Bank and Thrift Delinquencies Hit Post-1994 High; Fitch Says Refinancing Risks and Illiquidity to Force CMBS Defaults to 12% by 2012
The Mortgage Bankers Association reported that delinquency rates continued to rise in the third quarter on properties held by all but one of the five major commercial real estate investor groups tracked by the MBA. Defaults were the highest among holders of bank, thrift and CMBS loans.
Past-due payments on commercial mortgage loans held by banks and thrifts hit their highest level since 1994, while third-quarter commercial mortgage-backed securities delinquencies shot from 0.63% a year ago to a record 4.06% in the most recent quarter, according to the latest MBA Commercial/Multifamily Delinquency Report released this week.
Meanwhile, in its 2010 outlook for structured finance released this week, Fitch Ratings predicts that, as a result of protracted illiquidity and refinance risk, CMBS loan delinquencies are projected to increase by 6% by first-quarter 2010 and as high as 12% by the end of 2012. Recovery in the commercial real estate sector will lag the broader economy, with operating cash flows expected to decline across all property types over the next 18 months to two years, Fitch said.
For more encouraging news about CMBS, including prospects for the first significant new activity in the securitization market in over two years, see related coverage: "CMBS: Back in Business"
"The market is going to take a hit on the CMBS side, and the mutual funds and insurance companies are going to have some good opportunities in 2010," said Carla Gazzola, executive vice president with Santa Ana, CA-based RiverRock Real Estate Group, a CRE management and brokerage firm heavily focused in the current market on asset stabilization and value maximization. "Not everyone will like the price, but properties are going to start trading. The pipeline of money that's available is stunning."
With development mostly idled around the country, loans backed by existing commercial property continue to perform far better than construction and development loans -- though all mortgages continue to feel stress from the weakened economy, noted Jamie Woodwell, vice president of commercial real estate research for the MBA.
Based on the unpaid principal balance of loans, the delinquency rate on mortgages held in commercial mortgage-backed securities that are 30 days or more past due or in real estate-owned (REO) status rose 0.17% to 4.06% between the second and third quarters. The delinquency rate on loans held by FDIC-insured banks and thrifts that are in accrual or at least 90 days past due rose 0.51 percentage points to 3.43%.
The 60-day delinquency rate on loans held in life company portfolios rose 0.08 percentage points to 0.23%, while the 60-day delinquency rate on multifamily loans held or insured by Fannie Mae rose 0.11 percentage points to 0.62%. Delinquencies of 90-plus days on multifamily loans held or insured by Freddie Mac remained unchanged at 0.11%.
Together, these groups hold more than 80% of commercial and multifamily mortgage debt outstanding, according to the MBA. The numbers in the MBA report do not include construction and development loans, which are frequently lumped into the CRE column even though they're often backed by single-family residential developments rather than offices, apartments, shopping center or other income-producing property.
Collateral performance for all structured finance sectors will be weak next year in spite of a slow economic recovery, including CMBS, according to Fitch's 2010 outlook. Downgrades in the CMBS, residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) sectors will continue, albeit at a slower pace.
Recent-vintage CMBS will continue to decline, though ratings should remain stable since Fitch has already factored in steeper future performance declines. Fitch is reviewing pre-2006 vintage CMBS and expects downgrades for older vintages rated below 'AAA' into 2010.
However, "The magnitude of downgrades is expected to be less severe due to seasoning, defeasance and the loans generally not underwritten as aggressively as those at the peak of the market," said Fitch Managing Director Bob Vrchota.