Commercial real estate loans grow more distressed

August 24, 2009

Realpoint, the ratings firm that specializes in bonds backed by commercial real estate properties, is out with its July delinquency report on loans in CMBS deals and it has lots of great data tidbits on the building pressure on distressed loans.

The amount of loans delinquent for three months or more – an indication of extreme distress – now stands at $11.23 billion, up from $9.57 billion in the previous month. What’s interesting about the 90-day plus delinquencies is that they’ve been rising at a much faster clip than say foreclosures and REO (when the property is turned over to the bank). Check out chart on page 9 of the full report here.

It could indicate that a wave of defaults is about to crash.

Part of the reason is special servicers, those charged with helpingĀ  borrowers work out a loan when they can no longer stay current on their payments, are still trying to figure out whether these loans are worth saving. Some, presumably will not.

Separately, Frank Innaurato of RealPoint notes that some loans, which are still current on their regular payments, have moved into special servicing anyway in anticipation of refinancing problems on the horizon. Typically, borrowers avoid special servicing unless they’re desperate since it signals a higher likelihood of default.

Here are some of the other key points in the report:

  • Based upon an updated trend analysis, we project the delinquency percentage to grow in
    excess of 6% before year-end 2009 (potentially approaching and surpassing 8% under more heavily stressed scenarios).

  • Nearly 54% of delinquent unpaid balance through July 2009 came from transactions issued in 2006 and 2007, with over 28% of all delinquencies found in 2006-issued transactions. When we extend our review to include the 2005 vintage, an additional 16% of total delinquency is found; thus over 70% of CMBS delinquency comes from 2005 to 2007 vintage transactions.

  • Throughout 2009, we expect to see continued high delinquency by unpaid balance for these three vintages due to aggressive lending practices prevalent in such years. We also expect to see some loans from the 2008 vintage to show signs of distress and default in cases where pro-forma underwriting assumptions fail to be realized.

In other words, on this last point, loans made based on rosy cash flow and property assumptions continued into 2008, well after the world had woke up to the downside of loose lending standards.

And one more point worth mentioning. Under the “other concerns/dynamics” the ratings firm has this point:

Growing balloon default risk from highly seasoned transactions for both performing and nonperforming loans coming due that are unable to payoff as scheduled, due mostly to a lack of
refinance availability or further distressed collateral performance.

Balloon payments typically are made 5, 7 or 10 years into the life of a loan so the vast bulk of the delinquencies we’re seeing now are based on borrowers unable to keep up with their regular interest/principal payments. If the market doesn’t open up soon, this is going to be problem for all kinds of borrowers, not just those caught up in the credit boom euphoria.


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