Trepp: CMBS Delinquency Rate Increases Yet Again

The commercial mortgage-backed securities delinquency rate rose again in April as numerous loans reaching their balloon date failed to pay off, reported Trepp, New York.

The delinquency rate for U.S. commercial real estate loans in CMBS rose 15 basis points to 5.52 percent, Trepp said.

“After hitting a post-crisis low [4.15 percent] in February 2016, the reading has consistently climbed over the past year as loans from 2006 and 2007 have reached their maturity dates and have not been paid off via refinancing,” Trepp said, noting that the delinquency rate ascended in 12 of the last 14 months.

The CMBS delinquency rate now stands 129 basis points higher than a year ago and has increased 29 basis points year-to-date. The reading peaked at 10.34 percent in July 2012.

Brian Olasov, Executive Director of Financial Services Consulting with Carlton Fields, New York, said the market is witnessing “adverse selection” as the loans that could have refinanced have already done so.

“We also have three immediately supportive trends in our favor and one longer term,” Olasov said. “First, balloon loans are still being taken out at higher than estimated rates. Second, there are indications that CMBS volume is starting to pick up, which mitigates the effect of diminishing CMBS outstanding. Third, even though net operating income growth has slowed measurably across most property types, it’s still growth; the real estate recovery continues.”

Olasov noted that ballooning loans tail off quickly after July. “That’s good and bad,” he said. “The good is that there are fewer opportunities for ballooning loans from 2007 to default. The bad is that this reduced flow of refinancing opportunities means that there are fewer chances for a new CMBS loan to take out an existing CMBS loan.”

Trepp has noted repeatedly that it does not foresee the CMBS delinquency rate falling anytime in the near future. “It’s a prediction we stand by as pre-crisis loans continue to reach their balloon dates every month,” the monthly delinquency report said. “If a loan posted strong financials in conjunction with an impressive tenant roster, chances are that the loan would have been defeased or paid off at its earliest ‘free’ period.”

Thus, Trepp said it assumes that loans that reach their maturity dates have weaker credit quality and do not meet today’s lending standards. “In addition, the loans coming due now were made toward the end of the 2007 cycle and underwritten very liberally. So, don’t be surprised if the delinquency rate continues to rise.”

Morningstar Credit Ratings, New York, reported that newly delinquent loan volume remained above $2 billion for the third consecutive month in March, reaching $2.08 billion. Nearly two-thirds of newly delinquent loans dated to the 2007 vintage and another 11.6 percent to the 2006 vintage.

Liquidated CMBS loan volume amounted to $1.99 billion, Morningstar said–making March the third consecutive month liquidations exceeded $1 billion–while the weighted-average loss severity tumbled to 26.1 percent from 42.6 percent in February.

CMBS loan prices posted a small decrease in March–the most recent data available–said DebtX, Boston. The estimated price of whole loans securing the CMBS universe decreased to 98.1 percent from 98.2 percent at the end of February, DebtX Managing Director Will Mercer said.

“The slight drop in March CMBS loan prices was primarily due to a small increase in Treasuries,” Mercer said.