Don't Overlook Commercial

Residential mortgage servicers have been buoyed by strong growth in mortgage debt outstanding in recent years. While the pace in growth is expected to slow, leading economists are still projecting growth of 8% to 10% annually in upcoming years.

While that is strong, the real estate lending industry shouldn't focus exclusively on the residential sector. An increasing number of firms with an appetite for real estate lending are making hay in the commercial real estate lending sector as well.

Just look at the growth in commercial mortgage debt outstanding. Between the second and third quarters of last year, commercial mortgage debt outstanding grew by 2.4%, or $51.7 billion, according to the Mortgage Bankers Association. That quarterly growth rate means commercial mortgage debt is growing at roughly a 10% annual rate. And industry leaders expect capital to continue flowing into the commercial real estate sector this year.

And there is now some $2.2 trillion in commercial mortgage debt outstanding. That's a big market for lenders to tap into.

To be sure, servicing rights in the commercial sector are not cheap. Just ask any of the lenders that compete for the right to service commercial mortgage-backed securities transactions. But the commercial sector has some tempting advantages, including loan terms that limit prepayments in many cases and loan balances that are exceptionally large compared to residential transactions.

Having said that, the commercial mortgage sector also poses some challenges. The sector includes a wide variety of asset types that each have their own peculiar features. Commercial realty values have a tendency to be more volatile than residential values, making loan performance a trickier issue to manage. Some experts have expressed concern about the run up in real estate values in recent years.

And the competition is strong, with commercial banks reporting the largest holdings of commercial real estate debt. But participants also face competition from the CMBS market, life insurers, government-sponsored enterprises, thrifts, finance companies and real estate investment trusts. But the growth rate can't be overlooked.

Copyright 2005 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.mortgageservicingnews.com