The default rate across banks' multifamily and commercial realestate mortgages declined to 1.6 percent in the first quarter,Chandan Economics has shown in its quarterly Bank Lending andDefault Report. The overall rate of default (including loans 90+days delinquent and in non-accrual) has now fallen for the twelfthconsecutive quarter, reflecting write-downs, troubled debtrestructurings, and the dilution of legacy loans by banks' newmortgage lending. The multifamily default rate has fallen to 0.7percent, its lowest level since before the recession, while theslower recovery in the commercial pool has pulled its default ratedown to 1.8 percent.

As legacy strains dissipate, bank call reports filed with the FDIC last weekshow large and smaller institutions reengaged in both commercialand development lending. Compared to a year earlier, netmultifamily 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 inbanks' underwriting standards. That heightened risk tolerance iscaptured in our models, which show higher cumulative defaultprobabilities on first quarter originations.