Loss Severities on CMBS Loan Liquidations Drop, a First in Two Years

Loans backing commercial mortgage-backed securities (CMBS) that were liquidated at a loss in the first quarter carried an average loss severity of 38 percent, according to data released by ""Moody's Investors Service"":http://www.moodys.com Wednesday.

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That figure represents a decline from 40 percent for the previous quarter. Excluding loans with losses of less than 2 percent, the average loss severity still dropped, from 53 percent to 52 percent.

The declines were the first reduction in the severity of losses since the fourth quarter of 2008, Moody's said.

The New York-based ratings agency noted, though, that average severities were still up 4 percent year-over-year in the first quarter. During the first quarter of this year, 391 loans liquidated for a loss.

""As commercial real estate markets begin to bottom out and valuations firm up, loan defaults should taper off and smaller severities of loss can be anticipated,"" according to Keith Banhazl, a Moody's VP and senior analyst.

Moody's expects to see stabilizing property values, higher transaction volumes, a slowing in the pace of loan delinquencies, and greater liquidity for commercial real estate in 2011.

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Over the 12 months ending in March, a total of $11.4 billion of CMBS debt was in liquidation, a $7.8 billion increase over the previous 12-month period, according to Moody's analysis.

Loans backed by healthcare properties have the highest loss severities, Moody's said, while loans backed by office properties have the lowest.

In a separate report, the ratings agency said the delinquency rate on loans included in U.S. CMBS inched up six basis points in April to 9.22 percent.

More significantly, the ratings agency reported, the total dollar balance of delinquent loans declined for the second straight month in April, slipping to $56.4 billion from $56.5 billion in March.

However CMBS loans outstanding fell by over $5 billion in April, leading to the uptick in the delinquency rate, Moody’s explained.

During April loans totaling $2.9 billion became newly delinquent, while previously delinquent loans for $3.0 billion became current, worked out, or were liquidated, according to Moody’s report. In all, the total number of delinquent loans decreased to 4,047 in April from 4,097 in March.

""We expect the delinquency rate to run high single digits to low double digits over the near term,"" said Tad Philipp, Moody’s director of CRE research. ""The resolution process is in full swing, and liquidations should roughly balance new defaults.""

Among the top 25 metropolitan statistical areas, Moody’s says the five best performing are Boston (2.9% delinquency rate), Seattle (3.4%), Washington D.C. (3.7%), San Francisco (3.8%), and San Jose (3.9%).

The five worst performing major metro areas are Las Vegas (29.4%), Riverside (19.8%), Tampa (17.9%), Phoenix (17.4%), and Orlando (15.5%).