More CMBS Defaults Coming this Fall as Special Servicers Try to Keep Up
With more commercial mortgage-backed securities (CMBS) loans on the verge of default this Fall, special servicers are being forced to accelerate them through the REO process to avoid building a shadow inventory similar to the one in residential. Eight loans in CMBS portfolios that hold balances greater than $20m are likely to default once they mature in August, according to the credit rating agency Fitch Ratings. Adam Fox, senior director at Fitch, said these five-year, interest only loans are proving difficult to refinance in the current market environment. The problem with refinancing is a lack of liquidity, and it’s raising the likelihood of a special servicing transfer for a modification or extension, according to Fitch. In August, Fitch expects 115 loans worth $1.3bn in balances to fall into special servicing and more to come through the rest of 2010, peaking in October at 181 loans at $2.1bn and totaling more than 772 loans worth $7.8bn. Analysts at Deutsche Bank found that the number of new transfers into special servicing will continue to outpace commercial loan workouts. But once properties are ready for liquidation, valuations on commercial real estate are missing the mark, according to Deutsche Bank. More recent appraisals are needed on these properties to narrow the gap between liquidation expenses and proceeds. The analysts projected an 18% delinquency rate on CMBS. Since the beginning of 2010, the balance of loans at least 90-days delinquent has increased every single month. “The implications for special servicers are potentially dire,” according to the Deutsche Bank report. “If they wait too long to foreclose or restructure loans, the number of loans in their portfolios will continue to build, so even when they finally resolve an asset it might not even make a dent.” Write to Jon Prior.