CMBS Update: Resolving Defaulted Loans And Plummeting Delinquencies



The news in the commercial mortgage-backed securities (CMBS) market is positive year-over-year for the five major property sectors.

As suggested by earlier announcements by credit rating agencies including Fitch, distressed commercial real estate assets are receiving the benefit of special servicing, often by third parties, that are lending stabilization to the CMBS market.

From Fitch:

Fitch Ratings-New York-01 May 2014: Delinquencies are likely to continue to recede and special servicer resolutions of distressed assets are likely to continue, supporting the U.S. CMBS market’s stabilization, Fitch Ratings says. We expect rating upgrades to continue to exceed downgrades for the near term. Most downgrades will be in below investment-grade classes. 

In first-quarter 2014, Fitch upgraded 87 classes. For the same period last year, only eight classes were upgraded, with 58 classes upgraded for all of 2013. Downgrades shrunk to 119 classes compared with 333 for first-quarter 2013 and 864 classes total in 2013.

According to Globe St.’s Paul Lubny, nearly 12.5% of industrial CMBS loans were delinquent one year ago.

The number today?  8.94%.

May saw $1.3 billion in new delinquencies, offset by $1 billion in resolutions and $800 million in cured loans. Accordingly, the total balance of delinquent loans fell to $33.6 billion from $34.1 billion in April.

“The CMBS market continues to just plug along nicely,” says Manus Clancy, senior managing director at Trepp. “In each of the past two years, the market has seen springtime swoons that led to noticeable spread widening;” however, at present new-issue spreads “are near their 2014 tights, the new-issue dance card is full for the next few months and the resolution of defaulted legacy loans continue to push the delinquency rate lower.” However, Bank of America Merrill Lynch earlier this month cut its full-year forecast for new issues.

8.94% Is Good News — For Certain Values Of “Good”

It’s no doubt been a good year for structured credit and commercial real estate, one of unambiguous recovery.  Will it hold up? Time will tell.  But one thing we can already tell is that celebrating a delinquency rate in the 8% range is a concept that was utterly alien to the earlier adopters of CMBS as a financial innovation.

To see what I mean, check out this 2002 report from the Commercial Mortgage Securities Association, written by then-Morgan Stanley associate Marielle Jan de Beur.

Seems like the common rate of CMBS delinquencies back then…was closer to 1%.

The industry’s got a lot more recovering to do.


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