Quantcast

Delinquencies Hit Bank Held Home-Equity Loans

The delinquency rate on home-equity loan products held by banks rose sharply in the third quarter, and the chief economist of the American Bankers Association believes the trend line may worsen in the fourth quarter.

The overdue rate on closed-end home-equity loans rose 29 basis points to 2.28% during the third quarter, according to the ABA's consumer credit delinquency bulletin. That's the highest delinquency rate seen in more than two years.

And while home-equity lines of credit continued to have the lowest delinquency rate among consumer loan products tracked by the ABA, the overdue rate rose seven basis points to 0.84% during the third quarter.

The delinquency rate on property improvement loans rose 14 basis points to 1.6%. The delinquency rate on mobile home loans rose to 2.87% from 2.61% in the second quarter. The deterioration in housing related loan performance drove up the ABA's composite consumer loan delinquency rate to 2.44%, despite improvement in the performance of credit card loans. That was 17 basis points higher than the overall consumer loan delinquency rate in the second quarter and it marked the highest overall consumer loan delinquency rate posted by banks since 1997.

ABA chief economist James Chessen said in a news release that while consumers are facing pressure from resets on adjustable-rate mortgage loans, they are trying to keep up with other payment obligations.

"Consumer loans directly related to the housing market were hit hardest. We anticipate delinquency rates will continue to rise on these types of loans in the fourth quarter of 2007 reflecting continued weakness in the housing sector," Mr. Chessen said in a news release.

Heading into 2008, industry watchers are concerned about what impact a slowing economy might have on the commercial real estate sector. In one sign of increased caution, Fitch Ratings is raising subordination levels on commercial mortgage-backed securities, based on the credit rating agency's view that commercial mortgage loan defaults are likely to rise.

The New York rating agency reports that for a "BBB" rating, an increase in enhancement levels of 10%-20% addresses the increased risk, while an "AAA" rated bond would require an additional subordination of 5%-10%.

The market is expecting higher commercial mortgage loan defaults, going by the spreads on the CMBX market indices (which are made up of CMBS deal tranches), the rating agency said. However, Fitch does not expect defaults to rise as much as the level the indices appear to be anticipating. Susan Merrick, managing director and head of Fitch's CMBS group, noted, "Fitch expects loan defaults to rise given the current capital market environment, but not threefold." Robert Vrchota, a managing director in Fitch's CMBS group, said that the CMBX index is reflecting default rates that are three times historic default rates on CMBS. He believes this is because the index is also reflecting the fallout from an ongoing credit crunch.

The increase in Fitch's subordination levels is based on the rating agency's view that a slowing economy will impact commercial real estate performance. Also, the credit crunch is looking to be more extended than the rating agency expected, which could impact access to capital for commercial real estate borrowers.

Ms. Merrick expects that CMBS issuance for this year is likely to go down to a range of about $100 billion to $120 billion. According to statistics from the Commercial Mortgage Securities Association, 2007 CMBS issuance was at $223 billion. If commercial mortgage lenders don't get a chance to offload loans into the CMBS market, they are also likely to cut down on new lending activity. Loans with variable interest rates are finding fewer takers, according to Ms. Merrick.

Fitch expects losses on commercial mortgage loans to go up by 50%. The increases in subordination levels will provide a cushion of over seven times expected loss for the "AAA" bonds and about two-and-a-half times expected loss for the "BBB" rated bonds, the rating agency said.

"Given that Fitch sees more defaults coming new issuance needs to have more protection everywhere, but particularly at the bottom of the capital structure since the top-rated bonds have demonstrated their ability to withstand various increasing stresses," said Mr. Vrchota.

Fitch also reports that CREL CDO delinquencies (on a base of 1,100 loans in 35 commercial real estate loan collateralized debt obligations (CREL CDOs) rated by Fitch) were up to 0.47% for December 2007, from 0.15% for November. On including repurchased loans (those that pool managers have bought out and removed from the pool due to credit impairment), the CREL CDO delinquency rate is an even higher 0.64%. This rate is double the CMBS delinquency rate of 0.31% for November.

"Retail bears watching because forecasts in personal income, a primary driver of retail demand, are still strong but are shallower than they were a quarter ago," says Sally Gordon, a Moody"s analyst/senior vice president. "The issues in the single family sector, in turn, are a bit of a wild card for multifamily, both as to potential demand increase from owners facing foreclosure as well as potential supply increases from condo projects converted to rentals."

Heading into 2008, industry watchers are concerned about what impact a slowing economy might have on the commercial real estate sector.

In one sign of increased caution, Fitch Ratings is raising subordination levels on commercial mortgage-backed securities, based on the credit rating agency's view that commercial mortgage loan defaults are likely to rise. The New York rating agency reports that for a "BBB" rating, an increase in enhancement levels of 10%-20% addresses the increased risk, while an "AAA" rated bond would require an additional subordination of 5%-10%.