Commentaries

Commercial property borrowers falling short

Commercial real estate loan delinquencies are on the rise again, and September’s increase is the largest ever, according to Moody’s Investors Service’s latest tally of those loans included in CMBS deals.

Delinquencies stand at 3.64%, up from 0.54% a year ago and 0.41 percentage points higher than August. The hotel sector showed the biggest increase in late payments, up 0.79 ppt to 4.97%. The multi-family housing sector now stands at 6.09% – the highest of any property type.

In terms of region, the South has been the hardest hit followed by the Midwest.

Commercial real estate loans grow more distressed

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 helping  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.

The subprime to prime mortgage handoff

Data released by the Mortgage Bankers Association confirms the trend that prime borrowers are the ones to worry about.

While the percentage of mortgages entering the foreclosure process in the 2Q held relatively steady at 1.36%, the change in composition is noteworthy.

From the MBA press release:

While the rate of new foreclosures started was essentially unchanged from last quarter’s record high, there was a major drop in foreclosures on subprime ARM loans.  The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase. As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts.  A year ago they accounted for one in five.

Another interesting bit for taxpayers – there’s been a big jump in FHA foreclosures, currently at 1.15% percent. The FHA is essentially a government mortgage insurance agency so foreclosures. While the FHA brags on its website that it’s self-funded, if the losses become too much, it’s safe to assume in the current environment that the government would extend a helping a hand.

Also, it’s the FHA that essentially took on subprime lending last month when it agreed to give mortgages with negative equity in their homes. In July, it loosened its criteria so homeowners significantly underwater could refinance into an FHA loan. These borrowers can now borrow 125% of their home’s worth, up from 105%.

UPDATE: MBA just got back to me about what’s included in their prime category and it looks like Alt-A loans are mostly categorized as prime by those banks participating in the survey. That could be skewing things since Alt-A loans by definition are less than prime and extremely loose lending standards during the boom have made them look more like subprime loans. For example, borrowers taking out an Alt-A loan could state their income rather than prove it.

Banks must brace for creditcard pile-up

Credit card delinquency figures bring to mind the rock classic “You Ain’t Seen Nothing Yet.”

Ever after today’s record report — delinquencies jumped to 6.6 percent of all card debt in the first quarter from 5.52 percent — the peak may still be far off.

The sunniest forecast in the Obama administration’s stress test suggested that credit card loss rates for banks would climb to between 12 and 17 percent in total over the next two years. This assumed an unemployment rate averaging just 8.4 percent in this year. Based on the gloomier scenario of 8.9 percent joblessness, the two-year write-off climbs to 20 percent.

As we race past the government’s worst assumptions, the risks mount that consumer distress will plunge the banks back into crisis. Despite recent rising profits, bankers will need to make sure that their seat belts are fully fastened for the turbulence ahead.

The dismal job market bodes ill for default rates. The United States is continuing to hemorrhage jobs at an unexpectedly rapid pace. It would take only another few months of job losses at last month’s rate to push unemployment above 10 percent, according to Decision Economics. If June’s payroll loss is sustained — an unlikely but possible outcome — unemployment would climb to 11 percent in less than six months.

Credit card issuers may also be dismayed that once Americans lose their jobs they are taking ever longer to find new work. The share of the jobless without work for more than six months is up to almost 30 percent — the highest level since records began in 1948.

While many people can continue to service their debts for a couple of months, half a year of unemployment can cause all but the most prudent saver to default. Benefits replace roughly half of previous wages, according to the Economic Policy Institute in Washington. A report issued Tuesday by Standard & Poor’s indicates that the loss rate on credit cards has risen faster than joblessness over the past six months.