Commercial Mortgages Ailing in February
By Prabha Natarajan
The Wall Street Journal
February 23, 2010
The performance of loans bundled in commercial mortgage-backed securities deteriorated sharply in February, raising fears that the coming wave of distressed loans may be much higher than expected.
As of the end of last week, 30-day delinquencies surged to 6.93% from 6.4% in January, according to Barclays Capital. That is well above the normal level of less than 1%, and a key indicator of future delinquencies suggest that they may rise even further soon.
Loans moved into special servicing have risen by $2.2 billion so far this month. That represents another 0.3 percentage point of the $770 billion market for commercial mortgage-backed securities. Loans are moved into special servicing when property owners are still current on their mortgage payments but are unable to refinance maturing loans or indicate they wouldn't be able to keep up with future payments.
Analysts forecast that the delinquency rate will peak between 10% and 15% later this year.
Credit Suisse researchers suggested that the pipeline of distressed loans may surge to $60 billion by the end of 2010, assuming that $2.7 billion of loans turn troubled each month.
Commercial mortgages have been pegged as the last stage of the credit crisis. A combination of low sales at retail stores, shrinking offices as the ranks of unemployed grow, and lack of financing for new loans and refinancing of existing loans have contributed to the bleak outlook for this sector.
The sale of three new commercial mortgage-backed securities late last year and support provided by the Federal Reserve's Term Asset-Backed-Securities Loan Facility seemed to suggest the market was thawing. But there has been no fresh issuance this quarter, and total new issues for the year is expected to be modest, perhaps $20 billion, Barclays said.
Market participants say a couple of multi-borrower deals are in the works, as banks including RBS, Deutsche Bank AG and Goldman Sachs Group Inc. look for loans to be pooled into securities.
"Available liquidity remains limited, which is making refinancing large loans more difficult even when they are performing," said Mary MacNeill, managing director of Fitch Ratings.
As a result, more loans approach maturity with no option to refinance or extend. The problem is likely to linger as special servicers, awash in transferred loans, struggle to keep up.
"One likely consequence of this is longer recovery lags, which to date have averaged 15 months for smaller loans (i.e., below $10 million) and 25 months for larger loans in 2009," according to the Credit Suisse report, which was led by analyst Gail Lee.
Fitch estimates that more than $43 billion spread over nearly 2,500 loans are already in special servicing. Retail loans lead the field with more than $15 billion in 842 loans.
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