Delinquency Increases Continue in CMBS, CREL CDOs

MBA (9/9/2008 ) Murray, Michael
Delinquency rates in commercial mortgage-backed securities and commercial real estate loan collateralized debt obligations continue to increase.

Total July CMBS delinquencies—up from .483 percent in June to .487 percent in July—total $4.2 billion. July's numbers were up 33 percent from January's $3.16 billion in delinquency volume and up 90 percent from $2.21 billion delinquent, a six-year low in March 2007, based on the August CMBS Delinquency Report from Realpoint Research, Horsham, Pa.

Citigroup Global Markets, New York, said CMBS delinquencies moderately increased by nearly six basis points since the end of the year to 0.45 percent overall as of August. However, Citigroup said delinquencies still remain relatively low compared to historical delinquency rates and dramatically different from the high subprime residential delinquency rates.

"For now, commercial fundamentals appear to be slowing, and we are cautious on the retail and hotel sectors at this stage of the economic cycle," said Darrell Wheeler, head of CMBS strategy at Citigroup. "If an economic slowdown is prolonged we expect to see rising delinquency rates from these low levels, possibly in the 1 to 1.5 percent range."

Special servicing exposure, once below $4 billion for 11 straight months through October 2007, increased to $6.45 billion in July from $5.94 billion in June, Realpoint’s report said.

Realpoint said special servicing exposure fell to $5.67 billion in April after the payoff of the $1.13 billion Macklowe EOP Manhattan Portfolio loan. The loan, which matured on February 9 of this year, was paid in full in April as the B-note holder exercised its option to buy the A-note out of the trust.

Deals seasoned at least one year held a total unpaid balance of $770.3 billion, with $4.14 billion delinquent—a 0.54 percent rate up from 0.45 percent six months earlier.

Without agency CMBS deals in the mix, deals seasoned at least one year had a total unpaid balance of $740.1 billion, with $4.13 billion delinquent or a 0.56 percent delinquency rate up from 0.47 percent six months earlier.

“Despite a decrease in 30-day delinquent loans for July 2008, a noteworthy increase in 60-day delinquency was reported, while the distressed 90-plus days, foreclosure and REO categories grew for the eighth straight month—up 41 percent since January," the report said.

Fitch Ratings, New York, reported the CREL CDO Delinquency Index in August had three new delinquencies and two recently repurchased loans, which led to an increase in the delinquency rate to 1.79 percent of the total loans.

CRE loans 30 day or less delinquent, 0.87 percent by dollar balance of all CREL CDO collateral, provided "a good indicator of future delinquencies," said Karen Trebach, senior director at Fitch.

Trebach said that compared to CMBS, with more than 42,000 loans, the U.S. CREL CDO Index should not be used to draw conclusions about the overall market because it is relatively small, representing just 1,400 assets—1,100 loans and 300 rated securities.

“The overall delinquency rate remains low compared to historical rates and, on average, CREL CDOs remain adequately cushioned to absorb some credit deterioration. However, investors should be aware that Fitch anticipates that a few more CREL CDOs will be placed on Rating Watch Negative as more problem loans come to the surface,” Trebach said.

Loans backed by land, hotels, multifamily and condo conversions made up the majority of delinquent loans within CREL CDOs as multifamily secured two repurchased loans by the asset manager.

"The loan’s interest-only period was scheduled to expire and property cash flow was not sufficient to cover the soon to be higher payment," Trebach said. "The other repurchased loan is a condominium conversion."

Foreclosure proceedings have been initiated on the condo conversion. Comparable units were selling at prices "well below" the required release prices for the subject property." The lender and borrower were not able to negotiate an acceptable lower amount, Fitch said.

In CMBS, the only sector showing elevated delinquency rates at this time is multifamily at 1.45 percent, Wheeler noted.

"This rate stems from a block of loans on Texas multifamily properties related to a single borrower," Wheeler said. "The manufactured housing rate has also increased to 0.47 percent from 0.11 percent since year-end, although this sector only contributes 1.8 percent to the overall fixed-rate collateral balance. Michigan delinquencies also remains elevated at 2.35 percent as the domestic auto sector continues to struggle."

Fitch’s CREL CDO DI continued its gradual upward ascent—from last month’s rate of 1.46 percent—but asset manager flexibility tempered the increase by changing terms of underlying assets through continued extensions and repurchases of credit-impaired loans.

“We have seen properties taking longer to realize on their business plans, which has resulted in higher delinquencies as interest reserves are depleted and/or property cash flows have not increased sufficiently to warrant take-out financing,” Trebach said.

The extension numbers in Fitch’s delinquency index increased, but repurchases as a percent of total CREL CDO delinquencies declined in recent months.

"Given that loans within CREL CDOs are generally highly levered and/or secured by properties in a state of transition, loans with upcoming maturities without extension options available will likely have difficulty refinancing in today's capital constrained environment,” Trebach said. "While extensions have allowed delinquencies to remain relatively low, they are potentially deferring possible losses on overleveraged assets.”

The number of extensions in August, 34 loans, represented nearly two-thirds or .3 percent of the number of loans in the CREL CDO universe, which were contemplated as extensions in the original loan documents, Fitch reported. The imminent extension of one of the newly added loans to the delinquency index, a matured balloon whole loan, could drop the index to 1.47 percent—only one basis point higher than last month’s rate.

“Per the asset manager, the borrower requested a one-year extension for this still-stabilizing office property,” Trebach said. “The extension is permitted in the loan documents, and is currently being processed.”