The delinquency rate on loans included in US Commercial Mortgage Backed Securities (CMBS) increased by 31 basis points in February to 5.73%, according to Moody’s.
“This month’s increase was relatively mild compared to the 44 basis point increase the DQT averaged over the previous five months,” said Moody’s Managing Director Nick Levidy.
Of particular note was a drop of two basis points to 5.22% in the delinquency rate of retail loans, the first decline in the delinquency rate in that sector since November of 2007.
This was largely the result of the fact that 45 loans totaling $780 billion that were delinquent as of the end of January became current, worked out or disposed of in February.
Among other property types, hotel loans saw the largest increase in delinquency, 82 basis points, to stand at 10.64%, multifamily saw the second largest climb rising 59 basis points to 9.36%, office property delinquencies increased 45 basis points to 3.98%, and the industrial property DQT currently stands at 4.28%, following a 40 basis point jump, breaking the 4% threshold for the first time.
For details, see US CMBS: Moody’s CMBS Delinquency Tracker, March 2010 (Premium)
Technorati Tags: CMBS, commercial-real-estate, mortgage-backed-securities, REIT, structured-finance
Fitch’s rating outlook for the U.S. banking sector remains negative, although many of the factors that put negative pressure on ratings are easing. We are pleased to offer a complimentary download of Fitch’s latest US Banking Quarterly, which includes individual comments on the top 24 banks rated by Fitch.
Fitch’s negative outlook is focused mainly on the regional banks, where a large portion of U.S. Fitch-rated institutions remain with a Negative Outlook or on Negative Watch. Fundamental financial performance for the banking sector will remain generally weak throughout most of 2010, although this will not likely result in broad downgrades. For the larger U.S. banking institutions, the credit outlooks on long-term Issuer Default Ratings (IDRs) remain generally Stable.
There are some notable exceptions to the negative rating outlook among regional banks including U.S. Bancorp (USB), PNC Financial Services (PNC) and New York Community Bank (NYB). These three banks carry stable rating outlooks owing to better than average asset quality and a comparatively healthier financial outlook.
Generally, the regional banks are more susceptible to further downgrades than the larger institutions, given their concentration in traditional lending activities and greater exposure to commercial real estate (CRE) losses. Fitch continues to view CRE risk as a key area of concern for the U.S. banking sector.
Despite some signs of stability, Fitch remains cautious in its outlook for 2010. High levels of losses from consumer-related exposures (particularly mortgages, home equity loans and credit cards) likely will persist well into the current year. In addition, CRE exposure will likely necessitate considerable incremental charges in 2010. On a cumulative basis, CRE losses now stand at $25 billion since the beginning of 2008 for the banks included in Fitch’s latest U.S. Banking Quarterly report. Given their lagging effect, Fitch anticipates that CRE losses will continue to trend higher throughout 2010. These factors will pressure earnings well into the current year and potentially in 2011.
The full 40-page report, U.S. Banking Quarterly 4Q09 has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $275.
Also available from Fitch: 3Q09 Bank Capital Ratios (Premium)
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Guest Post by James A. Kaplan, Chairman and CEO, Audit Integrity
Getting older has its comforts. One of them is that you get to experience a number of historic events and can gain perspective on consequences that result from those events.
It’s been well over a decade since the Japanese economy imploded. That implosion was based on a speculative frenzy that drove values to the extreme, where it was discovered the effects of gravity could not be overcome.
The Japanese government’s response to this dramatic situation was to slash interest rates and rapidly increase government spending. (Note: they did not substantially increase their money supply.) The government claimed to be making substantial efforts to correct the impact of the shrinking private economic sector. The private economic sector, while paying lip service to growth opportunities, continued to stagnate as the banking/industrial complex refused to take risks. The national economy floundered between underwater loans and lack of demand. To this day, over a decade after the implosion, Japan is still struggling with lackluster economic growth.
That sounds a lot like déjà vu, doesn’t it? Of course, in the “good old U.S. of A.,” we are different – or so we say. As best I can tell, our response to date looks much like Japan’s response of a decade ago. The Fed has lowered the cost of short-term borrowing to nearly Zero (a rate that discourages long-term savings) and increased government spending to the point where the credit of the United States is in jeopardy. Financial institutions continue to stagger under the weight of non-performing loans. Industry is reluctant to invest without evidence of a pick-up in demand, while consumers’ wealth and savings have dropped so precipitously they are reluctant — or unable — to spend.
