Commercial Realty Loans Buck 'Subprime' Trend.

While recent headlines on the residential mortgage side are all about rising defaults, delinquencies and foreclosures (particularly on subprime loans), the story on the commercial mortgage end is altogether different.

On the residential side, lender strategies that fueled homeownership growth among marginal borrowers with the use of all sorts of creative lending, in a historic low interest rate environment, have now come home to roost. In contrast, delinquencies on commercial mortgages have hit a new low.

Low commercial mortgage delinquencies have come about in a climate of good economic fundamentals that has enabled low vacancies and rising rents on various commercial real estate property types in the last few years.

Of course, the commercial mortgage sector could have its own version, albeit on a diminished scale, of the current residential-side problems a few years down the line, considering that commercial mortgage lenders too have gotten very aggressive in the last few years.

The question now is whether the subprime problems are going to spill over into the larger economy and cause a broader slowdown that could in turn impact the performance of commercial mortgages. This doesn't seem likely at the moment considering that the economy is doing fine taking into account other factors such as growth in the business sector, with technology at the helm, that is also fueling strong job creation.

These considerations have kept the Federal Reserve in a holding pattern on interest rates, with the central bank's concerns about inflation making it hold off on an interest rate cut that might otherwise help the economy tide through the housing slowdown. And on the other hand, while an interest rate hike could help deal with concerns about inflation, it could negatively impact the housing sector.

Against this background, two rating agencies report a decline in the delinquency rate on properties backing commercial mortgage-backed ...