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Commercial Mortgage Delinquencies in Securities Pools Continue Climb

Underperforming properties in states with weak economies led to another increase in U.S. commercial mortgage-backed securities (CMBS) delinquencies in April, according to the latest index results from ""Fitch Ratings"":http://www.fitchratings.com. The agency puts the CMBS delinquency rate at 7.48 percent, up from 7.14 percent in March.


""Because real estate fundamentals lag the overall economy, we're now seeing property market weakness in those states that were hit hardest during the recession,"" said Mary MacNeill, a managing director at Fitch. ""The highest loan delinquencies are concentrated in Sun Belt and Rust Belt states characterized by high unemployment, low personal income growth, and weak productivity.""

According to MacNeill, eight states have delinquency rates in excess of 10 percent. Nevada tops the list at 18.77 percent. The others include: Hawaii, Louisiana, Arizona, Michigan, Tennessee, Florida, and Indiana.

Those eight states represent 14.4 percent of the Fitch's rated universe but account for 24.1 percent of all delinquencies.

With no significant movement in delinquencies specific to any one property type last month, Fitch calculates the current delinquency rates for each property sector as follows:

* Hotel: 18.42 percent
* Multifamily: 13.60 percent
* Retail: 5.83 percent
* Industrial: 4.60 percent
* Office: 3.97 percent

Though commercial mortgage delinquencies are expected to continue to increase, Fitch maintains stable or positive rating outlooks on 75 percent of its U.S. CMBS portfolio and says recent rating actions have taken into account a continued rise in delinquencies.

According to Fitch, the 34 basis point climb in April represented a slowdown relative to previous months, owing in part to special servicers working through the inventory of defaulted loans.

The agency found that approximately $1.8 billion of loans that were delinquent in March did not reappear in the index in April due to a combination of liquidations,


repayments upon refinancing, and loan modifications or corrections. Fitch says loan resolutions within its delinquency index totaled approximately $1.5 billion in March, compared to $1.1 billion in February and less than $1 billion in prior months.

Interestingly enough, a separate report from ""Moody's Investors Service"":http://www.moodys.com paints an altogether different picture of the pace of delinquency increases. Moody's delinquency tracker shows that past due loans in CMBS pools it covers climbed to 7.02 percent in April, up from 6.42 percent in March. But the agency says April's 60 basis point jump is the second biggest delinquency increase it has ever recorded, outdone only by the record 69 basis point increase recorded just the month before.

Moody's says April saw a net increase of nearly $3.7 billion to the balance of delinquent loans. During the month, 415 loans totaling $5.9 billion moved into delinquency, while 230 loans became current or worked out and reduced the delinquent balance by about $2.3 billion.

Moody's tracks all loans in U.S. conduit and fusion deals issued in 1998 or later with a current balance greater than zero. By property type, the agency puts the delinquency rates as follows:

* Hotel: 12.98 percent
* Multifamily: 12.87 percent
* Retail: 5.86 percent
* Industrial: 5.24 percent
* Office: 4.58 percent

By state, Nevada saw its rate soar after two loans backed by exhibit halls in Las Vegas moved into foreclosure. It now has a 20.02 percent delinquency rate, Moody's says, which exceeds the rate for any other state by more than 500 basis points.

So, is optimism or pessimism the correct feeling towards the CMBS market?

Malay Bansal, head of portfolio management and advisory for commercial real estate and CMBS at NewOak Capital in Manhattan, commented, ""Just when spread tightening in [the] last two months had started making market participants more optimistic, volatility came back to the CMBS market, and is causing some to wonder if optimism is the appropriate feeling towards commercial real estate at this point.""

Bansal pointed to a recent survey of 300-plus top executives in the U.S. commercial real estate market, which revealed ""an interesting statistic regarding optimism vs pessimism,"" he said.

""The pessimistic part was that 60 percent of respondents described themselves as bearish and did not expect the CMBS market to return in time to help refinance more than $150 billion in CMBS loans coming due in [the] next two years. The optimistic part was that the number of bears has come down from 90 percent in September 2008 to the current 60 percent,"" Bansal said.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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