Wednesday, January 07, 2009

Commercial Mortgage Defaults
Here is a scary article. Commercial mortgages defaults are soaring. Default rates, currently at 1.2%, are expected to hit 3% by the end of 2009. Here is a quote:
But evidence is emerging that the commercial-property market -- which runs from apartment and office buildings to shopping malls and warehouses -- had some of the same excesses as the housing segment. An unusually high number of the underlying CMBS loans that are going bad were made and securitized in the past three years. That is a sign that investors overpaid greatly for those properties and that underwriting standards were loose. In many cases banks lent money based on future income assumptions rather than current cash flows, experts say.
Here is the chart from the article highlighting the defaults:

The article makes some good points. But it does not put the current defaults into a historical perspective. The chart above would be better if it went back to 2000. According to a research report from Deutsche Bank (that may have sourced part of the article), defaults in 2002, 2003 and 2004 approached 2%, nearly double today's rate. As quoted above, the article stated that many CMBS loans securitized over the past three years are in trouble, but the Deutsche Bank report showed this happening over other time periods as well.

The chart for multifamily looks the worst. But I suspect that this default rate is not due to traditional apartment transactions, but apartments that were bought by condo converters who paid over market price with expectations of selling units as condos. With a housing market in the tank, no cash flow due to empty units that were converted and not sold, or worse stuck in the middle of the conversion process, the multifamily default rate is not surprising. The Deutsche Bank report detailed one portfolio that had four converter loans and all were in default or past due.

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