Delinquent loan rate jumps in Chicago area

The epic commercial real estate hangover for banks is getting worse.

The delinquency rates for Chicago-area commercial mortgages along with construction and land loan delinquencies jumped again in the second quarter and could rise well into 2010 even as the economy improves. That means local banks aren’t likely to start making commercial real estate loans any time soon.

The delinquency rate on local commercial mortgages climbed to 6.1% in the second quarter. That’s up sharply from 5.6% in the first quarter and nearly double the year-ago quarter, when the rate was 3.6%, according to Foresight Analytics LLC, an Oakland, Calif.-based research firm.

Chicago now has the third-highest rate among the biggest 100 metropolitan areas, eclipsed only by Jacksonville, Fla., and Miami. Nationwide the rate now stands at 4.3%, and Foresight predicts it could climb above 6% next year.

For construction and land loans, which includes lending for condominium projects, the delinquency rate in the Chicago area is now a staggering 21.2%. That’s up from 18.2% in the first quarter and 10.8% in the second quarter last year.

Chicago’s construction and land loan delinquency rate ranks 12th-highest among the top 100 metros; the nationwide rate is 17%.

Foresight sees the national rate eclipsing 20% by the end of the year and peaking in 2010 at about 25%, says Foresight Partner Matthew Anderson.

“Banks are definitely focused inward on their existing portfolios,” Mr. Anderson says. “Until there’s a sense we’re either nearing or have reached a bottom, fresh credit for commercial real estate is going to be very constrained.”

Mr. Anderson says even as credit eases in other sectors of the economy, the availability of commercial real estate loans will lag. That’s a problem likely to stretch into 2011, when a massive wave of commercial mortgage-backed securities issued in 2006 — at near-peak valuations — comes due and borrowers will scurry to refinance those loans.

With the big decline in property values, some of those properties are sure to be worth less than what’s owed.

“That’s setting up a refinancing problem for commercial real estate,” Mr. Anderson says. “There’s going to be a gap between what financing is available and what is needed to replace existing debt. It’s going to wear on the market for several years.”

Foresight, which compiles its data from regulatory filings, defines delinquent loans as those 30 days or more past due. The firm calculates a rate by dividing the dollar amount of the delinquent loans by the value of all outstanding loans.

The Federal Deposit Insurance Corp. announced Thursday that at the end of June, 416 banks were on its “problem list,” meaning they’re at risk of insolvency. The list was at 305 banks at the end of the first quarter and just 117 at the end of the second quarter last year.

The agency, which insures bank deposits, says 84 banks have failed so far this year.

“We expect the numbers of problem banks and failures will remain elevated, even as the economy begins to recover,” FDIC Chairman Sheila Bair said in a statement.

FDIC-insured banks charged off $48.9 billion in uncollectible loans during the second quarter, up from $26.4 billion in the year-earlier quarter. Meanwhile, non-current loans and leases totaled $332 billion, or 4.35% of total loans and leases, according to the FDIC.

Banks are holding more than $34 billion worth of repossessed real estate, according to a Wall Street Journal analysis of FDIC data. The banks’ pools of foreclosed properties climbed 12% from the prior three months and are up 72% from a year ago, the newspaper reported.