Commercial real estate mortgage loans showed continued increases in the rates of delinquencies, the Mortgage Bankers Association (MBA) reported in a recent survey. [MBA's Commercial/Multifamily "Delinquency Report" keeps records on delinquencies of commercial real estate loans.]

The increase in delinquency rates for commercial loan mortgages is expected to continue throughout 2010 and peaking in 2011. There is about $300 billion in negative equity overhang that needs be refinanced in 2010 and 2011. Many of these commercial loans will end up in foreclosure or sold as short sales or modified to either extend the loan maturity or reduce the principal balance.

In response to this situation, the government recently announced new guidance for prudent commercial mortgage work outs and commercial loan modifications.

In 2009 modifying loans consumed the $700 billion market for commercial mortgage securities. Frozen credit markets have limited refinance capacity for maturing loans in commercial mortgage-backed securities, resulting in a wave of defaults and exacerbating the impact of the U.S. economic recession.

The urgency has continued to rise since the fourth quarter of 2008 as special servicers have taken on hundreds of new loans due to default or a reduction in cash flow that may foreshadow a default.

Thousands of commercial mortgages valued at hundreds of billions of dollars are approaching a renewal date. By some estimates, two out of every three will no longer meet the original loan conditions and won't be able to refinance. And with prices for commercial properties expected to plunge, a vicious cycle may unfold much as it has in the nation's housing market.

A commercial mortgage meltdown is likely to prolong the nation's economic recovery. The falling prices in commercial real estate will lead to additional bank losses at a time when banks are sapped by home mortgage defaults and soaring credit card defaults.

Just like the housing meltdown, the commercial property dilemma is likely to begin at a slow pace that gains momentum with each passing week. The coming commercial mortgage loan problem is likely to be spread evenly across the country, to a great degree because of a down turning economy that's spared few companies.

Federal Reserve Chairman Ben S. Bernanke said a potential wave of defaults in commercial real estate may present a “difficult” challenge for the economy. Bernanke, testifying before the Senate Banking Committee in 2008, urged lenders to modify “problem” mortgages to avert defaults.

Christopher Dodd, the Connecticut Democrat who chaired the panel, told Bernanke that “some have suggested” the commercial mortgage market “may even dwarf the residential mortgage problems” in the U.S.