Trepp: CMBS Delinquencies Spike in July to Hit an All-Time High

The commercial mortgage-backed securities (CMBS) market had been abuzz with positive momentum and murmurings of recovery for the better part of this year, but ""Trepp LLC"":http://www.trepp.com says that has all but vanished within the past few weeks.

The New York-based commercial real estate research firm reported Tuesday that its monthly CMBS delinquency reading for July surpassed the previous record.

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Last month, the delinquency rate for U.S. commercial real estate loans in CMBS shot up 51 basis points to 9.88 percent, according to Trepp's market analysis. The company says this is the highest delinquency rate in the history of the CMBS market.

The spike comes after Trepp recorded two consecutive drops in the rate for May and June, which marked the first back-to-back monthly declines since the credit crisis began in 2008.

The company’s analysts note that throughout the spring, the market was riding a wave of spread tightening,

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resulting in new issuance, greater velocity of troubled-loan resolution, and falling delinquency levels. However, each of those positive reactions has taken a turn for the worse in the last two months, according to Trepp.

In June, CMBS spreads widened noticeably, and this trend continued for the better part of July, the company explained. In turn, CMBS issuers became tentative about new lending, and Trepp says this led some industry players to begin lowering their expectations for CMBS lending in the second half of 2011.

Then, S&P said late last week that it was pulling its rating for a new issue underwritten by Goldman Sachs and Citibank. This move forced the lenders to ""pull the new deal"":http://www.themreport.com/articles/citigroup-goldman-yank-cmbs-deal-2011-07-29 from the market, and Trepp says it’s introduced an entirely new level of risk to new-issue CMBS.

“With the commercial real estate market already worried about how borrowers were going to find enough financing to handle the wave of loan maturities hitting the market over the next few years, this only added to current concerns,” Trepp said in its report.

And now, there’s the news that CMBS delinquencies have surged to a new all-time high.

Trepp says much of the jump, however, can be credited to a technical change in the way some special servicers have been reporting data.

Historically, the firm has treated a loan as delinquent when the servicer said they were pursuing a foreclosure strategy.

Recently, though, there has been an increase in the percentage of in loans that were on a dual-track of modification and foreclosure but still assigned a “foreclosure” workout code, Trepp explained.