REO Sales Cause CMBS Delinquency Rate to Lower

Fitch said $622 million of REO assets were sold in June, with the majority of these transactions coming from 2005-2007 vintages. Image: ThinkStock

Commercial mortgage-backed security delinquencies fell to their lowest level in three years due to a surge in REO sales, according to index results from Fitch Ratings.

Delinquent CMBS loans declined 19 basis points in June to 7.18% from 7.37% a month earlier. The New York-based ratings agency said these figures have not been this low since March 2010. 

Trepp LLC recently revealed similar findings for CMBS late-pays in June.

Fitch said the decline was driven by the sale of $622 million of REO assets, with the majority of these transactions coming from 2005-2007 vintages.

During the prior month, only $262 million in bank-owned assets were sold.

The June REO sales were led by two loans: the Silver City Galleria and Continental Towers, both of which sold for significant losses, Fitch stated.

Continental Towers, a three 12-story office building in Rolling Meadows, Ill., was backed by an original $115 million loan but sold for a 78% loss. Additionally, the Silver City Galleria mall located in Taunton, Mass., was sold for $22.1 million, representing a loss of nearly 91%.

At issuance in 2005, Silver City Galleria was appraised for $200 million and was burdened by a $138 million first mortgage. As of June, the outstanding principal balance was $119 million and this was the largest loan (7.5%) in the JPMCC 2005-LDP4 pool.

The retail mall, which is anchored by JC Penney, Dicks Sporting Goods and Best Buy, Sears and Macy’s, transferred to special servicing in October 2009 after experiencing cash flow issues due to occupancy declines because of the financial crisis. The asset became real estate owned in December 2011 after the original borrowers, a partnership between General Growth Properties and the Teachers Retirement System of the State of Illinois, gave the property to the lender.  

In September 2011, the mall was appraised at $56 million—substantially less than the issuance appraisal—because of the vacancy issue, as well as lower rental income and shorter term renewals on existing tenants. 

Furthermore, the outlook for CMBS delinquencies continues to be positive as Fitch expects several other large REO assets to be sold in the near-term. If this happens, it would push the CMBS delinquency rate down even more.

For example, special servicer ORIX Capital Markets is expected to sell a $185 million and $165 million portfolio. Other sales that are forecasted to occur in upcoming months are the $124 million The Shops at Dos Lagos and the $115 million Gwinnet Place. Also, the $133 million disposition of Duke Cleveland East Suburban portfolio will be reported within the next month.

Overall, the sale of these four assets would lower the CMBS delinquency rate another 17 bps to approximately 7%, Fitch projects.