CMBS Delinquencies Peak Lower than Expected.(Commercial mortgage backed securities)

Commercial mortgage delinquencies have held up well in the current economic cycle, and appear to have peaked well below the 3% high that some commercial mortgage-backed securities market participants and rating agencies were anticipating CMBS delinquencies to touch during the recent economic downturn. And with the economic downturn clearly past, the delinquencies are not likely to climb further.

Fitch Ratings for one reports that its CMBS loan delinquency index declined to 1.27% in December, 42 basis points below its reading for December 2003 and two basis points lower than its November reading. Mary O' Rourke, a senior director with Fitch Ratings, observes, "In the course of the year, Fitch's delinquency index has gone from an all-time high of 1.69% to 1.27%, the same record-low rate last reported in September 2002. Fitch expects overall CMBS delinquencies to continue to decline over the next several months and believes a CMBS delinquency rate below 1.2% is possible by the end of 2005."

The rating agency reports declines overall on office, multifamily and industrial property-backed delinquencies. Fitch has seen retail-backed delinquencies edge up, however. Ms. O'Rourke notes, "Retail loan delinquencies may increase in the short term as a result of a post-holiday decline in consumer spending." Also, "There was an increase in hotel delinquencies in December, largely due to the inclusion of a previously unreported $87 million real estate-owned hotel property in Houston." Fitch expects office properties to show continued improvement in 2005 and multifamily loan defaults to decline, despite what the rating agency sees as "overbuilding" in some markets.

Delinquencies are down, but what happens to the loans that do ultimately default? Two other credit rating agencies have conducted loan loss severity studies on CMBS loans. One study carried out by Moody's Investors Service and Lehman Brothers found that the average loss severity for "all defaulted loans resolved with a loss" was 48% of the mortgage's outstanding balance. In the case of "all credit-impaired resolutions," including all loans 90 days or more delinquent that were resolved without a loss, the severity was 41%.

In the case of multifamily, retail, office and industrial property loans resolved with a loss, the study found average loss severity was 39% of the outstanding balance, while the average loss severity for "non-core" property types, such as ...