Is Commercial Getting Caught Up in Credit Downturn?: 'It is this sort of demand for loan product that led to excesses in underwriting.'.

In what may be the first hint of trouble for commercial mortgages, it appears as though delinquencies on commercial mortgage-backed securities could be on the upswing, after a period of declining delinquencies. Delinquencies on CMBS in Standard & Poor's-rated CMBS universe were up 12.7% in the second quarter. The New York credit rating agency reports that this is the first rise since December 2003, when delinquencies peaked. S&P credit analysts Larry Kay and Eric Thompson suggest that this spike could be due to the weakness of loans originated in 2006, a period of underwriting excesses. Another factor is a weakening in retail fundamentals.

For retail properties, delinquencies were up 224% in the second quarter, compared to the first quarter.

At the end of the second quarter, $1.65 billion in CMBS loans was delinquent, up from $1.46 billion in the first quarter, S&P reports. It is possible that changes in economic conditions, property fundamentals and incidents such as the 9/11 terrorist attacks can impact property performance and cause an upspike in delinquencies and to control for these other causes S&P looked at a seasonally adjusted delinquency rate.

The analysts report, "In 2005 and 2006, a period characterized by economic stability and improving property fundamentals, the seasonally adjusted delinquency rate increased to 0.8% and 0.12%, respectively. With a sound economy and positive property fundamentals, indications suggest that loan origination practices may be the cause of the higher seasonally adjusted delinquency rates in these two years. Based on our review of vintage-year activity, the industry's concerns regarding more aggressive underwriting (including higher loan-to-value ratios, lower debt service coverages, interest-only loans) in 2005, and more so in 2006, may already be affecting delinquency numbers."

The rating agency is monitoring ratings on 2006 vintage CMBS deals and, while no rating action has been taken so far, is seeing an increasing number of them go delinquent, get transferred to special servicing, or appear on servicer watch lists.

The news of the day is how bad lending practices on subprime residential mortgages have led to a credit crunch in the financial markets as defaults and delinquencies on these loans started to rise as interest rates went up and the securities that the loans back have become less liquid. Early payment defaults are ...