Liquidated CMBS Loan Volume, Average Losses Plunge

CoStar reports:

volume of CMBS conduit loans liquidated in February retreated sharply, falling 43%...
...February liquidations were about $228 million--representing an average loss severity of 25.55% ...

Fitch - CMBS losses May Be "Manageable" 4% - 5% When Deals Mature

That's the Bloomberg headline, good for a laugh.

They go on to clarify that losses on all CMBS issued/rated prior to mid-2007 have been just 2.6% and will increase to 10.6% by maturity. I wasn't able to tie in the numbers from the headline to anything in the article, but double digit loss projections at least have the right number of digits...

The insanity!

The WSJ had a cute little article and imagery regarding CMBS loan mods. Nothing groundbreaking, but I didn't want to be accused of missing a story about CMBS in the MSM again.

There was a reminder in there that Fitch's highest loss projection on any one deal is just 11.7%. This number is trotted out right before they compare it to an annualized default rate, but describe it as a cumulative default rate (comparing it to a Loss rate, nonetheless). To cement their lack of understanding in the CMBS market, they later make a reference to the early-90s, which had an AVERAGE loss rate of 8% (and they think Fitch's CMBS worst deal forecast of 11.7% is reasonable enough to put into print).

CMBS Delinquency Rate Accelerates - Now Above 7%

Trepp makes it seem as if this was unexpected...

Overall, the percentage of loans 30 or more days delinquent, in foreclosure or REO, jumped 89 basis points - the highest monthly increase since the summer of 2009. The positive spin on that number is that it was inflated by about 40 basis points by the fact that the $3 billion Stuyvesant Town loan in Manhattan is now considered "in foreclosure."

It's embarrassingly reminiscent of a MSM report at first, but there are some redeeming nuggets of information...

More recently, weakness has extended to the Paci c Northwest states of Washington and Oregon. Other areas for concern are the Carolinas and Colorado and, to a lesser extent, New York and Pennsylvania....
The assets of the 200 banks we predict will fail total $170 billion - similar to the total for 2009...
The Deposit Insurance Fund (DIF) is getting a boost from $46 billion of accelerated insurance premiums from banks, which was collected in the fourth quarter. The cost of failures during 2010 will likely eat up most of that sum.

Losses will increases for CMBS!!! Read All About It!

I don't know if you heard, but CMBS losses are expected to be higher than historical averages! Apparently it is caused by longer workout periods?!? according to the chick below who regurgitates it for Bloomberg:

Oct. 20 (Bloomberg) -- Losses on commercial mortgage-backed securities are forecast to increase in severity due to a more than threefold increase in the time it takes to restructure underperforming loans, according to Fitch Ratings’ latest annual report on CMBS.

She's not alone, the official press release says:

It should be noted that other property types other than multifamily collectively make up a significantly smaller piece of the CMBS loan universe.

Multifamily does not make up more than the all the other sectors put together. The loss severity Fitch is referring too is in line with historical averages even during good times - mid 30% area. Of course it is going to get worse. The only interesting part is that they believe workout periods will multiply by 3 on average - that means it will take nearly 4 years to work out defaulted loans. If you could put any stock, at all, in anything that Fitch says today, that would be worth something. I think they're probably off by about 2 years (too long), though.

Live Fast, Die Young

S&P managed to downgrade a bond from AAA to BBB- and back to AAA with in ONE WEEK!

Let's not even discuss the fact that the bond has a break-even default rate above 100% - i.e. default all the loans underlying it, and you still get 100% of principal back.

Less Slow

Things got less slow the while I was out of town, but bid lists remain extremely sluggish.

PPIP details released as-advertised. Will include AJs and AMs.

REIS reported MF vacancies at a 22-year high.

Deutsche sold it's last Macklowe legacy asset for $330 (something) a square foot last week.

Deal Junkie highlighted an interesting article on co-tenancy - nothing new here, but just interesting.

Deal Junkie also highlighted an article where Cadwalader is asking lawyers to take a year off ... My favorite yard-hat is the one with Cadwalader on the front, because whichever neighbor walks up to me just keeps staring up at the name trying to figure it out.

Congress just got an earful about the horrible state of CRE from all sorts of folks, including Street analysts. All is lost.

June Retail sales were negative. Retail vacancies hit 10%! BUT Office vacancies win with a 15.9% vacancy rate.

In Miami Florida at the "Big House", Maison Grande filed for bankruptcy. They are a Condo Association (COA).

Duh, RevPAR is down.

Fear not, I'm not switching to a linkfest form, just been away - we'll try to say something more meaningful in the coming days. Spreads rallied today behind all this gleeful news (see, there!).

Not the NY Waterview that your thinking of, but the Chicago one....

Failed condo projects continue to be the primary scourge in CRE.... From Calculated Risk, and others, go to CR's page for a nice image and crane controversy.

Financial Overhaul rules

Some highlights, but more later...

• Residual Interests of 5% - pfandbriefe, covered bonds, etc. Consumer ABS deals typically had retained interests too - as an issuer, you can effectively value them at close to zero, pass the costs along to other investors (and ultimately the consumer/borrowers), and enjoy any upside with no risk. In CMBS the mechanism is to have the special servicer buy the first loss piece. For subprime HEQ, they just made horrible loans to people who never should have had them and sold them to investors who never should have bought them - that mechanism is currently working as well through foreclosures and invesment losses.
  
• Lack of data on loans - Even in consumer and resi ABS, there are fairly sophisticated models built around fairly detailed data.
  
