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The CMBS time bomb that never detonated

by  | Corporate
Posted:     Updated: Jan 8, 2016  15:19 ET
 
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One good news story coming out of 2015 is that the predicted wave of defaults foreseen for maturing bubble-era commercial loans tied to mortgage-backed securities simply didn’t happen.

Basically, the worry has been that a huge number of 10-year CMBS loans originated between 2005 and 2007 backed by retail, office and other commercial properties will come due through 2017. CMBS loans are often interest-only and have big balloon payments due at maturity, creating potential default scenarios if they are not refinanced. Some also are underwater, with the loan amount exceeding the asset value.

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A good portion of these loans were thought to be poorly underwritten during a more freewheeling time, with shaky fundamentals. The fear was that these loans wouldn’t be able to get refinanced in this era of tighter standards. That, in turn, would fuel delinquency rates, and the recovering CMBS market would consequently be disrupted as this looming time bomb detonated across the sectors. That didn’t happen last year, however.

According to the monthly reports by the rating agencies Fitch and Morningstar, the opposite has occurred.

Delinquencies finished 2015 down 17 percent by balance from year-end 2014, Fitch said in its latest report. The overall delinquency rate for CMBS loans also ended the year at 4.02 percent, down 14 basis points from November and down 60 basis points from one year earlier. The delinquency rate was the lowest since October 2009, Fitch said.

Delinquencies also fell in all the major asset classes. CMBS issues backed by hotel, industrial, and multifamily assets saw delinquencies fall by more than 1 percent, while office and retail saw only modest declines, the rating agency said.

The delinquency rate is declining, in part, because volumes of new issuances are rising, and these newer loans have had miniscule delinquency rates. Highly performing new CMBS loans do not entirely explain the downward trend in delinquencies, however. Bubble-era loans — even those with higher loan-to-value ratios and weaker fundamentals — have been refinanced successfully, some to the surprise of the rating agencies. The CMBS market is hot right now, and investors have been aggressively going after these deals.

The rating agencies are not entirely convinced that there won’t be some problems with CMBS portfolios in 2016 and 2017. Morningstar has pointed out in its monthly trend reports that most of the current delinquencies involve older loans.

Underwriting standards got even worse in 2006 and 2007. Morningstar has predicted payoff rates to decline and delinquencies to rise in the bubble vintages over the next two years. The rating agency also has noted that underwriting standards have deteriorated somewhat, which could affect the performance of newer issuances. Interest rates are also expected to rise this year, which will create a more challenging environment for refinances. The company’s analysts, however, have forecast that the payoff and delinquency rates will stay in a healthy range.

2016’s wave of maturing bubble-era loans leaves some questions open. Given how well 2015 went, however, the fears over a looming CMBS time bomb seem to have largely subsided.

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Victor Whitman is chief reporter for Scotsman Guide Media. Reach him at (800) 297-6038 or victorw@scotsmanguidenews.com.

Topics: Commercial economy | Commercial lending
More by: Scotsman Guide Media

 

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The CMBS time bomb that never detonated

by Scotsman Guide Media | Corporate
Posted: Jan 8, 2016  15:13 ET    Updated: Jan 8, 2016  15:19 ET

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