New York City – In the face of intense competition, commercial banks have been winning a growing share of the market for commercial and multifamily mortgages.

Even with real estate investment trusts and investors in commercial mortgage-backed securities increasing their holdings of commercial and apartment mortgages, commercial banks were able to widen their lead in the market.

About $1.1 trillion of those outstanding loans were held by commercial banks at the end of 2005 – boosting their market share to 42.9% from 42.5% at the end of 2004, according to the Mortgage Bankers Association (MBA).

That jump came in a period when commercial and multifamily borrowers increased their outstanding mortgage debt by 14% to $2.6 trillion from $2.3 trillion in 2004, according to Federal Reserve Board data. More money is now invested in apartment mortgages than ever before.

A gain of half a percentage point in market share might not seem like much, but it represents $151 billion in apartment deals.

“Commercial bank holdings have been growing pretty quickly,” said Jamie Woodwell, senior director of commercial and multifamily research for MBA.

After commercial banks, investors in commercial mortgage-backed securities are the second largest holders of commercial/multifamily debt with $553 billion, or 21% of the total, followed by life insurance companies, savings institutions and government- sponsored enterprises like Fannie Mae and Freddie Mac.

That gives commercial banks a substantial and growing lead in the race to make loans, even considering that MBA’s numbers for banks are somewhat inflated because they include mortgages in which a piece of commercial property has been pledged as collateral.

That practice allows a borrower’s business income – not the income derived from the property’s rents and leases – to drive the underwriting, pricing and performance of the loan.

Banks probably owe their growing market share to their existing relationships with borrowers, especially with smaller apartment investors. For small, relatively unsophisticated borrowers, the first place to look in their hunt for financing might be a branch bank where they already have an account.

These banks can often offer smaller mortgages, even under $1 million, more easily than competing loan programs.

Banks have also become increasingly adept at providing floating-rate mortgages with hedges against rising interest rates. “Across the board there’s a lot of innovation,” Woodwell said.

Many experts have worried that floating-rate loans might face heightened default risk if interest rates rise further. But so far, the rate of defaults for commercial bank loans has continued to drop despite a steady increase in short-term interest rates.

For example, the 1-year London Interbank Offered Rate has risen from almost 1% in June of 2003 to 5.2% in mid-March. But the delinquency rate for bank loans made to commercial real estate properties has dropped steadily since 1991, when the government first began gathering this data, with only a slight uptick during the weak real estate markets in 2001 and 2002 (see chart, right).

Top holders of commercial/ multifamily mortgages

(at the end of 2005)

dollar volume; market share

Commercial banks:

$1.1 trillion; 43%


$553 billion; 21%

Life insurance companies:

$263 billion; 10%

Savings institutions:

$197 billion; 8%

Government-sponsored enterprises and federally related mortgage pools:

$130 billion; 7%

Source: The Mortgage Bankers Association

Charge-off and delinquency rate

Commercial real estate loans include construction and land development loans, loans secured by multifamily residences, and loans secured by nonfarm, nonresidential real estate.

1991, fourth quarter   11.48%    

1992, fourth quarter   9.75

1993, fourth quarter   6.74

1994, fourth quarter   4.34

1995, fourth quarter   3.43

1996, fourth quarter   2.87

1997, fourth quarter   2.23

1998, fourth quarter   2.01

1999, fourth quarter   1.46

2000, fourth quarter   1.52

2001, fourth quarter   1.93

2002, fourth quarter   1.61

2003, fourth quarter   1.40

2004, fourth quarter   1.11

2005, fourth quarter   1.06

Source: Federal Financial Institutions Examination Council