CRE Finance Keeps Growing

The share of commercial mortgage debt in U.S. gross domestic product reached 15.8% in the fourth quarter of 2005, the highest level since the record of 15% set in 1988 at the peak of the last real estate cycle, Moody's Investors Service reports.

This, along with annual property appreciation of 12% for last year, which Moody's says is the largest increase since 1978, leads the credit rating agency to believe that commercial real estate finance is "entering uncharted waters."

Another indicator that is of concern to Moody's is that the loan-to-value ratio on commercial mortgage-backed securities conduit loans has reached 103.8% in the first quarter of 2006.

This is the highest level of record and Moody's views it as a sign of increased balloon refinance risk.

As well, the share of conduit loans that is partially or fully interest-only reached a "new high" of 70%, which is nearly triple the level of two years ago, "further contributing to increased balloon risk," according to Tad Philipp, Moody's managing director for CMBS and author of the report.

Further, in the first quarter as many as 53.4% of conduit loans were originated below a 1.30% debt service coverage ratio (an indication of the amount of a borrower's income available to cover principal and interest payments on debt), and Moody's sees this as a sign of "increased term default risk."

A factor that is boosting the market is the low level of commercial mortgage delinquencies, which are at or near long-term lows, which is credited largely to a record level of property price appreciation.

And property values were boosted more by capitalization rates, the return that property investors are looking for, that reached the lowest levels in 40 years than by improving property market fundamentals, as Moody's sees it. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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