The level of commercial/multifamily mortgage debt outstanding surpassed $2.5 trillion in the third quarter, growing 3.4 percent over the past three months, according to the Mortgage Bankers Association analysis of Federal Reserve Board Flow of Funds data.

At the end of the third quarter 2005, $2.5 trillion in commercial/multifamily mortgage debt outstanding was recorded by the Federal Reserve, an increase of $83.8 billion (a new record for a quarterly increase) or 3.4 percent from the second quarter. Multifamily mortgage debt outstanding stood at $641 billion at the end of the third quarter, an increase of $9 billion, or 1.5 percent, from the second quarter.

“The commercial/multifamily mortgage market continues to be buoyed by modest long-term interest rates, improving property fundamentals and strong equity flows,” said Doug Duncan, MBA’s chief economist and senior vice president of Research and Business Development. “The result is a quarter with record originations, record increases in mortgage debt outstanding, near records in CMBS issuance and record increases in commercial bank’s commercial/multifamily mortgage holdings.”

The third quarter also saw $38.3 billion in issuance of commercial mortgage-backed securities (CMBS), 78 percent more than the same quarter last year and 3 percent less than the second quarter’s record issuance level.

The Federal Reserve Flow of Funds data summarizes the holding of loans or, if the loans are securitized, the form of the security. For example, many life insurance companies invest both in whole loans for which they hold the mortgage note (and which appear in the Federal Reserve data under Life Insurance Companies) and in CMBS for which the security issuers and trustees hold the note (and which appear in the Federal Reserve data under CMBS issuers).

Commercial banks continue to hold the largest share of commercial/multifamily mortgages, with $1.1 trillion, or 43 percent of the total. Many of the commercial mortgage loans reported by commercial banks however, are actually “commercial and industrial” loans to which a piece of commercial property has been pledged as collateral and it is the borrower’s business income — not the income derived from the property’s rents and leases — that drives the underwriting, pricing and performance of the loan. Since the other loans are income property loans, meaning that the income primarily comes from rents, the commercial bank numbers are not comparable.

CMBS pools are the second-largest holders of commercial/multifamily mortgages, holding $499 billion, or 20 percent of the total. Life insurance companies hold $261 billion, or 10 percent of the total, and savings institutions hold $193 billion, or 8 percent of the total. Government Sponsored Enterprises (GSEs) and federally related mortgage pools, including Fannie Mae, Freddie Mac and Ginnie Mae, hold $128 billion in multifamily loans that support the mortgage-backed securities they issue (referred to here as federally related mortgage pools) and an additional $65 billion “whole” loans in their own portfolios, for a total share of 8 percent of outstanding commercial/multifamily mortgages.

Looking just at multifamily mortgages, the GSEs and Ginnie Mae hold the largest share of multifamily mortgages, with $128 billion in federally related mortgage pools and $65 billion in their own portfolios — 30 percent of the total multifamily debt outstanding. They are followed by commercial banks with $136 billion, or 21 percent of the total; savings institutions with $97 billion, or 15 percent of the total; CMBS issuers with $84 billion, or 13 percent of the total; state and local governments with $57 billion, or 9 percent of the total; and life insurance companies with $42 billion, or 6.5 percent of the total.

In the third quarter, commercial banks saw the largest increase in dollar terms in their holdings of commercial/multifamily mortgage debt, an increase of $49 billion, or 5 percent, which represents 59 percent of the total $83.8 billion increase. CMBS issuers increased their holdings of commercial/multifamily mortgages by $23 billion, or 5 percent, representing 27 percent of the net increase in commercial/multifamily mortgage debt outstanding.

In percentage terms, REITs saw the biggest increase in their holdings of commercial/multifamily mortgages — a jump of 20 percent — while nonfarm, noncorporate businesses saw the biggest drop (a net change of -11 percent).

The $9.2 billion increase in multifamily mortgage debt outstanding between the second and third quarters represents a 1.5 percent increase. In dollar terms, commercial banks saw the largest increase in their holdings of multifamily mortgage debt – an increase of $6.5 billion, or 5 percent, which represents 71 percent of the total increase. Federally related mortgage pools saw an increase of $1.8 billion, or 1.4 percent, in their holdings. Savings institutions increased their holdings of multifamily mortgage debt by $1.6 billion, or 1.7 percent.

In percentage terms, REITs recorded the biggest increase in their holdings of multifamily mortgages, 4.1 percent, while state and local government retirement funds saw the biggest drop, -64 percent.

The Mortgage Bankers Association is a national association representing the real estate finance industry.

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