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Discovering commercial mortgage statistics.

DISCOVERING COMMERCIAL MORTGAGE STATISTICS

Although financial institutions and commercial mortgage banking firms have an abundance of statistics relevant to the decision of whether or not to provide financing for a particular property (e.g., vacancy rates, absorption rates, demographics, rent levels, etc.), they have very little information about the business of commerical mortgage financing. The following two hypothetical memos, one from a chief executive and the reply from the head of the real estate department, suggest the questions that arise and the answers that can be given.

Following the memos is a description of where statistical information on commercial mortgages can be obtained and the sources used by the Department of Housing and Urban Development (HUD) for its monthly lending survey. The article concludes with some recommendations that the financial regulatory agencies collect more detailed information on commercial mortgages, following the example set by the American Council of Life Insurance for life insurance company investments.

Memo to the head of the commercial real estate financing department

From: Chief executive

The board of directors has asked me to discuss our share of the commercial mortgage market and to outline the directions that I think we should be taking to increase or decrease our market share. I believe it is important to compare ourselves to our competition, considering particularly our percentage of delinquencies. For this report, I will need by next week not only the most recent statistics on our commercial mortgage activity but also: * The total amount of commercial

mortgage holdings and originations

in the United States, broken down

by property type, and by type of financial

institution. * The commercial mortgage holdings

and originations of institutions

which are competitors of ours in the

commercial mortgage market, giving

the percentage of commercial

mortgage assets to total assets held

by each institution. * The delinquency and foreclosure ratios

on commercial mortgages in

the United States, by location and

by types of properties. * Our costs of origination and servicing

as compared with our

competitor's costs.

Thanks for your prompt attention to this matter.

Memo to the Chief executive From: Head of the commercial real estate financing department

In response to your request, I enclose the statistical information available and list the sources, but there are significant gaps in the availability of statistics for commercial mortgages as I will explain in this memo and a memo for the file. In the memo for the file, I conclude with some recommendations about statistics that you may wish to support in any discussion with others in the commercial real estate financing business.

Commercial mortgage holdings and

originations

The total amount of commercial mortgage originations by lender group in the United States for 1989 is shown in Table 1 for permanent mortgages and Table 2 for construction loans. The total amount of commercial mortgage holdings by lender group as of December 31, 1989 is shown in Table 3. The source of these figures is HUD. [Tabular Data Omitted]

HUD does not collect statistics by property type, such as statistics for office buildings or shopping centers. It divides commercial mortgages between "multifamily" and "nonfarm nonresidential." The statistics cover almost all lender groups in the commercial mortgage market, except mortgages held by individuals or partnerships, mortgages held by credit corporations, mortgages held by REITs, and mortgages held by foreign institutions.

The American Council of Life Insurance (ACLI) publishes commercial mortgage statistics by property type, regional or metropolitan area location, and interest rate and yield, mortgage structure (e.g., fixed-rate or joint venture), and debt service coverage, but these statistics, of course, are applicable only to mortgages of life insurance companies.

Competitors' statistics

As for your request for data on our competitors, you know that commercial banks and savings banks insured by the FDIC submit quarterly call reports, and institutions insured by the Savings Association Insurance Fund submit monthly thrift financial reports. The banks, for example, report quarterly (a) construction and land development loans of 60 months or less, (b) multifamily housing loans on five or more units, and (c) nonfarm nonresidential loans, excluding, of course, construction and land development loans of 60 months or less.

Several firms, including Sheshunoff Information Services of Austin, Texas and Ferguson & Company of Irving, Texas sell the data bases plus software for the call and thrift financial reports, so that we can generate our own analyses. Alternatively, these firms will do a custom report on any financial institutions you wish. Analysis can be done showing ratios of mortgage assets to total assets, by location of bank headquarters, or by several other criteria available in the data base. There is no information by property type or by location of the property on which the loan is made. Given the short deadline, I have not sought this information on our competition.

