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Rising CMBS Delinquency Rates to Continue in 2002

NEW YORK, Feb 15, 2002 /PRNewswire via COMTEX/ -- Standard & Poor's recently noted that delinquencies have continued to rise dramatically since the third quarter of 2001. In fact, it recently stated that the rate has increased to 2% in the two months following December 2001, at which time the rate was 1.7% as reported in the January 2002 edition of "CMBS Quarterly Insights."

The analysis of delinquency rates has also revealed that the month-to-month percentage increase in the delinquency rate from the beginning of January 2002 to the beginning of February 2002 was only about 5%, compared to approximately 12% in the prior month. While Standard & Poor's expects the delinquency rate to continue to rise, last month's more moderate increase may be a sign that the rate of increase going forward may not be as dramatic as it has been since the third quarter of 2001. At the beginning of September 2001, the rate stood at 1.21%.

The continuing deterioration, specifically in the lodging property sector, is the primary reason for the spike in the overall delinquency rate. Just prior to September 2001, the delinquency rate on lodging property loans in Standard & Poor's-rated CMBS transactions stood at 2.7%. By the end of 2001, lodging property loans had a delinquency rate of 5.6%. At the beginning of February 2002, the delinquency rate on lodging property loans had escalated to 7.5%. There is some preliminary mortgage performance data suggesting that the growth in this sector's delinquency rate may slow, but still could reach 10% by later this year.

The performance of the lodging property sector has been severely hurt by the cuts in corporate travel. The major business destination markets and the first tier recreation/business meeting markets have experienced the largest declines in revenue per available room (RevPAR). The decline in room revenue (RevPAR) during 2001 exceeds the revenue declines that occurred in 1991, and it now appears that the improvement in 2002 will be very modest-approximately 2.0%, indicating that the delinquency rate will continue to rise. Even this tepid outlook, though, depends on an economic recovery by the middle of 2002.

While the delinquency rates for mortgages in the major property sectors have increased in recent months, they remain below 1.5%, on average. The office sector's delinquency rate is below 1.0%. However, the office property vacancy rate has increased dramatically during the last year, and even reached 20.0% in a few markets by the end of 2001. The vacancy rate in most markets will continue to increase in 2002 as new property is added to the inventory. Peter P. Kozel, Ph.D., Director of Real Estate Research in Standard & Poor's Structured Finance group, indicated that "If the economy does not pull out of recession by the middle of 2002, then these high vacancy rates will lead to a substantial increase in the mortgage delinquency rate."

"Of major credit concern is the amount of loans that have been placed in special servicing which are not in loan payment default," noted Roy Chun, Director of Standard & Poor's CMBS surveillance group. "We have polled the servicers, and initial feedback indicates that there currently is a very high volume of loans at special servicing that are current but were transferred to special due to a risk of imminent default." Mr. Chun indicated that Standard & Poor's will publish a report shortly that will highlight the results of its poll.

Standard & Poor's

Roy Chun

or Peter P Kozel, Ph.D.,

both of Standard & Poor's Ratings Services

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