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Fitch: CMBS Delinquencies Could Triple by Year's End

Delinquencies on U.S. commercial mortgage-backed securities (CMBS) issues could double or even triple by the end of 2008, according to the latest index from rating agency Fitch Ratings, based in New York.

First, it is worth noting that 2007 was a banner year for CMBS from a delinquency standpoint. According to Fitch’s 2007 monthly index, delinquencies fell nine basis points to end the year at just 0.28% after starting in January at 0.37%.

That means that even if the rate triples, as Fitch thinks it might, CMBS delinquencies would close at or slightly above the annual average default rate of 79 basis points.

Fitch defines a loan as delinquent when it is at least 60 days late, in the possession of the lender as a result of foreclosure or forfeiture, in foreclosure or non-performing mature.

Now, 2008 is presenting a whole new set of challenges that began in 2007. “Additional economic stress to property cash flows, declining defeasance volume, balloon defaults and the decrease in new origination volume are likely to contribute to the increase in Fitch’s loan delinquency index,” says director Michelle Bayard.

Delinquencies began rising in late 2007, climbing three basis points in November alone. The multifamily market is showing the steepest declines, ending the year with $427.8 million more in delinquent loans. In December 2007, there were 145 multifamily loans with aggregate proceeds of $871.2 million compared to 99 loans comprising $443.5 million in January 2007.

States with the highest concentrations of multifamily loans include Texas with 49.5%, Michigan with 9.9% and Tennessee with 9.9%.

Slack underwriting is one likely culprit of the downturn, since recent vintages of apartment CMBS show greater performance weakness. As of December 2007, the vintages with the highest concentrations were 2006 (21.9%), 2004 (17.5%), and 2005 (16.1%). These three recent vintages accounted for 55.4% of all delinquent multifamily loans.

Fitch’s loan delinquency index, or LDI, tracks delinquent loans in all CMBS transactions rated by Fitch. As of December 2007, the Fitch-rated universe comprised 480 transactions with aggregate loan balances of $556.9 billion. The firm tracks 10 categories of commercial property, including office, retail, hotel, multifamily, industrial, healthcare, self storage, manufactured housing, mixed-use, and “other.”
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