Delinquency and foreclosures

Although national delinquency and foreclosure statistics are available for one-to-four family houses, they are not available for commercial mortgages, except for those held by life insurance companies. ACLI publishes quarterly a survey which shows amount and ratio to mortgage loans outstanding, of loans delinquent, loans in process of foreclosure and loans foreclosed during the year. It is indexed by type of property and the figures are shown for nine geographical regions. This kind of detail is important because, for example, on March 31, 1990, the nationwide delinquency rate of commercial mortgages held by life insurance companies was 3.04 percent yet the delinquency rate in the eight states of the mountain region was 8.20 percent.

The Office of Thrift Supervision (OTS) issues statistics on mortgage delinquency rates, but there is just one percentage given for each of three categories: "Construction and land," "Home" and "Other." The delinquency ratio for "Other" for savings associations not in conservatorship was 4.2 percent in October 1989. The definition of "delinquency" for thrifts is any loan past due, depending on the definition used by the thrift, whereas the life insurance companies consider delinquent, for monthly payment loans, any loan two or more payments past due.

On the call reports for commercial banks, past due (30 to 89 days) mortgages are all in one figure with no division between single-family, construction or commercial mortgages. The FDIC publishes deliquent real estate loan ratios for banks by state each quarter.

In short, you will have to rely on comparisons with life insurance companies for delinquencies and foreclosures because no other useful statistics are available.

Costs of origination and servicing

There is virtually nothing available, that I know of, regarding the costs of origination and servicing commercial mortgages, either by mortgage banking firms or by financial institutions. The Mortgage Bankers Association of America (MBA) publishes yearly "Financial Statements and Operating Ratios for the Mortgage Banking Industry" but it is primarily for those in the single-family mortgage business. Only five companies doing 100 percent commercial mortgages responded to the 1988 survey for this report, an insufficient number to provide guidance. A number of companies surveyed do both single-family and commercial mortgage business, but the costs are not separated by type of business.

One report, prepared by ICM Consultants, Inc. of Valley Forge, Pennsylvania, covers costs of origination during the past five years among a group of commercial mortgage banking firms represented by ICM. It is available for sale for $165. Other management consulting firms may also have done studies on either originations or servicing, but I have not seen them.

One of the difficulties in doing a study of servicing costs is that many firms combine single-family residential servicing with commercial servicing and have no easy way of separating the costs. A more basic problem, however, is that commercial servicing revenues generally exceed the costs until a property is in trouble. The time spent on delinquent loans may be brief or may be extensive. In the commercial real estate mortgage market, it is virtually impossible to predict, or average out, the expense of delinquencies, workouts and foreclosures.

This may be all the information you need for the board of directors.

Memo to the file

The sources of information that I could find are covered in Section A. Section B discussed the HUD monthly lending survey and Section C has recommendations for more detailed data collection.

Section A - Where to obtain

information

HUD - "The Survey of Mortgage Lending Activity" is published monthly by HUD. Each quarter the survey includes the holdings of land loans construction loans, and long-term mortgage loans by 11 lender groups. Tables 1 and 2 show nine lender groups, because two groups do not originate commercial mortgages.

This survey is issued as a press release by HUD. The press release appears about three to four months after the date of the statistics. The current mailing list is about 2,500, to libraries, trade associations and others. Those who wish to receive a copy or be added to the mailing list should call the HUD Office of Public Affairs at 202-755-6980.

ACLI - Each quarter, ACLI publishes an investment bulletin titled, "Survey of Mortgage Commitments on Commercial Properties." The reporting life insurance companies hold two-thirds of the commercial mortgages held by U.S. life insurance companies. The survey appears about five months after the date of the data collected.

The survey shows the amount of mortgages committed during the previous quarter by seven types of property. A further breakdown is by fixed-rate, fixed-term mortgage, participation (income/equity), joint venture, land sale leasebacks and other structures. The average loan amount and interest rates and yields and debt service coverages are included. Next, the mortgages are divided into several classifications of company size. There are statistics on amortization provisions and classifications by loan size. Finally, there is a breakdown by loan type by states and by certain metropolitan statistical areas.

The "Survey of Mortgage Commitments" is sold for $55 a year. The quarterly report may be purchased by calling ACLI at 202-624-2370.

