In commenting on the latest Loan Delinquency Index (LDI), Fitch Ratings Managing Director Mary MacNeill said U.S. commercial mortgage-backed securities (CMBS) delinquencies may not peak until 2012, despite the fact that they have already risen almost five times from one year ago. According to Fitch’s LDI, the U.S. CMBS delinquency rate closed 2009 at 4.71 percent.
“An increased amount of loans are coming due over the next two years that will result in delinquencies possibly peaking at 12%,” MacNeill said. Fitch’s surveillance criteria reflect a forward looking view of performance. Therefore, the current ratings on CMBS transactions recently reviewed by Fitch incorporate significantly higher delinquency rates.
Of the five main property types, each has seen an increase in delinquencies of over 195 percent since December 2008, ranging from multifamily with 196 percent increase, to hotel, with a 1,175 percent increase. Delinquency rates for these properties are as follows (along with total dollars delinquent versus total dollars delinquent as of December 2008):
—Office: 2.66 percent ($3.9 billion vs. $603.5 million);
—Hotel: 9.13 percent ($4.6 billion vs. $363.7 million);
—Retail: 4.25 percent ($5.7 billion vs. $1.2 billion);
—Multifamily: 7.54 percent ($5 billion vs. $1.6 billion);
—Industrial: 3.57 percent ($851.3 million vs. $186.2 million).
There are currently 25 delinquent loans greater than $100 million, compared to four in December 2008. An increased number of loans with larger balances were securitized in 2006 and 2007, when underwriting was most aggressive. Given the restricted lending environment, Fitch expects delinquencies and maturity defaults of these loans to be a significant contributor to the future Index.
Due to the increased volume alongside weaker underwriting parameters for later vintages, defaults increased significantly from the end of 2008. The four most-recent vintages have gone from representing just over half of delinquencies by balance to over 75 percent of the total at the end of December. They have the following delinquency rates (along with total dollars delinquent versus total dollars delinquent as of December 2008):
—2005: 3.16 percent ($2.4 billion vs. $420.1 million)
—2006: 5.11 percent ($5.6 billion vs. $1.1 billion);
—2007: 5.22 percent ($8.1 billion vs. $631.9 million);
—2008: 7.33 percent ($312.8 million vs. $236.5 million).
At this time, vintage delinquencies remain somewhat proportional to each vintage’s contribution to the Fitch universe. However, Fitch expects continued cash flow stress will lead to increased delinquencies among these vintages. The percent of delinquent loans versus the percent of the Fitch-rated universe are as follows:
—2005: 11.19 percent v. 16.68 percent;
—2006: 26.04 percent v. 24.01 percent;
—2007: 37.50 percent v. 33.80 percent;
—2008: 1.45 percent v. 0.93 percent.
Fitch’s delinquency index includes 2,143 loans totaling $21.6 billion of the Fitch rated universe of approximately 42,000 loans comprising $457.5 billion that are at least 60 days delinquent or in foreclosure. The LDI excludes Fitch-rated loans that are 30 to 59 days delinquent, which currently total $7.2 billion, a decrease from $7.5 billion one month prior (Extended Stay America was re-classified as 60 days delinquent after being only 30 in November).
Gregg D. Killoren
victoria1014
Fed Continues to Issue Alerts on CRE
Testifying before the House Subcommittee on Oversight and Investigations, Jon D. Greenlee, Associate Director of the Federal Reserve’s Division of Bank Supervision and Regulation, warned that banks continue to face significant challenges from rising delinquencies on commercial real estate (CRE) loans.
In his November 30 statement, Greenlee said, “Credit losses at banking organizations continue to rise, and banks face risks of sizable additional credit losses given the outlook for production and employment.” The level of delinquent commercial real estate loans in bank portfolios had almost doubled at the end of June, he said. Even as banks set aside funds to cover loan losses, poor loan quality, subpar earnings, and uncertainty about future conditions have raised questions about capital adequacy at some institutions, Greenlee said.
In related news, GlobeSt.com reports that industry insiders expect commercial mortgage-backed securities (CMBS) to receive more support from the Treasury’s Term Asset-Backed Securities Loan Facility (TALF). Even though a few deals may be moving through the securitization pipeline backed entirely by private investment, including a Bank of America Corp. $460-million deal backed by office and industrial properties in Florida—with a $47-million triple-B class tranche no less—these are still exceptions in a very difficult market and do not foretell a reemergence of the multi-borrower conduit CMBS transaction platform. According to GlobeSt.com, “Some investment banks are starting to cautiously rebuild origination platforms, [an investment banker] said—but issues coming to market are more than likely to remain in the category of special situation one-off transactions and supported by TALF.”
To view Jon D. Greenlee’s testimony, please click on the following link: Greenlee’s Testimony on Small Business Lending.
To view the article on CMBS at GlobeSt.com, please click on the following link: TALF Still Model for CMBS Despite New Deals.
The bottom line for investors is that financial stocks have enjoyed a nice bounce back from the March 2009 lows now that the global financial system has stabilized. However, due to continued losses from commercial real estate loans and consumer debt, banks will be hard pressed to generate profits that would create more upside potential in their stock prices.
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Posted in Banking, Commercial Mortgage-Backed Securities, Commercial Real Estate, Credit Crisis, Economy, Investing, Market Commentary, Mortgage-Backed Securities, TALF
Tagged Banking, Commercial Mortgage-Backed Securities, Commercial Real Estate, Economy, Investing, Market Commentary, TALF, Term Asset-Backed Securities Loan Facility