Monday, June 15, 2009

Commercial Mortgage Backed Securities score Record Defaults!

Commercial mortgage-backed securities (CMBS) (securities backed by commercial mortgages) experienced a 2.07% delinquency rate in May as multifamily and retail properties showed weaker performance, driving loan defaults.

It marks the highest CMBS delinquency rate ever recorded by Fitch Ratings since beginning its loan delinquency index in 2001!

“Defaults on larger loans continue to drive delinquency increases because later vintage transactions (closer to the peak of the housing bubble) have larger loans, many underwritten with now unrealized proforma income, as well as now-depleted debt service reserves and high leverage,” says US CMBS group head Susan Merrick in a media statement today.

One of the largest delinquent loans included in the index, Mansions Multifamily Portfolio, was added in the month, accounting for some of the jump from 1.78% at the end of April. The portfolio, worth $160m, consists of four cross-collateralized and cross-defaulted loans, according to the rating agency.

Fitch says declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, pushed the multifamily delinquency rate to 4.55%, the highest of all property types. Multifamily properties are highly susceptible to default in CMBS during the current economic downturn, according to the rating agency.

My comments:

This will certainly Not be the all time record of defaults, the worst is yet to come!

I have seen estimates that as many as 1/3 of all commercial mortgages will default in the next few years, which will Decimate the CMBS values and with them, the balance sheets of the banks, insurance companies and pension funds that are the their biggest holders.

I have written previously about the peril these commercial mortgage defaults represent to insurance companies and ultimately to your policies.

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