One can only hope that the rapid increase in money supply, both domestically and globally, will result in a different outcome than that suffered by the Japanese. I would not like to see the U.S. endure a protracted economic struggle. However, if we look specifically at the actions of our commercial banking system, we find little comfort.
Commercial banks hold over $1.7 trillion of commercial real estate, and are reluctant to write down their holdings. In fact, FASB has changed its interpretation of FAS 115-2 and FAS 124-2, making it extremely easy to avoid recognizing loss in value.
According to the Congressional Oversight Panel, over 2,988 commercial banks are classified as having a high commercial real estate concentration. The FDIC currently has 702 publicly-held banks on its watch list.
Much like Japan, we have turned a blind eye to a major potential implosion, and in fact, are working hard to cover it up. Of course the banks are taking FASB’s lead and not writing down assets. Remember, unwillingness to fairly reflect values was a criticism placed on Japanese banks one decade ago. .
Bank charge-offs of the 4th Quarter of 2009 totaled $59 billion, an increase of 47.7% year over year. The bulk of these charge-offs related to single-family home loans – not to distressed commercial real estate. I believe the real charge-off rate should be three to four times higher than the banks are willing to admit.
A charge-off rate that more accurately reflects commercial real estate values would drive banks into a substantial negative earnings position. That’s a position no one likes to be in, but denying it does not change the fact that a bank in that kind of financial distress represents a substantial risk to stakeholders, taxpayers, and the economy overall. We’ve seen the impact “Extend and Pretend” has had historically, and the results are not pretty.
Below is a select list of mid-sized commercial banks that I believe are representative, to a greater or lesser degree, of the problems the industry faces. They are all talking a good game. I certainly endorse the power of positive thinking – but not when it is used to distract investors from the truth.
Technorati Tags: commercial-real-estate, regional-banks, U.S. banks
There were continuing signs of recovery in the commercial real estate market in December, according to Moody’s.
The Moody’s/REAL All Property Type Aggregate Index measured a 4.1% increase in commercial real estate prices in December 2009. This marks two consecutive months of price gains, and is the largest monthly increase in the history of the Commercial Property Price Indices (CPPI). However, prices still are down 29.2% over a year ago, 39.8% over two years ago, and 40.8% from the peak.
Other key points:
- As is typically the case for the last month of the year, transaction volume saw a significant increase in December. There were 716 transactions totaling $9.0 billion recorded.
- Although three of the four national property type indices recorded value gains in the fourth quarter of 2009, each declined within a range of 19.0%-23.2% for the full year of 2009.
- Prices in the top ten cities for the fourth quarter of 2009 saw minor declines for apartments and industrial, a minor gain in retail, and a significant increase for office. Overall however, prices in all four property types have fallen 21.4%-36.0% from the peak.
- With the exception of the office sector, prices in the West have fared better than the national property price index for full year 2009.
For details, see Moody’s/REAL Commercial Property Price Indices, February 2010 (Premium)
Technorati Tags: commercial-real-estate, Moody's/REAL CPPI
Despite an improving economy, Standard &Poor’s expects delinquencies on loans backing commercial mortgage-backed securities to keep rising until job numbers meaningfully improve and employers feel confident that a recovery is firmly underway.
“In 2010, we expect higher vacancies and lower rents to continue to fuel delinquencies, especially for underperforming properties,” S&P says in its latest CMBS Quarterly Insights. (Premium)
Selected excerpts:
We expect the delinquency rate to reach 7%-8% of the outstanding principal balance of U.S. CMBS in 2010—up from 1.10% at the beginning of 2009 and 5.15% at year-end—before peaking in 2011.
In the previous recession, which lasted from March 2001 through November 2001, delinquencies among Standard & Poor’s Ratings Services’ rated CMBS peaked at 1.96% in December 2003, approximately 25 months after the recession ended. And in the prior recession, spanning from July 1990 to March 1991, the delinquencies peaked at 7.53% in June 1992, 15 months after the recession’s end, according to data from the American Council of Life Underwriters (ACLI) on commercial mortgage delinquencies.