ACLI's "Delinquency and Foreclosure Survey" may be obtained when available, by telephoning 202-624-2126.

Realtors - The National Association of Realtors publishes twice a year a paper titled, "Financing Investment Real Estate." It is based on a questionaire that goes to a mailing list of nearly 15,000 commercial real estate members in the organizations associated with the NAR, such as the Certified Commercial Investment Members. The mailing is also sent to the members of the Urban Land Institute and commercial members of the National Association of Homebuilders. The respondents are asked to submit information on two recent financing transactions. The results are then tabulated to help evaluate trends, interest rates, terms of loans and other factors. A copy of the report may be obtained by calling Patria Smith at 202-383-1221.

Federal Reserve Bulletin - The Federal Reserved Board publishes each month a table titled, "Mortgage Debt Outstanding" which is broken down by banks, savings institutions, life insurance companies, federal and related agencies, and mortgage pools or trusts and individuals. For commercial mortgages, the division is between multifamily and commercial. Some of the figures come from the HUD survey, but the figures on "Individuals and Others" are derived from Federal Reserve estimates. "Others" include mortgage companies, real estate investment trusts, and the categories covered by HUD but not specifically listed in the bulletin tables. For example, the total holdings of "Individuals and Others" at the end of the third quarter of 1989 was estimated to be $81,009 million in multifamily loans and $69,690 million in commercial loans.

American Banker - The American Banker provides lists of the largest servicing portfolios of mortgages held by 88 commercial banks, 100 top thrifts and 300 mortgage companies. Unfortunately, there is no division between single-family residential and commercial mortgages. One can tell by the number of loans that seven of the top hundred mortgage companies service only commercial mortgages, but many other firms service both, and there is no way of knowing what percentage of the portfolio is commercial. There are no lists of the top firms or institutions which originate commercial mortgages. The American Banker Top Numbers 1990 is available for $55 from American Banker, One State Street Plaza, New York, New York 10004.

Section B - The HUD monthly survey

Sources of information for the HUD survey - For the nine lender groups, the HUD survey: * Uses its own survey for commercial

banks and mutual savings banks insured

by FDIC. * Obtain figures from the OTS for

savings and loans. * Uses figures from the ACLI for the

life insurance companies. * Contracts with a private research

firm to do a survey of private pension

fund mortgages and state and

local retirement fund mortgages. * Uses figures from a survey of the

MBA for origination and holdings of

mortgage companies. The MBA reports,

in addition to one-to-four-family

loans, multifamily residential

(FHA-insured and

conventional, separately) and nonfarm

nonresidential. Reports cover

only those loans made, originated or

closed directly with a borrower in

the name of the mortgage banking

firm. In the commercial real estate

financing business, multifamily

loans sold to Fannie Mae or Freddie

Mac are among those originated in

the firm's name. Most commercial

mortgages, however, are originated

in the name of the life insurance

company, savings bank, or other investor

with the mortgage banker

arranging the financing but not

funding the loan.

The information obtained by the

MBA from 78 companies is expanded

by a carefully designed expansion

factor to represent the

universe of mortgage banking

firms. This expansion factor does

not differentiate between one-to

four-family houses, multifamily and

nonresidential. * Uses statistics from Fannie Mae,

Freddie Mac, GNMA and the Farmers

Home Administration for statistics

on "Federal Credit Agencies." * Uses information from The Bond

Buyer, published by American

Banker, for statistics on tax-exempt

and taxable financing from state and

local investment agencies, which

are primarily state housing finance

agencies.

Accuracy of HUD survey of banks - For the commercial banks and the mutual savings banks insured by the FDIC, the Office of Financial Management at HUD conducts its own survey. In 1970, it initiated the survey with a sample of 250 banks carefully selected to ensure that the sample reflected commercial banking as a whole. Some of the banks originally contacted have gone out of business and some have now refused to respond to the survey, but HUD states that the larger banks are all represented. The sample is based on the universe of all real estate mortgages, not total assets held by banks, but only one expansion factor is used to translate the sample's results into totals for all banks. There are no separate expansion factors for single-family mortgages, multifamily or nonresidential mortgages. This expansion factor is revised every six months. A complicated software package containing information from the call reports, is used to determine the expansion factor.

