The tide of underwater commercial mortgages is rapidly turning into the Great Flood. More than 36% of the $270 billion in commercial real estate loans maturing in 2010 have mortgage balances greater than the value of the underlying property, according to data from Oakland, Calif.-based research firm Foresight Analytics.

And the worst is yet to come. By 2011, 49% of maturing loans will have negative equity, followed by 63% in 2012, 61% in 2013, and 57% in 2014. In all, loans expected to mature in the next five years with balances greater than their collateral value total $770 billion.

“Dollar volume of maturities that is more and more underwater will become a greater problem for lenders of all types with the passing of each year,” says Matthew Anderson, a partner at Foresight Analytics.

Last year's loan extensions could add to the volume of underwater maturities this year, based on Anderson's estimate that 60% of mortgages with 2009 maturities were granted one-year extensions. “That obviously is just going to add to that [36%] figure.”

By contrast, only 16% of commercial mortgages that matured in 2009 had negative equity, Anderson estimates. That means that — barring an unexpected rebound in pricing — lenders have only begun a lengthy, uphill climb to deal with maturing mortgages that outweigh underlying asset values.

“There is a wave of problems coming there,” says Adrian Corbiere, executive vice president of capital markets at Chicago-based Cohen Financial. “At some point in time, [lenders] will have to either sell those loans at a discount or foreclose and get rid of the property.”

Like many financial service providers, Cohen Financial is helping lender clients with loan workouts, sales and other methods of dealing with troubled debt. “The larger banks are staffed to handle their workouts,” Corbiere says, “but the smaller banks are not.”

Among lender types, banks hold the most loans maturing through 2014, a total of $785 billion. Of that amount, 68% or $535 billion are projected to have negative equity at maturity.

Lenders may simply extend maturing loans, adding to the next year's troubles, Anderson says. Alternatively, some panic or event could pressure lenders to unload problematic loans in droves, taking hefty losses.

Loan extensions only delay a decisive fix, Corbiere says. “It's the performing non-performing loan,” he says. “The bank says I know the property is underwater, but the borrower is still making payments and has big savings accounts, so I'm not going to put the loan into default.”

Federal regulators would like to force lenders to write down problem loans, Anderson says, but know doing so would reduce available credit.

Yet some lenders are getting serious about loan values, Corbiere says. “The banks have been pushing their problems ahead of them and they're finally realizing they are going to have to have some write-downs.”

Percentage of Maturing Mortgages Underwater to Explode

As commercial mortgages continue to mature through 2014, the percentage of loans with loan-to-values that exceed 100% is projected to increase.

Maturity year Total amount maturing ($billions) Maturing loans with current LTV greater than 100% Amount ($billions)
2009 $248 16% $41
2010 $270 36% $96
2011 $296 49% $144
2012 $306 63% $193
2013 $303 61% $184
2014 $266 57% $152

Source: Foresight Analytics