MetLife Inc.'s chief investment officer, Steven Kandarian, said commercial mortgage defaults will rise in the next two to three years after the economic slump subsides.

"The worst is to come," Kandarian said in an interview Wednesday in New York, where the biggest U.S. life insurer is based. "Typically there's a lag between when the economy softens and when the defaults actually occur," he said.

The default rate on commercial mortgages held by U.S. banks may rise to 4.1%, the highest in 17 years, by yearend as debt for refinancing remains scarce and the recession drags down rents, the research firm Real Estate Econometrics LLC said in a report published Tuesday.

Kandarian, whose portfolio contains about $36 billion in loans on commercial property, said he expects delinquencies for MetLife to be "relatively small."

"Like all firms that hold these kinds of mortgages, we'll have some issues," Kandarian said.

The insurer, which also owns a federally regulated bank, underwrote loans "very carefully" to minimize the risk of losing principal and expects to fund more mortgages as competitors retreat from the market, he said.

Kandarian is seeking higher returns from MetLife's $300 billion portfolio after a 23% slide in first-quarter investment income helped push the company into its first loss since 2001.

He is drawing down the insurer's cash holdings to buy corporate debt, and he said in May that he was considering adding securities backed by commercial mortgages that were selling below face value.

MetLife's portfolio won U.S. endorsement in May when the Federal Reserve Board's stress test concluded that the company was adequately capitalized to withstand a prolonged recession.

The insurer is considering whether to buy depressed assets tied to the housing market through the Treasury Department's Public-Private Investment Program for troubled assets.

The program was designed by federal officials to coax private capital back into the credit markets by offering a degree of protection against losses.

Kandarian, who said earlier this month that MetLife was considering the public-private program, cautioned that public criticism of previous U.S. initiatives under the Troubled Asset Relief Program could dissuade MetLife.

"The tone in Washington is really an issue for anyone participating" in the public-private program, Kandarian said. "You may participate and you might make money on it or you may lose money. If you make money, and in some people's eyes too much money, may someone come back later on" to complain?

MetLife shares were up 41 cents, to $34.44, at 10:24 a.m. in New York on Wednesday.

The shares fell 42% in the past 12 months as the recession weighed on assets backing policies.

MetLife makes loans on commercial property, including office buildings and shopping centers. It also originates loans to the agriculture industry.

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