Commercial real estate markets have yet to see a big fallout from aggressively underwritten commercial mortgage-backed securities (CMBS) loans that were originated in the lead up to the credit crisis.

Low interest rates and other market conditions have made it easier to refinance maturing loans, keeping payoff rates high and delinquencies down, recent reports suggest. The 2005-07 vintages, however, remain a deep concern, Morningstar Credit Ratings reported.

The payoff rate for maturing CMBS loans in April remained a strong 87.6 percent of loans; low interest rates and other market conditions have made it easier to refinance maturing loans, the company reported. Year to date, the rate stands at more than 86 percent.

“So far the vast majority have been able to refinance,” said Steve Jellinek, vice president, CMBS analytical services for Morningstar.

Jellinek said the payoff rate should remain strong through the year. Conditions are good for refinancing. Interest rates are low and there is capital available. If those conditions change, however, the delinquency rates on CMBS loans could rise, payoff rates could decline and more CMBS loans could go into special servicing.

Analysts remain particularly concerned about the 2005-07 vintage, which were originated in the lead up to the credit crisis.

In its May report on April’s maturing loans, Morningstar noted that 2005 loans that were poorly underwritten have not been able to be refinanced.

In April, for example, a $133 million loan backed by a regional mall near Pittsburgh became delinquent when it lost its largest tenant, Sears. That loan was modified three years ago because of diminishing sales. Morningstar is now projecting a net loss of about $68.3 million.

So far, though, the overall conditions have been stable. In a separate report earlier this month, Trepp said that the delinquency rate on CMBS loans fell 21 times in the past two years. In April, the overall delinquency rate stood at 5.57 percent, down 87 basis points from a year ago. According to Trepp, CMBS loans backed by lodging had the lowest delinquency rate at 4.2 percent and multifamily had the highest at 8.9 percent.

When will the storm come?

Analysts remain concerned about a wave of CMBS loan delinquencies and foreclosures in the next couple of years as poorly underwritten, 10-year loans mature. Underwriting was even more aggressive in 2006 and 2007.

“That is basically a systemic concern, the way the loans were underwritten,” Jellinek said. He said the overall impact of these bubble loans is still uncertain.

“Right now, it is a little too early to tell because the bulk of those loans have not matured yet,” Jellinek said.

Many others, though, have predicted a storm.

“No question that it is a major problem,” said Ann Hambly, chief executive officer with 1st Services Solutions, which specializes in CMBS. Hambly said roughly 20 to 25 percent of the maturing loans in 2015 are backed by properties worth less than the debt. In 2016 and 2017, the numbers are closer to 30 percent, she said. Hambly said that the problem varies by asset class, but as many as 50 percent of the CMBS loans backed by retail properties from the 2006-07 years are over leveraged, she said.

Hambly said over leveraged borrowers can pour new money into the properties, ask the servicer to take a loss or extend the loan and hope the value rises.

“Or you hand the property back to the trust and let the bondholders suffer,” she said. “There are really not a lot of good options here. Something has to happen, whether it happens today or a couple of years from now. It is going to hit some people, for sure.”


Scotsman | Guide
May 2015

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