• The SEC does not currently have a system to track ABS? Surely WAPO misinterpreted - I haven't finished the 85 page doc yet. Maybe their going to decimate the bid/ask and put Wall Street traders out of business, or at least severely hobble it, similar to what happened in corporates.
  
• New rating scale for securitized products - this is a bad idea for so many reasons.
  
• Indications that there is a problem with the issuer-paid ratings model - the flip side of that, a consumer-paid ratings model doesn't work either, because most consumers wouldn't pay for it (just the ones whose charters required it, and even they would busily re-write the rules). Investors need to focus their expenses on evaluating the investments - you get paid for doing your homework, not for taking the letter-rating off the guy next to you who did his homework.

Update:

• Regarding the new rating scale, changing ratings on securitized products to some new scale, say S.AAA instead of AAA, doesn't do anything at all except add to confusion and opaqueness in the market place. Further, what does it mean for insurance companies that have ratios and charters based on the historical rating system - obviously they have to change their rules/policies. I'm a strong believer, along with the majority of the market I would imagine, that the ratings are more or less worthless. Yesterday's release makes note of this with the comment "Regulators should reduce their use of ratings in regulatory and supervisory practices where ever possible".
• The lack of transparent information is an important issue - the more data, and the more normalized it is, the better it is for the market. However, I don't think the SEC has a clue what level of information is available in both the resi and CRE market - it's very comparable to the level of detail a bank would have if it were purchasing a portfolio of loans or another whole bank. The same can't be said for consumer ABS or CDOs.

None of this debate is new, and the government solutions have the same problems they did over a year ago. In fact, almost one year ago BOA published a report titled "The Illusion of Progress", which touched on all these topics (I'm more or less in agreement) and also discussed accounting changes and price transparency.

CRE Losses at Banks

Everyone is waiting for this wave to hit, but the WSJ took a different look at it today and plugged the data from 900 or so regionals and locals into the "Stress Tests" previously performed on the 19 largest financial institutions.

The results were an expected $100 billion loss, and a possible $200 billion loss. That result is in line with some of the projections you see from other sources such as Goldman or Moody's, based on different kinds of analyses (Maturity schedules, credit quality, etc.). However, if you're like me and think the "Stress Test" were a joke, then you're also probably like me and think that Goldman and Moody's analyses were jokes as well. Nonetheless, an interesting take...

Total losses at those banks could surpass $200 billion over that period, according to the Journal's analysis, which utilized the same worst-case scenario the federal government used in its recent stress tests of 19 large banks. Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks analyzed by the Journal.

We're Halfway There!

Some very long-term landmarks are in sight. Right below Dow 7000, not 2% down from here, is a point at which half of the entire rise from the 1932 Depression low to the ultimate October 2007 high will have gone away. That's explainable given the low-double-digit Dow of '32, but losing half of 75 years worth of upside in 16 months is . . . quite something.

-Barron's Mike Santoli

All is Lost...

The CRE world has some pain coming, and no one denies that, but The Great Commercial Real Estate Crash: Mark Your Calendars in this week's WSJ misses the point.

Commercial real-estate securities have been Wall Street’s last claim to dignity. You might remember that Lehman Brothers Holdings in the final days pinned its hopes for survival on the values of its commercial real-estate portfolio.

Last claim to dignity? I must be on a different train - CRE has been the favorite whipping boy for at least the last 7 months. REIT equity prices are more than 40% off their highs, double digit unlevered returns are possible in AAA CMBS, and the AAA CMBX indices are implying the underlyings will experience losses 4 and 5 times history?

pinned its hopes for suvival on the values of its CRE portfolio? The train crash that I witnessed has Lehman moving some of the worst CRE assets out there into a separate entity - it was dumping them, not pinning its hopes for survival on them.

Commercial real-estate loans, including commercial mortgage-backed securities and collateralized debt obligations, total $3.7 trillion. It is only a slow burn right now: Many of those CMBS and CDOs mature in 2010 and 2011

The Fed reports outstanding CRE loans closer to $3 trillion, and a little less than 1/3rd of that is CMBS. The Journal might be double counting CDOs, but its not clear. I'm just roughing the numbers based on others' research, but the refi wave really starts in late 2011 and 2012 - less than 8% of the outstanding CMBS mature in 2009 and 2010 combined, and 2011 & 2012 have less than 9% of the outstanding each; most of those are 10-year loans maturing out of deals underwritten at the turn of the century. Late 2011, and 2012 are a little more problematic because the handful of 5-year loans from '06 and '07 deals start to mature.

Who stands to hurt the most? The list starts with the biggest holders of the loans, which include insurance companies, hedge funds and banks, specifically regional banks...
...investment banks took many of the highest-quality loans, leaving regional banks holding those commercial loans without stable income streams

Assuming, incorrectly, the pain will be felt most in CMBS - insurance companies have deep CRE experience. Before CMBS, they were the primary lenders for the highest quality sponsors for stabilized properties. CMBS stole market share, and insurance companies bought CMBS, but for the most part they picked the highest quality CMBS out there. Its easy enough to find Insurance Companies that failed to invest wisely, but thats for another post.

Regional banks are not big investors in CMBS. Regional Banks are the primary originator of land and construction & development loans (C&D) - the riskiest, shortest term, most likely to blow up loans out there. They didn't do this because the IBs only left these scraps on the table - this has always been their bread and butter because it has the highest risk yield.