How Commercial Mortgage Delinquencies Affect Residential Mortgage Loan Rates

When commercial mortgage delinquencies are high, mortgage lenders have a hard time managing their own finances. Mortgages are actually an asset to a bank. They represent a future revenue stream, and this potential revenue is usually very large on a commercial account. Once a mortgage falls into default, though, it is considered a liability, or a loss, for a mortgage company. Though delinquency is not default, high delinquency rates typically indicate high default rates, and this can compromise the mortgage industry.

Lenders are Borrowers, Too

Lenders borrow money. Many people forget this critical fact. However, all lenders have to borrow from each other and from the public. Lenders are not funded 100 percent by the mortgages they lend or even the deposits they take. A portion of these assets must always remain in the lender's accounts as protection against default. In order to expand and make new loans, then, the lenders must take new loans. This is why the industry is called the credit market; it is about the multiple transactions, bank to bank and retail included, that take place in order for a single mortgage to be issued.

Lenders need Good Credit

When a lender asks for a loan, the lender goes through the same process you do as a borrower. For example, if Bank A would like to issue a number of CDs in order to generate cash income in the short term, potential investors in these CDs want to know about Bank A. Specifically, they want to know if Bank A has a good income, a good record of repaying debts and is offering a healthy interest rate. If Bank A currently has a lot of commercial mortgages that are nearing default, then the assets Bank A is holding may soon be turned to liabilities, compromising the bank's ability to repay the investors. Investors will look elsewhere.

Investors Need Options

Investors turn away from the opportunity to place funds with Bank A because of the potential liabilities it holds in the commercial mortgage market. As a result, there are no funds in Bank A to continue to make loans. Investors go to Bank B, instead. In a credit market collapse, Bank B may have the same problem as Bank A, and Bank C and Bank D. The result? Investors will turn away from investments into credit institutions for a period of time. The commercial mortgage delinquencies must first be settled before any investor feels comfortable loaning money to these banks again.

Lack of Options Drive Up Rates

As a retail borrower, you go to Bank A for a loan. Then Bank B, C and D. Each of these banks is suffering from the same problem: it is short on cash and cannot get a loan. The banks also know, however, that the other banks are in the same position. This means they are aware you, the retail borrower, cannot simply go to another place for the loan. They will have to be choosy about who they select to make a loan to. If you are selected, you may face very high interest rates because of the lack of competition in the current market. The power is in the bank's hands at this point.