The fact that HUD has been using a sample that is 20-years old with a questionnaire that has not been changed for 20 years provides cause for concern. One wonders about whether or not the expansion of the figures collected to the total of commercial bank financing is accurate. Holdings reported in the HUD survey are verified by the call reports submitted by the banks, but the monthly lending reports depend on the relationship of the sample collected to the entire commercial mortgage portfolio for all banks.

It should be noted from Tables 1 and 2 that the commercial banks in 1989 originated about 90 percent of the construction loans, which is no surprise, and about 77 percent of the long-term mortgages, which is a surprise to many real estate financing professionals.

One reason that so many construction loans become "long-term" loans held by commercial banks may be explained by an example. Suppose that a bank makes a three-year construction loan, giving the borrower sufficient time to find a permanent mortgage after construction is completed. Suppose the construction is completed within two years, but the borrower decides to keep its loan for the full three-year period. The HUD reporting requirements state that, when the construction is completed, the bank should treat the remaining portion of the loan as a long-term or permanent mortgage.

Section C - Need for more detailed

statistics

Financing by institutional lenders for multifamily housing and nonresidential buildings, both construction and long-term mortgages, totaled nearly $350 billion in 1989 and yet we know virtually nothing about these figures. Only the life insurance companies provide information on types of properties financed, locations of financing, structures for lending, interest rates and yields. Only the life insurance companies provide detailed information on delinquencies and foreclosures.

There may be no particular need for a monthly survey of mortgage lending from HUD; a quarterly survey would probably be sufficient. There is a need to determine the extent of financing for particular types of buildings. It is important, for example, to those building or owning hotels, or those who finance hotels, to know the increase or decrease in the amount of hotel financing quarter by quarter. Yields and interest rates should be collected after closings so that mortgage officers can compare return on commercial mortgage portfolios with that on bonds or common stocks or real estate ownership. Also, given the fact that many people blame commercial real estate for the savings and loan disaster, it is important to keep an accurate delinquency and foreclosure record for commercial real estate.

Some organization, perhaps the Federal Financial Institutions Examination Council, should work with the FDIC and OTS, plus the other lending groups in the HUD survey, to develop a good sample of commercial mortgage investors. The sample should reflect the commercial financing business as a whole, and should be changed from time to time as the business changes. Credit corporations and foreign mortgage lenders should be included. A group of professionals in commercial real estate financing should provide advice on what kind of information would be available or could be programmed on institutional computers and what information is particularly needed for the business. Detailed information on deliquencies and foreclosures may not prevent a real estate crisis, but it can provide help in developing lending strategies, and it does give valuable clues to the state of the economy.

A separate study is needed annually on real estate owned (REO). Three employees of the OTS did a survey of a sample and expanded it in the Spring of 1989 to estimate that REO on March 31, 1989, held by regulated and non-regulated financial institutions and the government totaled $16.7 billion in multifamily $5.9 billion in office, $2.6 billion in retail, and $1.5 billion in mortgages on hotels and motels. They could not provide percentages of REO to total commercial mortgages held. Their report has the splendid title of "Flying Down with REO" and it appeared in the December 1989 issue of the OTS Journal.

Those involved in the real estate financing business need more information about market share and the cost of doing business. We have no statistics, for example, on the amount of commercial mortgages serviced by mortgage bankers as distinct from those serviced by financial institutions. We do not know the share of commercial mortgage originations originated by mortgage brokers. The costs of origination and servicing are unknown. It's surprising that, given the importance of commercial real estate to the nation's economy, we know so little about the trillion dollars of mortgage holdings.

Eric Stevenson is senior staff vice president of the Mortgage Bankers Association of America, Washington, D.C. Linda McKenna, staff assistant at the MBA, assisted with statistical information.
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Title Annotation:what to look for and where to look for it
Author:Stevenson, Eric
Publication:Mortgage Banking
Date:Jul 1, 1990
Words:3226
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