The volume of commercial mortgages at risk of default has quintupled since the beginning of 2008 as a deteriorating economy has made it increasingly difficult for shops and businesses to keep up with their payments.

Special servicers, companies that collect payments from borrowers in distress on behalf of mortgage bond investors, reported $23.7bn of mortgages under their care at the end of the first quarter, according to Fitch Ratings.

That was five times higher than the $4.6bn of mortgages needing special servicing at the end of 2007. Servicers experienced an almost 50 per cent increase in the volume of distressed commercial mortgages in the first quarter alone.

Mortgages for multi-family residential properties suffering from the housing downturn represented the largest share of the troubled loans at 31 per cent, said Fitch. However, mortgages for shops and businesses were catching up, with retail loans at 28 per cent of the distressed pools.

“Retail properties were the first property type to see the effects of declining economic conditions and consumer spending,” said Stephanie Petosa, analyst at Fitch. “[We have] observed an increase in defaults of retail loans and expect them to eventually surpass multi-family as the highest property type concentration.”

Fitch says it expects commercial mortgage defaults to continue to increase this year. At the end of the first quarter, defaults and payments more than 60 days late were at 1.53 per cent of outstanding mortgages. Fitch said they could reach 4 per cent by the end of 2010.

Good luck to banks holding onto junk commercial real estate loans… They better hope the government has deep pockets to cover the coming wipe out.

That’s because the total value of residential properties fell $2.4 trillion in 2008, from $21.5 trillion in December 2007 to $19.1 trillion at of the end of 2008, according to a study from First American CoreLogic.

Worse, an additional 2.16 million properties could go underwater if home prices fall another 5%, the study said.

“We have way too much supply and not enough demand,” Sam Khater, senior economist for First American, told Bloomberg. “People aren’t going to purchase a home as long as prices keep falling, and someone who is worried about their job isn’t going to purchase a home either.”

The news comes the same day Toll Brothers Inc. (TOL), the largest luxury home builder in the U.S., reported its sixth consecutive quarterly loss – $88.9 million, or 55 cents a share, down from $96 million, or 61 cents, a year earlier.

Chief Executive Officer Robert Toll, citing research from the National Association of Realtors, said that, “ironically, now is a very good time to buy a home. With the decline in home prices and historically low mortgage rates, home price affordability is at an all-time high.”

Never shy about commenting on housing-related issues floating through Congress, Toll also used the press release that announced quarterly earnings as a soapbox for his solution.

“Many experts continue to believe we must first stem home price declines before we can resolve the nation’s economic and financial crisis. The recent stimulus bill shows that Washington is paying greater attention to our industry; however, we think more is needed,” Toll said in the statement. “We advocate a buyer tax credit of $15,000 to be made available to all buyers of homes, not just first-time buyers: We must motivate the entire food chain of home buyers to stop the decline of home prices.”

Starting today, at least one remedy will take effect.

As apart of President Obama’s $75 billion foreclosure prevention program, loan servicers will lower interest rates of struggling borrowers so total payments are no more than 31% of their gross income. In addition to subsidizing a portion of the reduction, the government will throw in a few incentives.

Source: One in Five Homeowners Underwater: Report