Late payments on securitized commercial mortgages ticked higher again in July, for the same reason they did in June: a number of large loans fail to pay off at maturity.
Commercial mortgages typically have 10-year terms during which borrowers pay mostly interest; the bulk of principal is repaid at maturity. So if the value of the property does not appreciate very much over the term, or if underwriting tightens, it may be difficult to refinancing. That's what is happening to a number of loans taken out during the frothy lending years of 2006 that are now coming due.
The CMBS delinquency rate is now 4.76%, an increase of 16 basis points from June, according to Trepp.
The no-pay rate reached its multiyear low of 4.15% in February, and has been moving back up ever since. However, it is still 66 basis points lower than the year-ago level and 41 basis points lower since the beginning of the year.
The all-time high was 10.34% in July 2012.
In June, CMBS loans that were previously delinquent but paid off with a loss or at par totaled about $950 million. Removing these previously distressed assets from the numerator of the delinquency calculation helped move the rate down by 20 basis points. A little over $200 million in loans were cured last month, which helped push delinquencies lower by another four basis points.
However, almost $1.8 billion in loans became newly delinquent, which put 37 basis points of upward pressure on the delinquency rate. Also putting upward pressure on the number was a falling denominator: about $3 billion in loans were paid off, forcing the remaining delinquent loans to have an increased weight.
Of note is the percentage of loans that were classified as "nonperforming loans that were past their balloon date," a kind of leading indicator of future defaults. That number jumped 11 basis points in July after moving up 14 basis points in June. These would be loans that reached their maturity date and did not pay off or make an interest payment to satisfy the debt service.
Despite the steady rise in delinquencies over the past five months, analysts at Trepp think the CMBS market will be able tackle the bulk of pre-crisis loans coming due this year and next, thanks to low interest rates, large demand for commercial real estate, and rebounding property values.