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Wave of bubble-era CMBS maturities is ebbing

A final wave of bubble-era loans underpinning commercial mortgage-backed securities (CMBS) is maturing this year without so far disrupting the market too much.

Although problem CMBS loans originated during the 2005-07 era are the primary source of commercial loan delinquencies today, the bulk of these loans have managed to get refinanced and pay off on time.

Commercial building

The balance of bubble-era maturities has shrunk to just over $36 billion from a height of over $100 billion near the end of last year, according to Morningstar Credit Ratings. On-time payoff rates have hovered around 70 percent this year through April, about 10 points higher than was forecast to begin the year.

“It hasn’t been doom and gloom like a lot of people thought it was going to be,” said Steve Jellinek, a vice president with Morningstar Credit Ratings.

Morningstar analysts still believe that payoff rates could fall to 60 percent to 65 percent, and loan delinquencies will rise as the year progresses. About half of the CMBS loans that are left to mature this year are in the danger zone of defaulting, with leverage exceeding 80 percent of the value of the property. Delinquencies have been edging up. Loans reported as delinquent in April accounted for 19.3 percent of all maturing loans. Over 12 months through April, an average of 18.3 percent were delinquent, up from around 10 percent in the prior 12-month period to May 2016.

CMBS underwriting standards remain fairly tight. CMBS issuance also continues to be in a funk. Issuance is currently on a $55 billion annual pace, which is down from a weak 2016 and down from the market forecasts of $60 billion to $70 billion, Jellinek said.

Non-CMBS lenders, however, have been willing to loosen their underwriting standards to provide bridge loans or mezzanine financing (a loan that sometimes leaves the lender with some equity in the asset). In April, for example, some 68 percent of the maturing CMBS loans with loan-to-values above 90 percent paid off in time. There also has been an uptick in interest-only loans in the commercial loan market generally, another indicator of loosening standards.

“It is perfectly reasonable to think that the payoff rate could come in higher than what we expected,” Jellinek said. “It all depends on the lending environment, and how much some of these alternative lenders want to stay in the game.”

Among asset types, CMBS loans backed by retail and office properties have the highest delinquency rates, and represented nearly 80 percent of liquidations. CMBS loan liquidations have remained stable over the past 12 months, however.

According to the Mortgage Bankers Association (MBA), CMBS loans had by far the highest rates of delinquencies at 4.45 percent in the first quarter. The next highest delinquency rate were loans held by banks and thrifts at a 0.56 percent.

Jamie Woodwell, MBA’s vice president of commercial real estate research, said recently the industry “has largely worked through the so-called 'wave of maturities.' "


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