Apr 21, 2010 - CRE News
The cumulative default rate for CMBS conduit loans is projected by Fitch Ratings to climb to 11% by the end of the year from 6.59% at the end of last year.
Through the end of last year, $35.5B of loans in Fitch's universe of $539B of fixed-rate CMBS loans had defaulted. Last year alone, $17.7B of loans were added to the rolls of defaulted mortgages, with $6B of that being added in the fourth quarter.
In contrast, $17.7B of loans had defaulted between the market's inception in the early 1990s through 2008.
Fitch said that it expected another 4.4% of the universe it tracks to default by the end of this year, bringing cumulative defaults up to its projected 11% level.
That's because it expects loans, particularly large ones, to continue defaulting at a rapid pace.
The last time the cumulative default rate was anywhere near its current level was in 2004, when it was 4.14%. The rate after that fell sharply as a result of the massive volume of fresh, performing loans that were added to the CMBS universe.
The cumulative default rate counts delinquent loans that remain in CMBS pools and those that have been resolved and provides a complete picture of overall delinquency trends. Fitch counts as delinquent any loan that is more than 60-days late. However, it excludes loans that defaulted solely because they were not refinanced by their maturity dates and continue to make their debt-service payments.
The cumulative default rate is not to be confused with the delinquency rate, which is often updated monthly or quarterly and provides a snapshot of the volume of loans that are late at any given moment in time. Fitch determined that 7.14% of the volume of CMBS loans that it tracks were more than 60-days late at the end of last month.
Fitch's findings in its latest default study throw a wrench into a number of well-established historic trends. For instance, in the past, the default rate for commercial mortgages would gradually climb annually and spike in the eighth year. It then would begin its gradual decline to near zero in year 13.
That's no longer the case. The sharp increase in defaults is now taking place much sooner and lasts much longer, largely because of the aggressive underwriting that was in vogue between 2005 and 2007.
Indeed, Fitch found that CMBS loans originated in 2006, which are now roughly four years old, had a 6.72% cumulative default rate. Those originated in 2007 have a 5.32% rate and account for 35.6% of all defaults. Fitch projects that loans originated in 2007 will have a 10-year cumulative default rate of 27%.
In addition, whereas large loans had historically performed better than their smaller-balance brethren because they were generally less leveraged and backed by stable, high-quality trophy properties, they are now a liability with large default probabilities.
In 2008, for instance, five loans with balances of more than $50M each defaulted, including only one office loan with a balance of $25M or more. Last year, 56 $50M-plus loans went bad, including 33 $25M-plus office loans. The increase in large-balance defaults is also due to aggressive underwriting and the prevalence of pro-forma loans that relied on projected, as opposed to actual property cash flows.
After five years in which multifamily loans led all property types with most new defaults, retail loans led the pack last year, accounting for 32.3% of all defaults. But apartment loans continue to lead the retail sector in terms of cumulative defaults with a 9.15% rate, compared with a 6% rate for retail loans.
Hotel loans, meanwhile, have the highest cumulative default rate, at 13.9%.