Risk Analysis Targets Middle Market Commercial Credit

MBA (8/18/2008 ) Murray, Michael
An analysis of commercial credit risk reveals ongoing deterioration in the middle market through the second quarter, based on portfolio exposure from “top-tier” institutions representing more than half of all middle market commercial loans in the United States.

Middle market loans with ties to the construction sector continue to lead the deterioration, with 3.4 percent of these loans reported as non-accruing, up 35 percent from the prior quarter and 233 percent year-over-year, based on The Risk Analysis Service metrics conducted by Philadelphia-based Risk Management Association and Automated Financial Systems Inc., Exton, Pa.

“The data clearly shows that delinquencies and nonaccruals are rising,” said Kevin Blakely, president and CEO of the Risk Management Association. “We are in the downward swing of the business cycle, so we can expect continued asset quality deterioration.”

RMA said nonaccrual of middle market loans increased for the sixth consecutive quarter to nearly 1 percent of total outstanding balances in the second quarter, representing a 20 percent increase from the previous quarter and a nearly 80 percent increase from one year ago.

Past due middle market loans started their rise in early 2007, and they now represent 0.83 percent of total outstanding balances past due between 30 and 89 days. A 73 percent increase in delinquent loan levels during the second quarter from the previous year represents the highest delinquent loan level since the inception of the program in September 2003, RMA and AFS said.

The percentage of total outstanding balances past due 30-89 days in the first quarter represented a 26 percent increase from the prior quarter and was 84 percent higher from the first quarter of 2007, based on RAS metrics data.

However, the Mortgage Bankers Association reported first quarter commercial real estate delinquencies primarily increasing among banks and thrifts rather than other investors. The 90 or more day delinquency rate on loans held by FDIC-insured banks and thrifts rose 0.21 percent to 1.01 percent.

Loan delinquencies of 30 days or more held in commercial mortgage-backed securities rose 0.08 percentage points to 0.48 percent in the first quarter from the end of 2007. The 60 or more day delinquency rate on loans held in life company portfolios remained flat at 0.01 percent.

The 60 or more day delinquency rate on multifamily loans held or insured by Fannie Mae rose 0.01 percentage point to 0.09 percent, and the 60 or day delinquency rate on multifamily loans held or insured by Freddie Mac rose 0.02 percentage points to 0.04 percent for the first quarter, MBA said.

"Most investor groups saw delinquency rates rise slightly in the first quarter, but they remain at the low end of their historical range," said Jamie Woodwell, senior director of commercial/multifamily research at MBA.

Blakely, however, said loosened underwriting standards applied to credits proved “challenging to the industry” in the first quarter.

RAS metric showed loans tied to the construction sector in the first quarter highlighted deterioration at 2.55 percent of loans reported as non-accruing, up 36 percent from the fourth quarter of 2007 and nearly four times the level of 0.65 percent from the first quarter of last year.

RAS metrics also had delinquencies in the first quarter in real estate and the rental and leasing sector up 37 percent from the fourth quarter of 2007 and represented 0.96 percent of total outstanding loans in the sector—same as nonaccrual of middle market loans for the first quarter.