WASHINGTON, DC-Banks, GSEs and life insurance companies were among the institutional investors ratcheting up demand for mortgage debt in the second quarter, according to the Mortgage Bankers Association. The level of commercial/multifamily mortgage debt outstanding increased by $24.5 billion, or one percent, in the second quarter of 2013, according to the MBA, driven by these investors groups increasing their holdings.

The $2.45 trillion in outstanding commercial/multifamily mortgage debt was $24.5 billion higher than the first quarter 2013 figure. Multifamily mortgage debt outstanding rose to $875 billion, an increase of $10.9 billion, or 1.3%, from first quarter 2013.

"This past quarter we saw a strong appetite among different investor groups for commercial and multifamily mortgages in their portfolios," Jamie Woodwell, vice president of Commercial Real Estate Research for MBA tells GlobeSt.com.

"Even CMBS – there was a big run-off of multifamily loans through pays offs and pay downs," he adds.

Woodwell attributes the increased appetite to a number of reasons, including the improving loan performance – delinquency rates for most major asset classes continued to decline in the last quarter – and improving real estate fundamentals.

The breakdown in demand translates into a $16 billion increase in holdings by banks, or a 2% rise; Fannie Mae, Freddie Mac and FHA stepping up their multifamily holdings and guarantees by $5.6 billion, or 2%; and life insurance companies increasing their commercial and multifamily holdings by $4 billion. Although the absolute value of their investments was low relatively speaking, though, life insurance companies saw the greatest percentage jump, at 12%.

REITs were another institutional player to exhibit outsized appetite for mortgages; in percentage terms, REITs recorded the largest increase in holdings of multifamily mortgages, at 31%.

These positive trends, though, will likely reverse themselves if the US defaults on its debt this month if the debt ceiling is not raised by Congress.

Two summers ago when it just looked like the US might default the market reaction was ugly, Woodwell says.

"We saw it had a direct impact not only on base Treasury rates but also on spreads that lenders demanded for lending money not just in commercial real estate but in a range of different asset types," he says.

"So one would expect that if we get close to a debt ceiling issue and /or go over it, it will have direct impact on base rates used to determine mortgage rates as well as on spreads that lenders would require borrowers to borrow money."