Nonbank CMBS 2.0 loans' default rate is much higher than banks: Fitch

Register now

Loans in commercial mortgage-backed securities originated after 2009 by nonbank lenders have a significantly higher default rate than those originated by banks, a Fitch Ratings report said.

By units, nonbank loans have a 2.3% default rate versus 1.2% for banks.

Banks originated over 80% more CMBS 2.0 loans than their nonbank counterparts. Yet nonbanks originated 124 loans with a balance of $1.26 billion that are now in default versus 119 loans with a balance of $2.19 billion for banks.

The top three drivers of default for all CMBS 2.0 loans were occupancy decline, borrower/sponsor issues and loss of primary demand driver. These combined accounted for 69% of defaults by loan count.

Nonbank originations also defaulted quicker than bank loans. For nonbanks, the peak default period was in year three following origination. The peak default period for bank originations was in year five.

Early defaults are a concern for all CMBS loans, no matter who was the originator. Over one-third of the total CMBS 2.0 defaults occurred during the first two years, Fitch said. In 2018, 20 loans defaulted in the first two years of the term compared to 19 in 2017, 26 in 2016, eight in 2015, six in 2014 and five in 2013. Nearly 60% of these mortgages by unit were originated by nonbanks.

CMBS loans originated in 2016 and 2017 had weaker credit metrics as a group. Bank and nonbank defaults from 2016 and nonbank defaults from 2017 had lower debt service coverage ratios and higher loan-to-value ratios than the conduit averages for those years.

Nearly 35% of the nonbank defaults were secured by multifamily properties. This "may be attributable to the higher concentration of properties located in secondary and tertiary markets and concentration to several weaker sponsors. These multifamily loans were not originated by Freddie Mac or Fannie Mae, which may also have been a factor in their subsequent performance," Fitch said.

The total CMBS delinquency rate ended December at 2.19%, a 103-basis-point decline from the same month in 2017, a separate Fitch press release said. There were $8.9 billion of CMBS loans delinquent as of Dec. 31, 2018, compared with $11.9 billion on the same day one year earlier.

"Fitch expects the overall delinquency rate will decline further by the end of 2019 to between 1.75% and 2%. While volatility is expected over the course of the year, the overall lower expectation is driven by the small maturing loan volume, relatively stable performance of CMBS 2.0 loans and assuming new issuance volume remains consistent with the prior year," the press release said.

For reprint and licensing requests for this article, click here.
Mortgage defaults Distressed CMBS Nonbank Multifamily Fitch