MBA: Commercial Loans Strong; Few Late-Pays

Woodwell points to low delinquency rates for life companies and the GSEs.

WASHINGTON, DC—The CMBS market is experiencing its share of volatility lately, a state of affairs that may be aggravated when new regulations take effect later this year. Nonetheless, taking the long view of the commercial lending market, including CMBS, leads to a brighter picture, as the Mortgage Bankers Association reported this week that delinquency rates were low across the board during the first quarter. And CBRE’s latest Lending Momentum Index is showing positive momentum compared to a year ago, although it declined by 6.3% in Q1 from the end of 2015. “Strong fundamentals and strong property prices, as well as still-low interest rates, continue to support the performance of commercial and multifamily mortgages,” says Jamie Woodwell, MBA’s VP of commercial real estate research. ”A record decline in the volume of CMBS loans in foreclosure and REO brought a record decline in the delinquency rate for loans held in CMBS.  At the same time, delinquency rates remain extremely low for commercial and multifamily mortgages held by life insurance companies, Freddie Mac, Fannie Mae and banks and thrifts.” Life companies and GSEs continued to post the lowest delinquency rates as Q1 ended, a vanishingly low 0.06% in the case of life companies and Fannie and 0.04% for Freddie. One difference between the two figures, though, is that for life companies and Freddie the Q1 numbers actually represented an uptick of 0.02 percentage points from Q4 ’15, while for Freddie it resulted from a decline of 0.01 percentage points. Although Trepp reported earlier this month that late-pays for CMBS have ticked upward by a handful of basis points over each of the past three months, MBA notes that the investor group still ended Q1 80 bps lower than at year-end ’15. At 3.93%, CMBS is the only group with delinquencies above 1%, specifically 3.93% as Q1 ended; for banks the delinquency rate was unchanged at 0.73%. With Q1 CMBS issuance down 29.5% from a year ago to $19 billion, CBRE Capital Markets notes that bank lenders contributed disproportionately to overall non-agency loan closings. Banks accounted for 43% of Q1 originations tracked by CBRE Capital Markets, up from 28% in Q1 2015. In contrast, CBRE says CMBS conduits accounted for only slightly more than 10% of deal volume, representing one of the lowest quarterly market shares in several years. In a video segment posted on Wednesday featuring Matt Galligan, president of CIT Real Estate Finance, Galligan points to a pair of regulations governing CMBS that, absent any legislative modifications, are scheduled to take effect in Q4. One requires underwriters to retain part of the risk as they sell CMBS bonds into the secondary market. The second new regulation requires senior individuals to sign off on the quality of the CMBS loan product. “The market is struggling to interpret the specifics of these regulations,” Galligan says in the video. He points out that many CMBS originators are clearing inventory in Q2 in order to help divert any potential risk they may be exposed to by these new regulations later this year. This could siphon off liquidity needed to refinance loans. “Alternatively, on a positive note, employment growth has been smooth and steady, which is a great thing for real estate.”