Problem CMBS Loans Don't Seem to Be Getting Better

More than 80% of all loans that were a month delinquent in the fourth quarter of 2008 remained delinquent at the next scheduled payment date, according to Fitch Ratings.

These loans, according to Fitch, have become a more accurate predictor of future performance for U.S. CMBS. 4Q08 results for 30-day roll rates, which show the percentage of loans that were 30 days delinquent in the prior month that become 60 days delinquent, are more than twice the rate experienced during the first three quarters of 2008.

Fitch attributes the increased rate to deteriorating real estate fundamentals and borrowers' inability or unwillingness to cure property level issues. Loans that were 30 days delinquent missed the following month's payment more than 80% of the time in 4Q08, thereby triggering a loan default. This represents a sharp increase from the roll rate of the prior three quarters. Approximately 25% of 30-day delinquencies remained uncured in the 1Q08, rising to 40% in 2Q08 and 50% in 3Q'08.

"The majority of loans that were 30-days delinquent in the first three quarters of the year were brought current prior to the next payment date," said Fitch managing director Susan Merrick. "The fourth quarter of the year presented a new roll rate trend, as most loans that were 30-days delinquent advanced to a 60-day delinquency status."

Up until July 2008, 30-day delinquencies were not considered a meaningful predictor of defaults. The majority of 30-day delinquencies were due to chronic late paying borrowers, or errors in account set ups for newly originated loans. In addition, borrowers were more apt to carry a property through short-term stresses to avoid defaulting and incurring special servicing fees following two consecutive missed payments.

"In the current economic recession, borrowers are less inclined to come out of pocket for a property not covering debt service if the perceived value of the equity in the property has declined substantially," said Fitch managing director Eric Rothfeld.

Mr. Rothfeld added that Fitch expects more properties to fall behind in debt service payments as deteriorating real estate fundamentals have resulted in declining rents and increased vacancies.

"Borrowers are more uncertain about their ability to lease vacant space or ultimately refinance their maturing debt in an illiquid market," he said.