KBRA: CMBS Loan Defaults Continue Decline
Commercial mortgage-backed securities loan defaults have maintained a steady decline since peaking in 2010, reported Kroll Bond Rating Agency, New York.
The trend continued during the first six months of 2016 as loan defaults fell 26 percent to 199 compared to 268 during the same period in 2015, KBRA’s Default and Loss Study said. The cumulative default rate ended June at 15.6 percent.
But losses took a different path during the same period, with a 50-plus percent increase between first-half 2015 and first-half 2016, KBRA reported. The cumulative loss rate equaled 4.0 percent as of June with a 49.7 percent average loss severity across the study period.
The time to resolve a loan–which has trended higher since 2010–increased to 36.1 months in first-half 2016 compared to its 21.5-month long-term average, KBRA said.
“In the post-recessionary period there was significant noise surrounding what was deemed to be ‘kick-the-can CMBS economics’ given the time it took to resolve many specially serviced loans,” the KBRA report said. “In retrospect, it may have served the industry well, as it likely contributed to higher recoveries than would otherwise have been achieved if assets were sold into distressed markets.”
But KBRA said the tide may be turning for future resolutions because commercial real estate prices have reached or exceeded peak levels in many markets while CMBS mortgage originations will likely slow due to new risk-retention rules that start in December. In addition, well over one-third of loans set to mature in 2017 are brick-and-mortar retail, and structural secular shifts in that sector due to growing e-commerce may harm the overall refinance rate or contribute to increased loss severities for defaulted retail loans, the report said.
Meanwhile, the delinquency rate for commercial mortgage-backed securities loans remained fairly steady at 2.95 percent in August, down a single basis point from July, reported Morningstar Credit Ratings, Chicago. “[We] expect the maturity payoff rate to continue to slide and drive the delinquency rate higher, as poor underwriting and a decline in cash flow may cause a significant portion of aggressively leveraged legacy loans made between 2006 and 2007 to face difficulty refinancing,” Morningstar said.
Prices for commercial real estate loans underlying CMBS declined two basis points in August, third-party loan valuation service DebtX reported.DebtX estimated that the price of whole loans securing the CMBS universe decreased to 99.6 percent in August from 99.8 percent in July. Prices equaled 98.2 percent one year ago.
“CMBS prices were basically flat again in August,” said DebtX Managing Director Will Mercer. “Most of the slight decline can be attributed to changes in the yield curve.”
DebtX examined $958 billion in commercial real estate loans that collateralize U.S. CMBS trusts. It said the median adjusted loan-to-value remained at 57 percent in August and the median debt-service coverage ratio increased to 1.5x. The median estimated loan yield also remained at 4 percent.
