Monday, July 26, 2010

Defaults to increase in 3rd quarter

Housingwire reports

Analysts at Deutsche Bank found that the number of new transfers into special servicing will continue to outpace commercial loan workouts. But once properties are ready for liquidation, valuations on commercial real estate are missing the mark, according to Deutsche Bank. More recent appraisals are needed on these properties to narrow the gap between liquidation expenses and proceeds.

The analysts projected an 18% delinquency rate on CMBS.

There we have it - a realistic delinquency rate - 18%. I believe that number.

If you've been watching the MSM, the WSJ, CNN, Fortune etc. all had articles over the last couple of weeks talking about the "accidental recovery in CMBS", and shiny unicorns that shit rainbows that taste like skittles, etc. etc.

I almost sold all CMBS just based on the CNN article alone - they highlight Hartford for pete's sake. You see something that rosy, written by someone who obviously knows little about the world in general and less about CMBS, highlighting "good" companies that were really the "bad" ones - well, you just have to interpret the opposite of how they intend to get anywhere close to reality.


crabsofsteel said...

Playing devil's advocate here: what makes you think the deliquency rate will be better than subprime residential? The same actors were involved, pretty much.

Dark Space said...

Did I say that somewhere?

I think it'll be much worse than what we're hearing out of Street research and the rating agencies, but not as bad as Subprime (not that I follow Subprime, nor do I know where/if delinquencies peaked there). Same players except on the borrower side - Subprime is a pool of the lowest credit borrowers in the residential space. CMBS is a pool of bad and good credits. Obviously all the borrowers are stressed in this environment to some extent, and you can obviously make arguments as to how to define bad borrowers and good borrowers, but it's safe to say that CMBS was not just a collection of the absolute worst borrowers in commercial real estate.

crabsofsteel said...

No, you didn't refer to subprime but FYI the delinquency rates are around 50% although they seem to have stabilized there for now. One line I draw between good and bad CMBS borrowers is whether their debt is interest-only. The I/O borrower could always afford to pay more for a given property, and Countrywide became a lender in 2006. Something like 80% of 2007 issuance was I/O. Thanks to SPEs, even a good borrower can walk away from an underwater loan. If CRE prices are down 30-40% and stay there, I think you'll see some deals come in a lot higher than 18% delinquent. In fact, we already have.

Dark Space said...

I agree completely - some deals will be way above 18%. I wouldn't be surprised to see a partial principal shortfalls at the AM level on 1 or 2 deals in particular. 18% on average though, for delinquencies, seems like the right ballpark. This 11% nonsense from folks like Realpoint seems way too optimistic (and they're more respectable than the other rating agencies...

Anonymous said...

Not even going to start with crabs.

CR, I think RP is saying they expect YE 2010 total dlq numbers will reach 11%. Not that it will be a total etc, just a YE 2010 number. I could be remembering wrong. The 11% isnt that hard to get to if you are near 9% now, and increasing at about 0.5% per month typically, then at YE 2010 the 9% will maybe be in 11% area.
Not sure what the 18% number is, but just make sure you are comparing apple to apples there.