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    Wednesday, April 23, 2008

    CMBS Delinquencies rise slightly

    U.S. CMBS delinquencies rise slightly

    April 21, 2008
    Although delinquencies on residential mortgage loans continue to skyrocket, that’s not occurring among U.S. commercial mortgage-backed securities (CMBS). Securities backed by commercial real estate loans deteriorated only modestly last month even as the real estate industry continued to struggle.According to Fitch Ratings’ CMBS delinquency index, the delinquency rate rose by three basis points, to 0.33%, in March, the second monthly increase in a row.“At this point, there is not cause for alarm,” Susan Merrick, managing director and CMBS group head, said in an interview. Although the delinquency rate is expected to rise to about 1% over the course of this year, Ms. Merrick said it will still be “just a bit above the historic average.”

    Comment: This level of delinquency is surprisingly low.

    There was some bad news for the CMBS market. Fitch noted an uptick in loans underlying the CMBS that are not refinancing precisely at their maturity date, thus putting them in non-performing status. The number of non-performing matured loans—that is, loans at least a year old—increased to 11.6% of the Fitch delinquency index in March, compared with 2.9% a year ago. But Ms. Merrick said the 11.6% of non-performing matured loans at the end of March “is not substantial, given the very low base it has risen from.” She said the majority of the fixed-rate non-performing matured loans pay off in full or extend their terms within 60 days of being transferred to special servicing or delinquent status. For example, of the 26 fixed-rate non-performing matured loans, with a total value of $79.5 million, at the end of January, only eight loans, comprising $26.2 million, remained in special servicing and had not refinanced by the end of March. Although more of these loans are reaching maturity without financing in place, the loans are continuing to pay off near maturity, thus avoiding default status. “Certainly there’s a lot less capital in the markets, but the loans that have matured so far have refinanced” when necessary, with capital being provided either by regional banks or insurance companies, Ms. Merrick said. Multi-family property loans made up most of the rise in the delinquency index, followed by office, retail, hotel, manufactured housing and mixed-use properties.

    Comment: The state of the CMBS market gives me confidence that we will not see deterioration like that which has occurred in the residential market migrate to the Commercial Office market in any significant way. It is worth keeping a close eye on this indicator.

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