Stronger Economy Means Defaults May Be Nearing Peak.

Employment numbers, the piece of the economic puzzle that has been holding back the current recovery, are finally shaping up, with March and April employment figures coming in really strong (the economy added 288,000 jobs in April, following March's strong job creation of 337,000, the Department of Labor has reported).This leaves no doubt that the economic recovery is moving ahead on all fronts. Federal Reserve action to move toward a tighter money policy by gradually raising interest rates, sooner rather than later, to curb inflation is likely to be the next step.

In this sort of scenario, the economic script calls for commercial mortgage delinquencies to peak sometime this year, considering that this is a lagging indicator, before they start declining. In a departure from this script, commercial mortgage delinquencies have been reported as declining for the first quarter, by Standard & Poor's.

The rating agency says in its first-quarter 2004 CMBS roundup that delinquencies on commercial mortgage-backed securities have actually declined from 1.96% for the last quarter of 2003 to 1.77% at the end of the first quarter (on a base of CMBS rated by S&P). However, the rating agency doesn't expect the decline in delinquencies to hold up. According to S&P analysts Roy Chun, Larry Kay and John Kemp, "The sustainability of the delinquency rate decline is in question. As one quarter does not make a trend, it is still too early to say that the upward trend has been broken. Even though positive job growth will benefit many property sectors, the effect will not immediately appear in the delinquency numbers. Standard & Poor's expects the delinquency rate to rise in 2004." One explanation for the seeming contradiction could be that the economic recovery has been gaining traction right from the middle of last year after the brief war in Iraq concluded, and that commercial mortgage delinquencies have already peaked.

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