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CMBS Delinquencies Improve in June

CMBS Delinquencies Improve in June

CMBS delinquency rates dropped for the second straight month, according to two firms that track the sector. The improvement is a result of loans being resolved with losses and being liquidated.

As of the end of June, the CMBS delinquency rate stood at 8.22 percent according to Horsham, Pa.-based Morningstar Credit Ratings LLC (formerly Realpoint LLC) and at 9.37 percent according to New York City-based Trepp LLC. Both firms recorded the drop as sharper than the improvement in May. (Trepp reported its findings in early June while Morningstar published its report late last week.)

According to Morningstar, the delinquent unpaid balance for CMBS fell $1.51 billion, to $60.86 billion from $62.37 billion a month prior. This followed the previous month’s decrease of $974.6 million. “As has been the case throughout 2011, a large majority of the decrease / net change in delinquency can be found within liquidations,” the firm wrote. “Another $1.27 billion in liquidations were reported for June 2011 across 142 loans, at an average severity of 48.2 percent - the second highest monthly liquidation amount on record. As a whole, the distressed categories of 90+-day, foreclosure and REO decreased in aggregate by $697 million on a net basis in June 2011, following a $1.19 billion decrease in May 2011.”

The total unpaid balance for CMBS pools reviewed by Realpoint for the April remittance was $756.63 billion, down from $759.31 billion in March.

Inside the numbers

The delinquency ratio for June of 8.22 percent (down from the 8.35 percent reported for May) is 1.1 times the 7.70 percent reported in June 2010 and more than 29 times the Realpoint recorded low point of 0.28 percent in June 2007.

According to Morningstar, “The movement in both delinquent unpaid balance and percentage is now clearly being impacted by the size and amount of loan liquidations, modifications, extensions and resolutions reported on a monthly basis, leading to a potential slow-down in the reporting of new delinquency for the remainder of 2011.”

The firm projects that the delinquent unpaid balance for CMBS still has the potential to grow higher than 9 percent in 2011.

The delinquent unpaid balance in June decreased in part because of $1.27 billion in loan workouts and liquidations across 142 loans, at an overall average loss severity of 48.2 percent, according to Morningstar—the second highest monthly liquidation amount tracked by Morningstar.

According to Morningstar, all deals seasoned at least a year had a total unpaid balance of $688.9 billion, with $60.86 billion delinquent – reflecting an 8.83 percent rate. When agency CMBS deals are removed from the equation, deals seasoned at least a year had a total unpaid balance of $649.29 billion, with $60.81 billion delinquent – reflecting a 9.37 percent rate. Finally, conduit and fusion deals seasoned at least a year had a total unpaid balance of $595.53 billion, with $58.84 billion delinquent reflecting a 9.88 percent rate.

By property type, in June, multifamily loans continued to top retail loans as the greatest contributor to overall CMBS delinquency. Retail loans had been the greatest contributor for six straight months prior to June 2010. Delinquent multifamily loans account for 2.19 percent of the CMBS universe and 26.7 percent of total delinquency. The retail default rate decreased to 7.3 percent in June after peaking at 7.7 percent in April 2011. The current default rate compares to 6.4 percent in June 2010.

Hotels, meanwhile, had the highest delinquency rate—12.2 percent, although the figure is down from a high of 14.3 percent in October 2010. The industrial delinquency rate fell to 10.9 percent in June—down from a peak of 11.1 percent in May. The multifamily delinquency rate remained at 9.5 percent for the third straight month and is down from a peak of 10.2 percent in January. The office delinquency rate is at 7.0 percent for the second straight month—its highest point in the past 12 months.

In its monthly report, Realpoint wrote, “Despite a leveling off over the past five months, we still consider retail delinquency a legitimate concern for 2011. A prolonged economic recovery could have further impact on consumer spending and cause retailers to continue to struggle. We also cannot rule out additional store consolidation, closings and potential bankruptcies along with growing balloon maturity default risk as retail collateral continues to suffer from the experienced decline. This is evidenced by the recent news on Borders closing all stores.”

Trepp's view

Meanwhile, in its analysis, New York City-based Trepp said that the CMBS delinquency rate fell to 9.37 percent in June, down 23 basis points from May and down 28 basis points from the high of 9.65 percent in April.

According to Trepp, “For the first time since the credit crisis began in 2008, the CMBS delinquency rate fell for two consecutive months. The rate reduction was driven primarily by a sharp spike in loans being resolved with losses, rather than delinquent loans actually curing. … The drop was driven by the fact that about $1.8 billion worth of loans were liquidated in June. That was the highest total since we began measuring the loss resolution numbers 18 months ago.”

The delinquency rate one year ago was 8.59 percent. The percentage of loans seriously delinquent (60+ days delinquent, in foreclosure, REO or non-performing balloons) is at 8.75 percent, down 21 basis points from May 2011

The elimination of troubled loans reduced the delinquency rate by 28 basis points. The remaining loans in the index saw delinquencies rise by about five basis points, according to Trepp.

Multifamily remained the sector with the highest delinquency rate, according to Trepp. The multifamily rate is at 16.48 percent (down from 16.71 percent in May) while the lodging delinquency rate fell to 13.87 percent from 15.37 percent in May. The lodging delinquency rate peaked at 19.33 percent in September and been improving in recent months.

The delinquency rate for industrial properties fell to 11.68 percent from 11.96 percent in May. It has more than doubled from a year ago when the rate stood at 5.48 percent. The delinquency rate fell for retail properties from 7.94 percent to 7.82 percent and is down from a peak of 8.15 percent in April. It is the first time Trepp has measured the retail delinquency rate above 8 percent. The delinquency rate rose for office properties from 7.23 percent to 7.35 percent.

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