, or about two-thirds of the CMBS  market.

Deliquencies haven't stopped rising either. Fitch projects that they will hit 5% by the end of the year.

The danger is that these delinquencies will set off another round of balance sheet explosions as banks, insurance companies, pension funds,and other investors have to write down the value of CMBS they hold on their books. A rising tide of delinquencies among commercial mortgages themselves would hit small and regional banks hardest since they have the biggest exposure, in relation to the size of their portfolios, to the commercial morgage market.

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