Loan defaults will continue to escalate for U.S. commercial mortgage-backed securities (CMBS), with an additional 4.4% likely this year and the overall rate to exceed 11% among Fitch-rated deals by the end of the year, according to Fitch Ratings.
New CMBS loan defaults increased more than five-fold last year (1,464 conduit loans totaling $17.75 billion), with 34% taking place in the fourth quarter alone.
‘Fourth-quarter default rates reached their highest ever levels both in principal balance and number of loans with no clear signs of stabilization,’ says Mary MacNeill, a managing director with Fitch.
The number of defaults recorded in 2009 surpassed the cumulative number from the inception of the CMBS market through 2008, according to Fitch data.
Another area of concern is large loan defaults, which increased dramatically last year. In 2009, 56 loans over $50 million in size defaulted compared to just five in 2008. Most of the defaulted loans came from 2006-2008 vintages.
Delving deeper into specific vintages, 2007 deals led in defaults last year, accounting for 35.6% by principal balance, the rating agency explains.
"The aggressive underwriting and higher leverage in the 2007 vintage is leading to substantially higher default rates," adds MacNeill. Fitch predicts 10-year cumulative default rates on 2007 Fitch-rated CMBS to reach 27%.
For the first time in five years, multifamily was not the property type with the most new defaults, with that distinction going to retail (32.3%) last year. Following retail was multifamily (22.1%), office (20.2%) and hotel (17.8%). Fitch projects sizeable default increases for each property type, with rates likely to increase at accelerated rates for office and hotel loans.
"Office defaults spiked in the fourth quarter last year, with further rental and net operating income declines likely through next year before a rebound takes place," says Fitch Senior Director Richard Carlson. "Larger concentrations of hotel loans in recent vintages will translate to higher defaults, particularly among luxury properties, resort destinations and those hotels heavily reliant on group and convention business."
SOURCE: Fitch Ratings