Commercial Realty Loans Keep on Getting Stronger.

While debate continues in some quarters about whether the economy has hit a soft patch or not, the performance of commercial mortgages is undisputably getting better on the delinquency and default front. The commercial mortgage loan default scenario for 2004 improved compared to that for 2003, according to Standard & Poor's. And Fitch Ratings saw an overall drop in commercial mortgage-backed securities delinquencies as of the end of April, although the rating agency saw an increase in multifamily and health care-backed delinquencies.

Standard & Poor's reports that as of December 2004, there were 306 more defaults - on 29,827 loans that were originated between 1993 and 2002 and went into CMBS deals rated by S&P - compared to the increase of 404 for 2003. The total number of defaulted loans over a 12-year period, up to last December, was at 1,657 and cumulative default rate on the loans was at 5.56%, S&P said.

Joseph Hu, research head of Standard & Poor's global real estate finance group, co-authored the report with Roy Chun, head of CMBS surveillance for S&P.

Mr. Hu notes, "The 1995-1997 vintages continued to be the worst performers with cumulative default rates of 8.92% to 9.56%, an increase of between 81 and 128 basis points from year-end 2003. Holding seasoning constant, however, the 2000 vintage, now in its fifth year, continued to have the worse cumulative default rate at 6.12%. In contrast, the 2002 vintage with a third-year cumulative default rate of 0.96% outperformed its older vintage counterparts during their third-year seasoning."

As a result of findings from studies that show that "past support levels were excessive," credit support levels for new transactions have been lowered. Mr. Hu said, "Going forward, as long as the loan underwriting standards remain stringent and disciplined, the significantly lowered support levels are expected to adequately protect investment-grade investors."

The default study, which updates two other studies put out by S&P in July 2003 and December 2003, revealed the following:

* Defaulted loans had a "markedly shorter" loan age, larger rate spread (in the case of fixed-rate loans, which accounted for 95% of the studied loans), longer maturity, shorter amortization, smaller principal balance, higher LTV and lower debt service coverage than good loans.