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Commercial Loan Liquidity Still OK

S&P issues Q4 CMBS report

May 8, 2008

By MortgageDaily.com staff

Despite growing concern that a major wave of balloon payments on commercial mortgages coming due would have difficulty refinancing, a new report indicates these borrowers are finding lenders. But that hasn't stopped delinquency from rising.

The U.S. commercial mortgage-backed securities market is facing its first major wave of balloon mortgage maturities this year, according to CMBS Quarterly Insights from Standard & Poor's Ratings Services. But despite the current credit crunch, S&P said first-quarter refinancings went "quite well."

About $16.5 billion in S&P-rated CMBS loans mature this year, with 480 loans for $4.2 billion having matured during the first quarter. Over half of all fixed-rate loans outstanding mature between 2015 and 2017.

Total CMBS rated by the agency are around $591.2 billion, with nearly a third of fixed-rate CMBS backed by retail properties, 30 percent backed by office properties and 16 percent backed by multifamily properties.

While costs are higher, S&P noted balance sheet lenders and other market participants have stepped in to take advantage of a window of opportunity for achieving attractive pricing even on conservatively underwritten loans.

Delinquent CMBS loans totaled $2.7 billion for 0.43 percent on March 31, climbing from $2.3 billion for 0.34 percent at yearend. Quarterly CMBS delinquency has consistently risen since reaching the bottom in the first quarter 2007. Delinquency growth will likely continue at the same pace.

Recent CMBS vintages are seeing a bigger increase in delinquencies than older vintages, more than half of first-quarter delinquency being in issuances from 2005 to 2007.

"We expect 2008 will bring further challenges for CMBS performance," S&P stated. "Besides anemic economic growth and higher levels of balloon maturities, the aggressively underwritten loans of the 2005-2007 CMBS vintages are either entering or are already in their 13th to 18th months of seasoning, which is typically a period of increased default risk."

CMBS multifamily delinquency accounted for 55 percent of total delinquency. The rate is the highest since lodging loans reach a record in 2003 when travel had declined in the wake of the terrorist attacks. Nevada, Texas and Florida saw the highest level of multifamily delinquencies. A single loan on a Nevada condominium-conversion property drove that state's delinquency higher than any other.

All of this activity led S&P to issue 54 downgrades in the first quarter -- the highest number since the first quarter of 2004. The upgrade-to-downgrade ratio declined to 1.70-to-one in the first quarter from 2.87-to-1 in the fourth quarter.

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