Wednesday, June 2, 2010

CMBS Update: Worst Not Over?

Wall Street Journal 6.2.10: For CMBS Arena, 'The Worst Is Yet to Come'

“Fitch Says Loss Rate Hit All-Time High Average of 57% in '09”

"CMBS became one of the most favorite forms of real-estate finance during the boom years. Roughly $700 billion of the securities are outstanding, more than the amount of securitized credit-card, student-loan and car-loan debt combined.

Investors have seen a steady rise in defaults for months. The delinquency rate reached 8.4% in June, more than triple the level a year earlier, according to Trepp, a New York company that tracks the commercial-property market.

But other bad news for CMBS investors also is beginning to surface. Historically, when mortgages that were bundled into CMBS run into problems and are foreclosed on or sold, investors have lost, on average, 37% of their principal. But according to a study to be released by Fitch on Wednesday, that figure, known as the "loss-severity rate," averaged 57% last year, an all-time high. The rate will exceed the historical average, through 2011, Fitch projects.”

Realpoint LLC Reports:

“In April 2010, the delinquent unpaid balance for CMBS increased by another $3.603 billion, up to $54.65 billion from $51.05 billion a month prior. This included an increase in each of the five delinquency categories. Overall, the delinquent unpaid balance is up almost 219% from one-year ago (when only $17.15 billion of delinquent unpaid balance was reported for April 2009), and is now over 24 times the low point of $2.21 billion in March 2007. The distressed 90+-day, Foreclosure and REO categories grew in aggregate for the 28th straight month – up by $2.14 billion (5%) from the previous month and $31.16 billion (315%) in the past year (up from only $9.89 billion in April 2009). The total unpaid balance for CMBS pools available for review for the April 2010 remittance was $790.93 billion, down from $798.22 billion in March 2010. Both the delinquent unpaid balance and delinquency percentage over the trailing twelve months are shown in Charts 1 and 2, clearly trending upward. The resultant delinquency ratio for April 2010 of 6.91% (up from the 6.4% reported one month prior) is over three times the 2.07% reported one-year prior in April 2009 and over 24 times the Realpoint recorded low point of 0.283% from June 2007. The increase in both delinquent unpaid balance and percentage reflects a steady increase from historic lows in mid-2007.

Therefore, with the combined potential for large-loan delinquency in the coming months and the recently experienced average growth month-over-month, Realpoint now projects the delinquent unpaid CMBS balance to continue along its current trend and grow to between $60 and $70 billion by mid 2010. Based upon an updated trend analysis, we now project the delinquency percentage to grow to between 8% and 9% through mid 2010, potentially approaching and surpassing 11% to 12% under more heavily stressed scenarios through the year-end 2010). This forecast / outlook is driven by the watchlist reporting of several Realpoint identified High Risk Loans from recent vintage transactions that continue to show signs of stress and are on the verge of delinquency, along with continued balloon maturity defaults from more seasoned transactions. As part of our monthly surveillance efforts of every CMBS transaction, we continue to monitor in detail many large Realpoint Watchlisted loans that have never met pro-forma underwritten expectations. This includes a large number of loans that remain current in payment but have already been transferred into special servicing - many of which may ultimately default based upon a denial of requests for loan modifications or debt restructuring by the special servicers, or a decision by borrowers to surrender the collateral.”