The default rate across banks' multifamily and commercial real estate mortgages declined to 1.6 percent in the first quarter, Chandan Economics has shown in its quarterly Bank Lending and Default Report. The overall rate of default (including loans 90+ days delinquent and in non-accrual) has now fallen for the twelfth consecutive quarter, reflecting write-downs, troubled debt restructurings, and the dilution of legacy loans by banks' new mortgage lending. The multifamily default rate has fallen to 0.7 percent, its lowest level since before the recession, while the slower recovery in the commercial pool has pulled its default rate down to 1.8 percent.

As legacy strains dissipate, bank call reports filed with the FDIC last week show large and smaller institutions reengaged in both commercial and development lending. Compared to a year earlier, net multifamily and commercial lending has increased by $80 billion; construction and development lending is up more than $12 billion. Amid the enthusiasm for larger lending volumes, Chandan Economics' first quarter loan-level analysis shows a continued migration in banks' underwriting standards. That heightened risk tolerance is captured in our models, which show higher cumulative default probabilities on first quarter originations.