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Rising US CMBS Delinquencies Concentrated in Distressed States (May 19, 2009)

Location: New York
Author: Susan Merrick
Date: Tuesday, May 19, 2009

New defaults corresponding to loans located in U.S. states with the most economic stress are emerging for U.S. CMBS as monthly late-pays increased 25 basis points to 1.78%, according to the latest U.S. CMBS loan delinquency index results from Fitch Ratings.

'Emerging trends suggest that collateral located in states facing the bleakest economic conditions are seeing systemic declines in occupancy and net operating income, which have pushed property valuations lower and loan default rates higher,' said Fitch Managing Director and U.S. CMBS Group Head Susan Merrick. 'Maturity defaults represent a diminishing proportion of the index at 8.3%, while performance defaults continue to rise'.

Michigan has the highest proportion of loans currently in default for any state, with 6.89% of all loans at least 60 days delinquent or in foreclosure. The Michigan delinquencies consist of 100 loans totaling $501 million, and include 20% of all delinquent industrial loans across the index. Other states with the weakest loan performance and steadily increasing state-wide delinquency rates include:

  • Tennessee 6.57%,
  • Ohio 4.34%,
  • Indiana 4%,
  • Rhode Island 3.76%,

While the loans secured by properties located in the worst performing states account for less than 6% of the Fitch-rated universe by balance, they make up nearly one-fourth of all real estate owned (REO) loans tracked in the index - an indication that special servicers are finding limited opportunities to work out or to quickly dispose of assets in these locations. Each of the preceding states has an unemployment rate significantly higher than the 8.9% national rate.

Fitch has also identified an acceleration in CMBS loan defaults for those states with the worst performing housing markets, as measured by home price depreciation and foreclosure rates. Over the past six months, delinquencies corresponding to loans collateralized by properties in California, Florida, and Nevada have risen at a pace nearly twice as fast as that of other states.

Fitch notes that in recent months, the volume of loans leaving the index each month due to resolution has increased. However, the pace of new delinquencies continues to outweigh resolutions. Last month, $383 million of loans (eight bps) resolved, compared to resolutions of $289 million (six bps) and $121 million (two bps) three and six months prior, respectively. Of the 68 loans which were delinquent in March but did not reappear in April's index, only 4% paid off, while 22% were liquidated for a loss and an additional 22% were modified or extended by the servicer. Fitch has found that the remaining half of resolutions are likely to return to the index in future periods. These loans were generally brought current (or remained 30 days delinquent) as the respective borrowers made partial payments; lockboxes swept excess cash flow; or reserve accounts were applied to debt service deficiency amounts. For instance, the Riverton Apartments loan, which in March was excluded from the index due to the repayment from reserve accounts of past due amounts, reappeared in the April reading due to foreclosure actions filed by the servicer.

To date, the loan delinquency index has not been heavily impacted by the chapter 11 bankruptcy filing of mall owner and operator General Growth Properties (GGP). The CMBS loans sponsored by GGP which have been included in the bankruptcy filing have been or will be transferred to special servicing, but will not be included in the delinquency index unless balloon defaults occur upon maturity or monthly debt service payments are discontinued.

Fitch's delinquency index includes 1,432 delinquent loans totaling $8.5 billion, out of the Fitch rated universe of approximately 43,000 loans totaling $479 billion.

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