Fitch Expects More Large CMBS Loan Delinquencies in 2009

Delinquencies on commercial mortgage-backed securities (CMBS) tracked by Fitch Ratings increased to 0.88% for December, up from 0.64% for November, largely because of defaults on bigger loans.

Two loans with principal balances greater than $100 million each contributed to the rise in the delinquency level, according to the New York-based credit rating agency. Fitch expects that more delinquencies on larger loans will arise in 2009, pushing delinquencies up to about 2% by the end of the year.

“What began as weakness in the performance of smaller properties located in tertiary markets now includes larger collateral in secondary and primary markets,” says Susan Merrick, a Fitch managing director and head of Fitch’s U.S. CMBS group. “Highly levered loans on transitional assets that were originated at the height of the market are proving particularly susceptible to performance default, as the deepening recession continues to make stabilization according to schedule increasingly unlikely.”

Of 20 loans with a balance of $25 million or more that are included in Fitch’s delinquency index, six loans became delinquent in December.

The December delinquencies include a $125.2 million loan backed by a Corona, Calif., retail property, and a $104 million loan collateralized by two hotel properties located in Tucson, Ariz., and Hilton Head, S.C. Even though the loan sponsors are experienced in their property types, they both cited the market deterioration as the reason for not being able to meet debt service obligations. Both of these loans were securitized in early 2008.

Defaults on loans originated in 2008, 2007 and 2006 are rising at a faster pace than the historical trend. This is because loan-to-values associated with these vintages are higher, and properties backing the loans are now facing an economic downturn before they are fully stabilized.

The Fitch delinquency index is based on loans that are at least 60 days delinquent, backing Fitch-rated CMBS deals.

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