According to Bloomberg, a report by the Real Capital Analytics Inc (RCA) shows that defaults on mortgages held by US banks on apartment buildings has reached 4.6%. RCA derives its figures from bank filings and on data from the Federal Deposit Insurance Corp.

The economic downturn led to a cut in the demand for US apartments, office space, retail shops, hotels and warehouses. With it came a reduction in jobs and consumer spending. This does of course have an impact on the value of commercial property and hence the value of assets that lenders hold. It also makes refinancing harder as well as leaving some mortgages ‘underwater’ (in negative equity).

Now defaults on apartment building mortgages over the last three quarters have broken the record set in 1993.

One type of mortgage, the ‘multifamily’ mortgage, has seen default levels go from 2.4% last year to 4.6% this year. Multifamily mortgages are given to borrowers to cover purchases of properties designed for apartments with five or more separate family living spaces. They are normally extended on a commercial basis.

Most of these were underwritten and loaned during the good times when property prices were high and credit cheap.

There is a hope that as vacancies go up prices will come down just as the economic recovery takes hold and more jobs are created. A US property research company, Reis Inc, that has tracked apartment occupation since 1980 predicts that voids will reach 8.2% this year then start declining again in 2011.

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