Index results released by Fitch Ratings recently indicate that the loss severity on liquidated loans has decreased significantly (http://www.dsnews.com/articles/delinquent-loans-in-commercial-mortgage-bonds-drop-as-loan-losses-narrow-2011-04-12). This data shows that late-pays dropped as much as two basis points to 8.74%, while the overall delinquency rate fell 88 basis points to 7.78%. This positive data has many commercial real estate mortgage insiders encouraged that the commercial real estate market is recovering.
Potential for Recovery
Some of the drop in delinquency comes from the resolution of seven loans totaling more than $100 million, including the resolution of Extended Stay America when that company emerged from bankruptcy. In fact, hotel delinquency fell to 14.1% from 21.3%, the largest decline in history for any CMBS loan sector. Much of this is due to increased consumer confidence and spending.
The potential for recovery is good news for borrowers with commercial real estate mortgages. Borrowers are still feeling the pinch of over leveraged loans and depressed values. The increase in consumer spending may help with future modifications as borrowers will have more confidence to provide new capital to these legacy CMBS loans.
CMBS Forecast
CMBS insiders believe that stronger market liquidity will encourage commercial mortgage backed security issuance and help slow the rise of delinquency. Delinquencies declined over four of the five major property types last month, yet Fitch advises that the trend for liquidated loans will slow considerably, but will still rise to around 10%. The only major property type that did not show a reduction in delinquency rate was office space, which did show an increase of 10 basis points.
Loss Severity
In March, 105 loans with a total balance of $1.2 billion were liquidated representing an average loss severity of 17.8%. This low loss severity is due to the fact that many loans were closed out very close to even, according to Trepp. This is the lowest loss severity since January 2010 when Trepp LLC (http://www.dsnews.com/articles/delinquent-loans-in-commercial-mortgage-bonds-drop-as-loan-losses-narrow-2011-04-12) began releasing loss analysis reports. Over the past 15 months, the average loss severity was 41.4%, indicating the large gap still needed to fully recover from the recent cycle.
The reports from Fitch Ratings and Trepp Inc. indicate that the economy may be slowly recovering with a reduction in CMBS loan liquidations as well as increased efforts to resolve commercial real estate loans before foreclosure. With over $400 Billion in maturities within the next three years, it’s still uncertain how losses will look in the near future. For more information on CMBS loans, visit www.1stservicesolutions.com or find us on Facebook at www.facebook.com/1stservicesolutions.