No Plateau for CMBS Delinquencies

Servicers of securitized commercial mortgage loans beware of the still-elevated delinquency rates.

Mixed reviews continue to pile up indicating commercial mortgage market performance during the third quarter has equal chances of improving and deteriorating.

“Negative market pressures” such as persistently high unemployment, which directly affects office and industrial demand and secular changes in how retail real estate interacts with consumers, are affecting all vintages of originations by keeping the delinquency rates elevated, says David Tobin, principal of Mission Capital Advisors in New York.

The July Trepp CMBS delinquency rate report showed the U.S. CMBS delinquency rate set an all-time high once again increasing 18 basis points to 10.36% and marking the fifth straight month of increases since February.

A total of $59.5 billion in CMBS loans are now delinquent and growing despite Trepp’s expectations to see the rate plateau in July.

The main reason was “a wave of 2007 loans that had reached their balloon dates but could not be refinanced,” Trepp said.

According to Tobin, as evidenced by Moody's CPPI Six City Index, the continued divergence of real estate recovery is driven by pronounced differences between the gateway markets in the U.S., which consist of 48% of real estate stock above $2.5 million, and the remainder of the market “suggests that vintage CMBS loan performance will continue to exhibit similar delinquency.”

It means special servicers and banks with similar loan collateral should be concerned of this continued delinquency “despite generational lows in capitalization and interest rates,” he said.

While Trepp’s senior managing director Manus Clancy said the anticipation for the next six months is neither a lot of improvement nor many more increases in the rate.

Other recent data show some signs of improvement.

According to Barclays, after a steady deterioration through much of 2012, in July, the delinquency rate of securitized commercial mortgage loans “showed the first signs of stabilizing.”

While the 30 days plus CMBS delinquency rate remained flat compared to last month at 10.3%, the 60 days plus delinquency rate dropped 30 bps to 9.6%.

Barclays’ analyst Keerthi Raghavan attributed most of the decline to a nearly 90 basis points decline in the delinquency rate of 2006 vintage loans by the end July at 9.6% of the total outstanding.

In July liquidation volumes were up slightly from last month’s levels as over $1 billion in securitized loans were disposed from CMBS trusts with losses of less than 3%. A number of matured loans also paid off with small losses, “likely a result of sundry servicer fees,” Raghavan wrote.

Different maturation dates affected the CMBS market performance with some five-year term loans were not paid in full and are past their maturity date in 2011.

Maturity defaults on five-year and 10-year loans continued to push the 60 days plus delinquency rate higher on the 2002 and 2007 vintages, even though it “was tempered somewhat by modification related cures.”

It is not sure whether improvements will persist going forward as new loans may become delinquent for a variety of reasons, including depreciation.

One such example was the $678 million Skyline Portfolio, securitized in GECMC 2007-C1, JPMCC 2007-LDPX and BACM 2007-1. It was the largest loan to transition to 30 days plus delinquency in July. A new appraisal on the loan valued the properties at $296.6 million, which is 56% lower than the senior loan balance.

Other nonperforming loans matured after failing to pay down on their balloon date, the analyst noted, so their future performance will depend on whether the outstanding balances are paid down in full in the coming months.

In July the $340 million Maryland Multifamily Portfolio, in GCCFC 2005-GG5 and GSMS 2006-GG6 and the $310 million 450 Lexington loan in CSMC 2008-C1/2006-C5 were the largest such assets in the CMBS universe.