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Commercial Mortgage Delinquencies May Not Peak Until 2012

Posted by Larry Doyle on January 11, 2010 2:50 PM |

I have yet to find a financial site that aggregates as much quality material as Wall Street Pit. With over 160 authors from leading universities, central banks, think tanks, and private enterprise, there is little that gets by this crowd. The quantity of the Wall Street Pit material is only exceeded by the quality. Amidst my reading and reviewing today, this commentary stood out as it addresses perhaps our weakest domestic economic link, commercial real estate.

Commercial real estate [CRE] continues to face significant pressures in the U.S. as the level of delinquencies increases.
Defaults on hotel, office, and retail loans are driving up delinquency rates for CRE loans, with strong concentrations in the multifamily segment, which represents parts of the US hit hardest by the housing crisis, Fitch Ratings said in its latest Loan Delinquency Index report.

According to the results, released Monday, rising defaults among all property types led to a 42 basis point increase in U.S. Commercial Mortgage Backed Securitie [CMBS] delinquencies to close out 2009 at 4.71%.

The report also quotes firm’s Managing Director Mary MacNeill as saying “delinquencies have increased approximately five times from a year ago”, and “they may not peak until 2012″.
Fitch cited currently 25 delinquent loans greater than $100 million, compared to four in December 2008.

Here are some more data from the ratings agency report:
“Of the five main property types, each has seen an increase in delinquencies of over 195% since December 2008, ranging from multifamily with 196% increase, to hotel, with a 1,175% increase. Delinquency rates for these properties are as follows (along with total dollars delinquent versus total dollars delinquent as of December 2008):

–Office: 2.66% ($3.9 billion vs. $603.5 million);
–Hotel: 9.13% ($4.6 billion vs. $363.7 million);
–Retail: 4.25% ($5.7 billion vs. $1.2 billion);
–Multifamily: 7.54% ($5 billion vs. $1.6 billion);
–Industrial: 3.57% ($851.3 million vs. $186.2 million).

Due to the increased volume alongside weaker underwriting parameters for later vintages, defaults increased significantly from the end of 2008. The four most-recent vintages have gone from representing just over half of delinquencies by balance to over 75% of the total at the end of December. They have the following delinquency rates (along with total dollars delinquent versus total dollars delinquent as of December 2008):

–2005: 3.16% ($2.4 billion vs. $420.1 million)
–2006: 5.11% ($5.6 billion vs. $1.1 billion);
–2007: 5.22% ($8.1 billion vs. $631.9 million);
–2008: 7.33% ($312.8 million vs. $236.5 million).

At this time, vintage delinquencies remain somewhat proportional to each vintage’s contribution to the Fitch universe. However, Fitch expects continued cash flow stress will lead to increased delinquencies among these vintages. The percent of delinquent loans versus the percent of the Fitch-rated universe are as follows:

–2005: 11.19% v. 16.68%;
–2006: 26.04% v. 24.01%;
–2007: 37.50% v. 33.80%;
–2008: 1.45% v. 0.93%.

Fitch’s delinquency index includes 2,143 loans totaling $21.6 billion of the Fitch rated universe of approximately 42,000 loans comprising $457.5 billion that are at least 60 days delinquent or in foreclosure.”

The picture certainly isn’t pretty. Will CRE serve as a drag on our economy until 2012? Will banks be able to withstand these CRE hits to capital? Will banks extend CRE loans and pretend the property values haven’t declined? Lots more questions than answers currently. Suffice it to say, the pain in this corner of our economic landscape will continue for the foreseeable future.


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