NEW YORK CITY-With a 133-basis point rise in the cumulative default rate for CMBS during the second quarter, predictions of an 11% to 12% rate of securitized loans in arrears come closer to reality. Fitch Ratings says 9.48% of the fixed-rate conduit CMBS loans in its universe were in default at the end of Q2, while Realpoint said in late July that $3.11 billion of unpaid loans were added to the total during June.
“Based on an updated trend analysis, we now project the delinquency percentage to potentially grow to 11% to 12% under more heavily stressed scenarios through the year-end 2010,” Realpoint says in its July 23 report. The agency says the forecast is driven by the watchlist reporting and transfers to special servicing of several high-risk loans “that continue to show signs of stress and are on the verge of delinquency.” Realpoint says the unpaid balance of delinquent loans could reach $90 billion by Dec. 31.
CMBS loans from 2006, 2007 and 2008 have already shot past the 10% mark and are expected to reach 14.8% by year’s end, says Fitch managing director Mary MacNeill in a release “Large, highly leveraged loans are also adding to the rising rate of defaults, with 14 loans greater than $100 million defaulted in 2010.”
Perhaps surprisingly given that the sector represents one of the bright spots in the current market, the highest default rate is for healthcare properties, at 22.37%. However, the total balance of healthcare-related CMBS conduit loans is the smallest by far at $5.79 billion. The second highest-ranking sector is lodging, with a 17.98% default rate on a balance of $45.4 billion in loans. Following that is multifamily with a 14.13% default rate, retail at 8.25%, industrial at 7.37%, office at 6.42% and miscellaneous categories at 4.46%.
As another indicator of the challenges facing legacy CMBS, Trepp noted that the average loss severity of loans that were liquidated in July showed "a sharp increase" over the severities seen in the prior two months: nearly 55%. “That is a significant jump from May and June which saw losses average 46 and 47%, respectively,” says Trepp.
The landscape ahead for legacy securities continues to look rocky. Within the Fitch-rated CMBS universe, there are 772 fixed rate loans, representing a balance of $7.7 billion, scheduled to mature between now and year’s end.
Of these loans, 93 representing a balance of $1.7 billion—22.9% of total—are in special servicing, says Fitch. Among those in special servicing, 28 loans representing 49% by balance are current.
Even for loans that haven’t yet gone into special servicing, the future looks iffy. In separate ratings actions over the last three days of July, Moody’s Investors Service placed a total of $6.5 billion of securities on review for possible downgrade, and downgraded more than $300 million. Largest of the CMBS pools on the Moody’s watchlist is a $1.66-billion class of JPMorgan Chase Commercial Mortgage Securities Corp. Commercial Mortgage Pass-Through Certificates Series 2006-LDP9, which at the moment still carries the triple-A ratings assigned in 2007.
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