Bank Loans More Vulnerable to Commercial Real Estate Losses
In a new analysis, Moody’s explains why bank loans are more vulnerable to commercial real estate losses than mortgage securities backed by CRE or life insurance company CRE loans.
According to the results from the recently announced US government “stress test”, bank holding companies’ cumulative two-year loss rates for commercial real estate loans will be between 5.0% and 7.5% in a baseline case and between 9.0% and 12% in a more adverse case. In rating US commercial mortgage backed securities (CMBS), Moody’s uses a cumulative ten-year expected loss rate of 3.0% to 4.0% on average across all vintages for our baseline case and a 7.0% to 9.0% rate for a more
adverse case.
Moody’s says that “Given where we are in the economic cycle, it is important to point out that there is a marked difference in performance by loan vintage and term. For example, CMBS loans are typically ten year loans, and the current lower delinquency rates encompass performance of those loans originated as early as 2000. These early vintage loans have seasoned and benefit from cash flow and value appreciation over the years.”
“Thus, CMBS loans originated earlier in the cycle are likely to help offset higher delinquencies from more recent vintage originations. A similar situation exists for life insurance companies as they hold loans with longer maturities. Bank loans tend to have maturities of five years or less. As a result, bank loan portfolios exhibit greater concentration in years representing the peak of the real estate cycle. They lack seasoned loans on their books to offset the higher delinquency rates expected from this time period.”
“Bank loans have an additional burden over CMBS at refinance due to their shorter remaining term. The economic downturn is just beginning to have a negative impact on real estate loan performance. As a lagging sector, real estate delinquencies are expected to rise over the next two years. For a bank loan with less than five years remaining, the potential to refinance in a more robust economic period is lower than for a comparable CMBS or life insurance company loan, with more than five years remaining.”
A higher level of refinance risk for bank loans should contribute to higher delinquency rates over time.
For the full anlysis see:Comparing Bank, US CMBS and Life Insurance Company Commercial Real Estate Expected Loss and Delinquency Rates
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