Image: Thinkstock
Image: Thinkstock

Life insurers got burned in the big commercial real estate bust of the 1990s. But as the sector emerges from a smaller Great Recession-era bust, insurers are showing no indication of "once bitten, twice shy."

Insurers are on track to make 2014 their second record CRE lending year in a row, according to David Stevens, president of the Mortgage Bankers Association. Last year, "originations for life insurance companies in the first three quarters of 2013 ran 20% ahead of the first three quarters in 2012, with originations in the second and third quarters the highest on record," he told a recent commercial and multifamily conference the MBA held in Orlando.

And commercial mortgages have increased as a percentage of mortgages held in life insurer portfolios, from 92% in 1992 to 94% as of 2012, according to numbers from the American Council of Life Insurers trade group.

Still, a look at the delinquency and foreclosure performance of these loans shows why insurers are confident about holding commercial mortgages. Their aggregate portfolio is absolutely pristine. Vigorous underwriting has resulted in commercial mortgages overdue, foreclosed or restructured at just 50 basis points of an industry portfolio of $331 billion in 2012. That's even better than their single-family loan performance, which is also outstanding.

Of course, one defaulted residential mortgage doesn't threaten a lender's existence. But one big commercial mortgage default certainly can, as many thrifts that diversified into commercial mortgage lending found out the hard way in the 1980s and early 1990s (and as banks that made construction loans learned during the most recent downturn).

CRE loans in commercial mortgage-backed securities are also seeing a rapid improvement in delinquency, but are nowhere near as impressive as the books of business the insurers are showing. Delinquency rates fell by 18 basis points in January, according to Trepp LLC, and the current rate of 7.25% is 225 basis points lower than 9.5% a year before.

Insurers were active in both commercial and residential mortgages a generation ago (Prudential Home Mortgage was a top ten residential lender), but have steadily reined in residential in favor of commercial. They are also a significant lender in farm mortgages, a niche that combines aspects of both residential and commercial lending (since the farm is a place of business as well as a home).

Residential mortgages accounted for just 10 basis points of life insurance total portfolios in 2012, according to ACLI, while farm mortgages made up 30 basis points and commercial mortgages 5.7%.

The 6% of assets from mortgages doesn't make up the total insurer sector involvement, though. Life insurers are also huge holders of mortgage-backed securities, and also make some direct investments in real estate.

Insurers held more than half a trillion dollars in MBS on their books as of 2012, or 10.1% of total assets, plus $30 billion in real estate, according to ACLI. All in, that's about one sixth of their total assets.

Top servicers of life insurance commercial mortgages, according to MBA, are Prudential Asset Resources, at $39 billion; GEMSA Loan Services, with $36 billion; and Met Life at $34 billion. Met Life services the biggest average loan size, at $58 million.

MBA's Stevens is confident the good times are at hand again for commercial and multifamily debt, which rose to $2.5 trillion in 2013. "With commercial property incomes and values once again supporting borrowing, commercial real estate lending has reawakened," he told the MBA commercial mortgage conference. "Across all investor groups—banks, life insurance companies, CMBS, Fannie Mae, Freddie Mac and FHA—the appetite for commercial and multifamily mortgages remains strong."

Now, if we could only persuade commercial real estate developers not to overbuild!

Mark Fogarty, Editor at Large at National Mortgage News, is starting a regular blog of analysis and commentary based on his 30 years covering the mortgage industry.

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