Commercial Mortgage Backed Security Delinquencies Hit Record High

On Mish’s blog I cam across the latest Realpoint Delinquency Report:

In January 2010, the delinquent unpaid balance for CMBS increased by another $4.3 billion, up to $45.94 billion from $41.64 billion a month prior. The overall delinquent unpaid balance is up 326% from one-year ago (when only $10.79 billion of delinquent unpaid balance was reported for January 2009), and is now over 20 times the low point of $2.21 billion in March 2007. The distressed 90+-day, Foreclosure and REO categories grew in aggregate for the 25th straight month – up by $7.42 billion (28%) from the previous month and over $27.95 billion (508%) in the past year (up from only $5.51 billion in January 2009). This included a substantial jump in 90+-day delinquency in January 2010.


Other concerns / dynamics within the CMBS deals we are monitoring which may affect the overall
delinquency rate due to current credit market conditions in 2010 include:

  • Balloon default risk is growing rapidly from highly seasoned CMBS transactions as loans are unable to payoff as scheduled. In many cases, collateral properties that have otherwise generated adequate / stable cash flow results are not able to refinance their balloon payment at maturity, due mostly to a lack of refinance proceeds availability. This scenario has added to loans with distressed collateral performance in today’s credit climate.
  • Some five-year and seven-year balloon maturity risk is also on the horizon for more recent vintage pools from 2003 through 2005 where little no amortization has taken place due to interest-only payment requirements. Within this area of concern, large floating rate loan refinance and balloon default risk continues to grow, as many of such large loans are secured by un-stabilized or transitional properties that are soon to reach their final maturity extensions (if they have not done so already), or fail to meet debt service or cash flow covenants necessary to exercise in-place extension options.
  • Aggressive pro-forma underwriting was the norm on loans originated for 2005 through 2008 vintage transactions, many with debt service / interest reserves required at-issuance. The balance of such reserves is declining more rapidly than originally anticipated, and many are close to default or transfer to special servicing (if not already there). Exacerbating such concern is the large unpaid balance related to loans underwritten with DSCRs between 1.10 and 1.25 as any decline in performance in today’s market could cause an inability to meet debt service requirements. This is especially evident with the partial-term interest-only loans that will begin to amortize in the near future, or those that have recently converted.
  • Declined commercial real estate values and diminished equity in collateral properties may prompt more struggling borrowers with marginal collateral performance to walk away from properties.
  • A cautious outlook for the hotel sector remains as many sizeable hotel loans from 2005-2008 vintage pools have reported poor or declined results in 2009 (especially on the luxury side) or were transferred to special servicing for imminent default and / or debt relief. Many properties have had to significantly lower rates to maintain an acceptable level of occupancy across the country and in some cases have experienced severely distressed net cash flow performance as a result. Our expectations are that even more of these loans may be asking for debt relief in the near future and may ultimately default if a resolution is not reached.
  • Continued weakening in retail performance may lead to increased loan defaults as we have not yet experienced the full affect of retailer consolidation, closings and possible bankruptcy (i.e. many loans secured by collateral with troubled retailers as an active anchor).
  • Layoffs, bankruptcies and downsizing have impacted office vacancies across most MSAs, including historically strong markets like New York City, and this trend is expected to continue.
  • External factors mitigating risk include indications that credit liquidity is showing signs of improvement via foreign investors, and public REIT’s are showing the ability to restructure balance sheet debt. Political and governmental focus on job creation in 2010 along with increased support of mid-tier community banks to ease the credit crunch and stimulate lending may affect the overall commercial real estate markets as a whole.
  • On the other hand, as three new issue deals closed in late 2009 and more new issuance is expected to come to market in 2010, some of the delinquency growth we have experienced in the trailing 12-months may yet be offset somewhat by any new issuance’s speed to market in 2010.
  • In addition, liquidations of severely distressed defaulted loans picked up speed in the latter half of
    2009, while modifications and forbearance at the loan level continue to be discussed between
    borrowers and special servicers that may also result in a delinquency “leveling-off” period.


Special servicing needs have had a huge increase over the past year. We are about one year into Commercial Property Crunchtime and it seems to be gaining steam.

The impact of CMBS TALF which runs out by the end of this month has of course been negligible. All in all, about $9.8 billion have been settled since its inception, according to the NY Fed’s TALF announcements.

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