Delinquent mortgages, construction loans rise in Chicago
(Crain's) — Press fast forward to 2011 if you've heard this song before.
Past-due commercial real estate mortgages and construction loans rose in the Chicago area during the fourth quarter and are expected to climb even higher before the woe begins to ease.
Local delinquent commercial mortgages — those with payments 30 days or more past-due — rose to 6.2% of all mortgages during the fourth quarter, compared to 5.9% during the third quarter and 4.0% during the fourth quarter, 2008, according to Foresight Analytics LLC, an Oakland, Calif.-based research and consulting firm.
Meanwhile, the local delinquency rate for construction and land loans — which include the troubled housing sector — shot up to 25.7% during the fourth quarter, compared to 24.0% during the third quarter and 14.8% during the fourth quarter of 2008, according to Foresight, which collects data on bank loans from regulatory filings.
Chicago lost more jobs last year than any major metropolitan area in the country, a key factor for commercial real estate, which is driven by changes in total employment. But local delinquency rates have been worse than the rest of the country since 2001, and any recovery here is likely to be protracted.
"Chicago was impacted a bit earlier than other major markets, but I don't know if that is going to translate into an earlier recovery," says Matthew Anderson, a managing director with Foresight, which last month was acquired by New York-based Trepp LLC, which tracks commercial mortgage-backed securities.
The national delinquency rate for commercial mortgages has been rising rapidly since late 2008, but at 5.1% was significantly lower than Chicago's during the fourth quarter. Meanwhile, the national delinquency rate for construction loans rose to 18.6% during the fourth quarter, still much lower than the local rate.
As a result, Foresight is revising its national projections on when the crisis will peak. The wave of commercial mortgage delinquencies nationwide is now expected to crest at between 8.0% and 9.0% of all loans some during the first half of the 2011.
Nationwide, construction loan delinquencies should reach 25% in late 2010 before loan performance begins to improve. The company does not provide forecasts for particular markets, but the Chicago area is unlikely to improve until after the national recovery is under way, Mr. Anderson says.
Foresight calculates the delinquency rate by dividing the dollar value of the loans that are at least 30 days past due in the monthly payments by the value of all outstanding loans. The data covers only loans issued by banks and does not include loans packaged up and sold off as CMBS, a segment blamed for some of the biggest excesses during the boom.
One meager sign of hope for the Chicago area is that the pace of the increase is slowing down for delinquent commercial mortgages compared to some other markets, such as San Diego, where the rate shot up to 6.7% in the fourth quarter, compared to 5.2% in the prior period; or Fort Lauderdale, Fla., where the rate rose to 7.2%, from 6.4%.
Mr. Anderson blames the weak local economy, particularly the job market, for the Chicago-area delinquency rates that have been higher than the national average since 2001, when Foresight began tracking the data.
The Chicago-Naperville-Joliet area lost 163,200 jobs during in 2009, more than any other metropolitan area nationwide, the U.S. Bureau of Labor Statistics reported Feb. 2. Chicago did worse than Los Angeles, which lost 115,300 jobs, and the New York, which lost 103,500 jobs.
The Illinois workforce is expected to shrink 2.73% this year, according to a January forecast by the Regional Economics Applications Laboratory at the University of Illinois.
But Illinois may have more troubled banks than the rest of the nation, making it more difficult to restructure loans, says Chicago real estate lawyer Michael J. Delrahim.
In Illinois, 23 banks have failed since January 2009, more than any other state except Georgia, where 27 banks have failed, according to a list on the Web site of the Federal Deposit Insurance Corp. During the same time, 18 California banks have failed, according to the list, which does not include the assets of the institutions.
Mr. Delrahim notes that many more banks are operating under regulatory orders that limit their ability to renegotiate past-due loans.
If that explains the high delinquency rates here, then it also means that the rates won't come down until banks get their houses in order.
"Once we have a clean slate of healthy banks that are able to lend, then we won't have the problems we have had in '08 and '09," he says. "Will that happen in 2010? I am cautiously optimistic."
