By Brad Donnell
Just five years ago, the commercial real estate market and CMBS market was thriving. The delinquency rate on mortgage loans was at a record low, and the volume of new mortgages being sold to investors was at a record high. 2007 was a banner year for loan originations, topping $230 billion.
Now, the first of the 2007 vintage mortgages that were securitized have started to come due, and it is becoming very clear just how “corked” many of the loans were. The delinquency rate for commercial mortgage-backed securities hit an all-time high of 10.04% for May, up from 9.68% in March and 9.8% in April. The worst category is multifamily, with a delinquency rate of 15%. By comparison, in early 2007 when the loans were being made, less than one-third of 1% of all existing loans was delinquent.
That’s the first time the rate passed the 10% mark, fed largely by five-year loans that were made in 2007, when standards were at their weakest, and are now coming due. Borrowers have had substantial difficulty paying these off as underwriting and credit standards are now far more stringent. Even as the commercial-property market across theU.S.slowly recovers, more loans are falling into trouble because leases made during times when rents were higher are now rolling and renewing at lower rental rates.
Many loans may appear to be alive, but in reality, they are dead. Like zombies wandering the halls, many properties are producing enough cash to cover the monthly interest payments but are not worth enough to enable the loan to be refinanced or the guarantor is no longer financeable (or more likely, both).
Currently $59 billion in CMBS loans are past due. Only 28% of the loans from 2007 that have matured so far in 2012 have managed to pay off in full, said Manus Clancy, the senior managing director at Trepp, which monitors the commercial mortgage market. 61% of the CMBS loans that should have been repaid this year are still outstanding. Half were extended or otherwise modified, while the other half fall into the zombie category, meaning that they have not been modified but are continuing to exist with eyes closed and fingers crossed that something better happens soon.
Fortunately, the increase in delinquencies is not expected to continue for much longer. Most of those loans were made in the first half of 2007. CMBS volume started trailing off around mid-2007 as the first shocks of spreads becoming unstable and securitization losses began to be experienced by lenders. Therefore, maturities and defaults should slow in the last six months of the year as fewer bad apples are added to the pile. However, other loans in those securitizations were for 7 or 10 years, so new waves of losses may arrive in 2014 and again in 2017, but hopefully capitalization rates and rents will have further time to recover.
This still leaves the 2007 vintage securitization with some difficult decisions ahead. While servicers have become adept at the process of extending and pretending, at some point all the zombies they are creating always wind up eating you. If you have a loan that is maturing this year that may be challenging to refinance, please call us. We have several options available to help you navigate the process. From discounted payoffs, note purchases, and structured finance solutions, MCA has substantial experience “reconditioning” this difficult vintage.