03/05/2010

CMBS Credit Quality Continues to Plunge

The ongoing decline in commercial MBS credit quality continued at a rapid pace in February.

The percentage of CMBS loans in special servicing spiked to 10.6%, from 10% at the end of January, according to Trepp (see tables on Pages 10-11).

Meanwhile, the 60-day delinquency rate for CMBS loans jumped another 29 bp, to 6.29%, according to Fitch.

At the end of February, $76.6 billion of the $722 billion of outstanding CMBS loans in the U.S. were in special servicing. The net amount of loans in special servicing climbed by 8.5%, or $4.3 billion, last month. There was a net increase of 341 loans, bringing the total to 4,332.

The special-servicing rate, now more than six times higher than the yearend 2008 level of 1.62%, is being driven up by disproportionately large loans that are running into trouble. While the average CMBS loan is $12 million, the average loan in special servicing is 50% larger, noted Trepp managing director Manus Clancy.

Last month 10 loans of $100 million or more were transferred to special servicers. Among them were the $419.6 million senior portion of a $675 million loan to Broadway Real Estate Partners and Lehman Brothers on the office building at 237 Park Avenue in Midtown Manhattan; a $284.5 million loan on a MeriStar hotel portfolio; a $249.8 million mortgage to developer Joseph Moinian on the office building at 1775 Broadway in Midtown Manhattan; and a $223.1 million mortgage to a partnership on an office portfolio in Woodbury, N.Y.

A large proportion of loans transferred to special servicing last month were current on their payments, including 11 of the 13 largest. But that is often only a prelude to delinquency. “Specially serviced current loans are a strong leading indicator of future delinquencies,” Barclays analyst Aaron Bryson wrote in a report this week, noting that on average, 11% of up-to-date loans in special servicing migrated to the 30-day-late category each month for the past six months.

Fitch said that the spike in the delinquency rate last month was tied in large part to five-year loans that matured but could not be refinanced. Such loans accounted for about 30% of the combined balance of Fitch-rated CMBS loans that passed the 60-day threshold last month. That included the four largest loans, ranging from $65 million to $112 million.

In many cases, property values have fallen below the levels when the loans were originated in 2005. Because of that and tighter credit standards, borrowers are having a hard time refinancing the full amount of current loans. Fitch expects that maturing loans originated within the last five years will continue to play a big part in boosting the CMBS delinquency rate.

Across all CMBS vintages, the delinquency rate for multi-family mortgages posted the biggest increase last month. Some 8.97% of apartment loans were 60-days late as of Feb. 28, up 64 bp from 8.33% a month earlier. But the hotel rate was still the highest, at 16.61%, up 17 bp for the month. The rates in other sectors were 5.09% for retail loans at the end of February (up 15 bp), 4.16% for industrial mortgages (up 43 bp) and 3.5% for offices (up 44 bp).

The defaulted $3 billion mortgage on the Peter Cooper Village and Stuyvesant Town apartment complexes in Manhattan was originally expected to reach the 60-day-late threshold last month, but now is not likely to show up in Fitch's index until May. When that mammoth loan is included, the multi-family delinquency rate will jump by 400 bp and the overall rate will increase by 60 bp.

The delinquency rate has climbed virtually nonstop from a low of 0.27% in January 2008 and is now at the highest level by far since Fitch began tracking the data on a monthly basis in 2004.

The index tracks loans in U.S. securitizations rated by the agency that are overdue by at least 60 days or in foreclosure. At the end of last month, 2,505 loans totaling $28.5 billion were in that category — up from 2,318 loans totaling $27.1 billion a month earlier. Another $3.2 billion of loans were delinquent by 30-59 days in February, down from $3.8 billion in January. Overall, Fitch rates $452.6 billion of U.S. CMBS transactions backed by about 42,000 commercial mortgages.

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