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Liquidating Lenders Manage 60% Recovery

NEW YORK CITY—To date, $1.9 billion has been recovered through liquidating commercial mortgages, a fraction of the $130 billion in defaulted loans out there, says RCA.

By Paul Bubny | Updated on October 19, 2009

NEW YORK CITY—Lenders that liquidate defaulted commercial mortgages are recovering an average of just under 60% of the balance of those loans, Real Capital Analytics says in a new report. The bigger picture rendered by the RCA report contains a few surprises, not least of which is the relationship between underwriting and the rate of recovery.

“It is reasonable to expect that the more conservatively a loan was underwritten, the higher its recovery rate upon resolution,” the report states. “However, the resolutions thus far in 2009 challenge the assumption that loans originated when lending standards were the loosest and property prices were the highest will suffer steeper losses.” In fact, mortgages from 2002 and earlier have a slightly lower RR than those originated in the irrational exuberance of 2006 and 2007, even though the more recent loans have a higher default rate, according to RCA.

Similarly, the highest RR among property types is the 72% rate for retail, “even though the outlook for the retail industry remains poor and retail properties have among the highest default rates.” One explanation is that lenders have liquidated only a small percentage of defaulted retail mortgages, choosing “only those loans that offer the prospect of a relatively high RR.” A similar dynamic is at work in the hospitality sector.

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