In addition to the impact of higher vacancies and lower rents, our delinquency forecast also considered the following factors:
- We’ve observed that default probabilities are generally highest during the third through fifth years of a loan’s life, which indicates that loans in the 2006-2008 vintages are now in their peak default periods.
- $28.6 billion of loans mature in 2010, approximately double last year’s $14.4 billion, although increasing use of loan extensions could mitigate maturity defaults this year.
- The largest concentration of CMBS loans (15% of the total outstanding balance) is in California, which Standard & Poor’s recently downgraded to ‘A-’, the lowest general obligation rating for any U.S. state.
Technorati Tags: CMBS, commercial delinquencies, commercial mortgage-backed securities, commercial-real-estate, structured-finance
Renewed investor interest has helped equity REITs regain their financial footing and significantly improve their liquidity positions since last summer, according to Standard & Poor’s.
With access to capital markets mostly restored, these companies were able to raise roughly $22.5 billion in new public debt and equity capital last year to deleverage, extend debt maturities, and strengthen their balance sheets.
Nonetheless, our ratings outlook for rated equity REITs (which take ownership positions in real estate investments rather than mortgages) remains negative. Despite improving financial market conditions, we believe real estate operating fundamentals will remain challenging and competitive over the next year.
With demand for rentable space weak and access to capital less plentiful, tenants and lenders will remain in the driver’s seat with sustainable improvement (which will lag an economic recovery) still a few years away.
Even with these negatives, however, the current, more conservative lending environment is restraining growth in new supply across most property segments, and tenants are migrating to higher quality assets and stronger more creditworthy landlords. Finally, we expect better-positioned REITs will start adding to their portfolios as the dust settles and growth opportunities begin to surface.
For details see With Liquidity Improved, Equity REITs Shift Focus To Declining Fundamentals And Growth Opportunities (Premium)
Technorati Tags: commercial-real-estate, REIT
Standard & Poor’s today lowered its credit ratings on 43 European commercial mortgage-backed securities (CMBS) tranches and affirmed 19 ratings.
“The rating changes result from our assessment of the effect on these transactions of the unprecedented events in European real estate, including drops in property values in some markets that have exceeded those of the 1930s.”
“The difficulties for European banks and their real estate exposure have contributed to a shortage of real estate debt capital and we believe this could endure for a substantial period of time. Although borrower net operating income has generally held up, we believe economic difficulties will continue to exert downward pressure on debt service coverage ratios.”
In our view, the market remains under severe stress, with no obvious refinance route for more than one-third of outstanding debt in European real estate
finance.
For the full list of rating actions see “S&P’s Ratings List For European CMBS Transactions – Feb. 8, 2010 Review. (Premium)
Technorati Tags: CMBS, commercial mortgage-backed securities, commercial-real-estate, Europe, structured-finance
But despite elevated losses from commercial real estate loans, Moody’s does not expect to make system-wide rating downgrades.
Moody’s estimates that rated U.S. banks hold 50% of total CRE loans and will incur CRE losses of $120 billion from 2008 through 2011. This sum represents a loss rate of approximately 17% on the banks’ year-end 2007 CRE loan balances. For both rated and unrated banks, total remaining losses on CRE lending may well exceed $150 billion.
“So far, Moody’s rated banks have incurred $43 billion of CRE losses through charge-offs and purchase accounting marks, leaving $77 billion — or close to 65% of our estimate — to be taken in the fourth quarter of 2009 and all of 2010 and 2011,” says the report’s co-author, Assistant Vice President Joseph Pucella. “Based on our forecasts and expectations for the CRE sector, however,” the analyst adds, “we see no need for further system-wide rating downgrades of U.S. banks beyond what we have already done.”
Outside of the rated bank universe, the analyst notes that the CRE problem is a more troubling issue.
A large number of smaller banks, which constitute just 15% of total system assets but carry 50% of all CRE loans outstanding, will likely continue to struggle under the weight of their CRE exposures, and many will collapse.
The cost of these failures will inevitably be borne by the entire banking system, but it is unlikely to be a ratings driver.
