According to Trepp, one of the world’s leading providers of global research and analysis for the securities and investment management industry, the delinquency rate for Commercial Mortgage-Backed Securities (CMBS) hit a 14-month high-water mark in December 2016. At 5.23%, the rate of CMBS delinquencies was 20 basis points higher than a month earlier (November 2016).
So what does this mean in terms of what industry watchers might expect in the next year
and beyond? Is this a prelude to the CMBS ghosts of 2007 making a revival?
Since the 2007 crisis, some borrowers have seen respite to their dire situations. With their property values on the rise, and their own financial situations set to improve gradually, they are in a much better position today to re-finance upcoming loans.
According to Trepp, over $54.5B of CMBS conduit loans matured in 2015. By 2018, the researcher forecasts nearly $205.2 of such loans to become due. $87.1 billion of that came due in 2016, while over $105.8 billion is set to mature this year – 2017. When we compare these amounts to what matured in 2014 ($37B) and 2015 ($70B), we can see there is a definite uptrend in delinquencies.That uptrend is forecast to dip in 2018, with $12.8 billion up for re-negotiation that year.
While the fortunate few have managed to make a comeback, for many others things don’t look too good! Barely able to keep up with their payments; and with scant equity created in the property they own, these unfortunates aren’t seeing their property values appreciate either.
For them, as for the general CMBS market, there’s more doom to come!
THE SQUEEZE IS ON
For CMBS loan borrowers who are up for re-financing, things could get even tougher. With the massive volume of debt that’s coming due, and the spectre of 2007 still looming large, many lenders are taking a fresh look at their own lending practices. The ensuing soul-searching is causing lenders to more closely review their regulatory compliance, with many of them now requiring borrowers to meet a higher underwriting standard – that of current income as opposed to projected income.
As a result, some lenders have been forced to close shop and exit the CMBS marketplace, with others preparing to brace a fresh onslaught of defaulters and delinquencies.
BIG NAMES…BIG PAINS
Big names like CA Technologies (formerly Computer Associates) are not immune to the CMBS turmoil’s either. In August 2016, Fitch Rating had tagged CA’s commercial loan for purchase of its former HQ as “high probability” of defaulting. While CA finally did agree to a sale-leaseback arrangement, the loan (which was part of a $4.2 collateral for Goldman Sachs Mortgage Securities), highlights the murky waters of the CMBS business.
Wealth manager UBS was yet another ‘big name’ that has been swept by the tidal wave of bad CMBS loans. Early last year, its $156 million mortgage against its downtown Stamford premises, which it had securitized in association with Lehman Brothers, was put into the hands of a “special servicer” who deals with problem loans.
While these are just a few examples of ‘name brand’ borrowers defaulting on their mortgage commitments, it sets the tone of what we are to expect in 2017 and beyond. According to a report from Kroll Bond Rating Agency, “lending volumes for both insured depositories and non-bank lenders are likely to fall in 2017 and beyond…” The report expects a sharp decline in refinancing volume – from $263B in Q4 2016 to
just under $145B in Q1 of 2017.
And if businesses, homeowners and corporations can’t refinance – then what?
BRACING FOR THE FALL
Industry watchers are concerned about the massive tide of maturities that loom from now till 2018. While the 2018 wave is expected to be less “messy” – largely due to improving real estate values in certain areas, the CMBS market as a whole faces other headwinds.
Though employment rates are improving gradually, large segments of mortgage holders aren’t benefiting from the green shoots in the economy. Add to that the increasing demand by many lenders for lower loan-to-value (LTV ratio) requirements, and toss in potential (impending) interest rate hikes – and we are looking at a recipe for disaster.
Borrowers, whose loans are set to mature shortly, shouldn’t automatically expect that they will get renewed. Lenders, who have such loans on their books, should worry about what course of action to follow if/when their clients default.
In either case, it does seem as though the ghost of the sub-prime past is once again rearing its ugly head. Let’s hope this time everyone involved – lenders, accountants, real estate lawyers, borrowers, regulators – are well prepared and already bracing for the fall!
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