CMBS Delinquency Rate Increases as Risk Retention Approaches

The commercial mortgage-backed securities delinquency rate inched up again in May, but the bigger problem lies elsewhere, said Brian Olasov, Executive Director with Carlton Fields, New York.

Trepp, New York, said the delinquency rate for commercial real estate loans in CMBS increased 12 basis points to 4.35 percent in May–the third straight month that the rate crept higher following January and February decreases. The percentage of loans seriously delinquent (60-plus days delinquent, in foreclosure, REO or non-performing balloons) reached 4.24 percent, up 11 basis points for the month. 

But the slight delinquency rate increases should be measured against the “melting ice cube” of shrinking CMBS outstandings, Olasov said. “The absolute dollar values are dropping. The more interesting dynamic is that CMBS 2.0 loans now constitute the bulk of CMBS loans outstanding and 2.0 loans in special servicing just broke through $1 billion for the first time.”

Olasov said legacy deals with operating problems or too much debt will become more perplexing as new risk retention rules approach–starting in December, CMBS issuers must retain five percent of every new deal issued or find a B-piece buyer willing to take on that risk. “In the short run, this makes it more challenging for ballooning 2006-2007-vintage loans to refinance back into CMBS,” he said. “You can expect balloon defaults to start creeping up.”

Moody’s Investors Services reported that 139 loans liquidated during the first quarter with an average disposed balance of $15.8 million and a loss severity of 49.3 percent. Loan liquidations from the troubled 2006-2008 vintages drove the first quarter’s high loss severity, Moody’s said. The 2006-2008 vintages accounted for nearly 90 percent of early 2016’s liquidated loans by balance.

The 2008 vintage continues to have the highest loss severity at 59.3 percent, Moody’s said. The 2006 and 2007 vintages represented the second- and third -highest loss severities at 48.5 percent and 44.4 percent, respectively. These vintages constituted 43.2 percent of CMBS collateral and 70 percent of delinquent loans as of March.