Moody's Sees CMBS Delinquency Poised to Rise 9%-11% in 12 Months
Moody's Investors Service expects the share of commercial mortgage-backed securities loans that are delinquent or in special servicing to continue to rise over the next year. Analysts expect delinquencies to increase by 9% to 11% during the next 12 months with loans in special servicing climbing to about 20%, which would be up from the current 11.3% and 5% a year ago. Analysts said $3.2bn of commercial loan debt was liquidated between Jan. 1 and June 15, including $731m in March and another $743m in April -- which represents the highest-monthly total ever, according to Moody's. For the entire same period a year ago, a mere $600m of loans were liquidated. Senior analyst Keith Banhazl said he wouldn't be surprised if the agency's next quarterly report shows a monthly amount of liquidated loans that's even higher than April. The overall weighted average loss severity rate for liquidated loans at the end of the second quarter increased to 35.4% from 34% in the first quarter. And analysts expect the rate to continue to climb as more loans originated between 2006 and 2008 liquidate. Loss severities can have a significant impact on the agency's expected loss ratings and the current downward turn in the real estate cycle "can impact the probability that a loan will default and its loss severity." Loan extensions may mitigate loss severity, "as moving a maturity date away from a depressed market period to a more robust period is likely to minimize severities," according to analysts. Analysts pointed to lax underwriting standards; the absence of amortization and other structural features in loans; low capitalization rates; reduced market liquidity; and the overall economic downturn when forecasting higher loss severities. Moody's also expects delinquent loans originated in 2006 to 2008 "to have a higher-than-average loss severity absent any modifications by the special servicer" because of "high leverage and valuation levels at origination, the lack of loan amortization, and depressed property values at liquidation." Write to Jason Philyaw.