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Investors Concerned Shadow Supply of Distress Could Add to Delinquency Troubles

Mortgage Bankers Assn. Reports Increase in Deliquency Rates for All Commercial/Multifamily Mortgage Investor Groups
June 23, 2010
Delinquency rates continued to increase in the first quarter for all commercial/multifamily mortgage investor groups, according to the Mortgage Bankers Association's (MBA) Commercial/Multifamily Delinquency Report. The delinquency rate for loans held in CMBS is the highest since the series began in 1997.

"Weakness in the economy has continued to weigh on commercial properties, which in turn weighs on the mortgages they back," said Jamie Woodwell, MBA's vice president of commercial real estate research. "Economic growth, specifically in areas of jobs and consumer spending, will be key to stabilizing the commercial property and mortgage markets going forward."

Construction and development loans are not included in the Mortgage Bankers' numbers. Based on the unpaid principal balance of loans (UPB), delinquency rates for each group at the end of the first quarter were as follows.
* Life company portfolios: 0.31% (60+days delinquent);
* Fannie Mae: 0.79% (60 or more days delinquent);
* Freddie Mac: 0.24% (60 or more days delinquent);
* Banks and thrifts: 4.24% (90 or more days delinquent or in non-accrual).

According Mark Fitzgerald, senior debt analyst for CoStar Group, the overall CMBS delinquency rate has now passed 8.5%, an all-time high "at least, until next week," Fitzgerald said.

"This equates to just under $62 billion of distressed commercial real estate loans," Fitzgerald said.

More importantly Fitzgerald noted is the much-discussed topic among real estate investors is how the overhang of "shadow supply" will impact a recovery in real estate values.

"In the CMBS market, there is currently an additional $76 billion worth of loans with a debt service coverage ratio (DSCR) below 1.01 - meaning the net operating income (NOI) on the property is not enough to cover the loan payment -- that are still performing," he said. "With NOIs across the U.S. expected to fall over the next couple of years, it is unlikely that many of these properties will be able to hang on."

"When available loan reserves run out, borrowers must decide whether to fund properties out of their own pockets; considering that a large percentage of these properties are underwater, many will choose to simply walk away," Fitzgerald said. "Alternatively, borrowers can seek modifications from the special servicers. Assuming that all of these properties enter the delinquent ranks, we can see that all property types will be affected."

"For hotels and apartment properties, this would imply future delinquency rates of 40% and 30%, respectively," Fitzgerald said. "Of course, not all these loans will become delinquent, but with declining NOIs, some properties whose DSCR is currently greater than 1.00 will also join the distressed ranks. This increased volume of distress would cause special servicers to become even more overburdened, and loss severities, already high, could increase further. Clearly, this is scary news for CMBS investors. But it could create tremendous opportunities for equity capital now on the sidelines."

Download this story and other national news in the Watch List Newsletter,, a weekly pdf that includes leads of distressed properties and loans and other news items not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. It's the quickest way to link directly to the news and leads you want. Just e-mail your name, title, company, company business, city, state, and e-mail address to Mark Heschmeyer

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