Moody’s estimates that high leverage and slack demand will cause property prices to ultimately drop 45% to 55% from their 2007 peak. Mr. Pucella explains: “We have periodically revised our CRE loss assumptions to reflect the worse-than-expected deterioration in the commercial property markets, and we have moved bank ratings down accordingly.”
Beyond U.S. banks’ ability to absorb CRE losses during the near term, Moody’s continues to have longer term concerns about the credit standing of those banks with outsized CRE concentrations. “Such institutions could find themselves with diminished franchises after the recession because CRE lending opportunities and the associated revenue have dried up,” Mr. Pucella points out, “which could then have major implications for the sustainability of their business models.” As a result of these franchise issues, a large CRE concentration could act as a constraining factor on bank ratings.
For details, see U.S. Bank Ratings Incorporate Continued High Commercial Real Estate Losses(Premium)
Earlier this week Standard & Poor’s said The Worst May Still Be Yet To Come For US Banks’ Commercial Real Estate Loans
Technorati Tags: banks, commercial-real-estate, regional-banks, U.S. banks
Audit Integrity Updates Investor Watchlist for Western Europe
McKinsey roundup of top business risks for 2010 according to EIU, Eurasia and WEF
AT&T likely to retain iPhone exclusivity thru 2011: Credit Suisse’s Jonathan Chaplin
Q&A with Simon Johnson (Obama unlikely to reform banking much as lobby is too powerful and he’s too centrist )
Watch out: Martin Lukes is out of jail..
Worrisome chart of UK and US debt as percentage of GDP exceeding Greece’s (Economist)
Investors shower funds on start-ups for more efficient buildings, grids, but cool on biofuels (WSJ)
US Commercial Property Values Tick up in January and are now up more than 10% since mid-‘09 (Green Street Advisors)
With No Help in Sight, More Homeowners Walk Away – if home value dips below 75% of mortgage( NYTimes)
More readily than ever before, US consumers paying credit cards prior to mortgages (TransUnion)
Technorati Tags: (T), AAPL, Apple, AT&T, commercial-real-estate, debt, iPhone, mortgages, Toyota, twitter updates
The fallout from Commercial Real Estate exposures for banks has yet to run its course, in Standard & Poor’s opinion.
Although many of the problems are already evident in the homebuilding sector, and are well underway in commercial construction, these are the smaller sectors, S&P says in an Industry Outlook. “We believe the problems in the larger mortgage and multifamily sectors are yet to be felt because for now low interest rates and still-adequate cash flows make debt servicing possible. As rates rise and rent rolls decline further, we believe that delinquencies will rise in this sector as well, and prices will fall further, complicating the refinancing of these portfolios.”
We see no reason to believe the impact of this credit cycle in CRE will be less severe in terms of losses banks incur than that of the 1990s.
“However, this time the smaller banks have the heavier concentrations in CRE. They also have healthier capital cushions that could help them weather the painful cycle. Our stress tests show that most rated banks are able to absorb the associated losses without eroding capital below 4% of tangible common to RWA, as long as the losses are spread over a few years. We believe that downward pressure on the ratings will continue, however, as the banks that appeared to be better positioned in terms of their portfolios or capital cushions prove to be more vulnerable, or fail to maintain their business-generating power.”
The report includes a table of the combined commercial real estate loans, CMBS and CRE equity investments shown as the banks’ exposures as a multiple of their tangible common equity. Below are the banks with TCE ratios in excess of 4%.
Even for the most heavily exposed banks, underwriting varies, S&P says. For example, New York Community Bancorp Inc. (NYB) focuses on rent-controlled New York City apartment houses, which produce steady cash flow and do not experience significant vacancies, and where nonperforming CRE loans were only 2% of CRE loans at Sept. 30, 2009. Synovus (SNV), on the other hand, with a high proportion of construction loans, has 10% nonperforming assets (NPAs). Some, banks such as Zions Bancorporation,(ZION) have portfolios whose average LTVs at origination were in the mid-50% area, whereas others aimed for 80%.
For details see: Industry Outlook: The Worst May Still Be Yet To Come For U.S. Commercial Real Estate Loans (Premium)
Technorati Tags: banks, CMBS, commercial-real-estate, New-York-Community-Bancorp, regional-banks, Synovus-Financial-Corporation, Zions-Bancorporation
