Tuesday, May 19, 2009

CRE Problems: Rate Structure, Maturity, and Vintage

Zero Hedge’s post, “The Special Servicing Problem,” talks about the ballooning transfers to Special Servicing status. The post includes a table of large CMBS loans which have been transferred, which I think gives a nice snapshot of the types of loans which are in trouble:


(Click on image for a larger version in a new window)

Rate Structure. The only floating rate loans in this group are loans which have matured. Given the very low floating rates today, we are not going to see many payment defaults, but given the decline in values, tightening of underwriting standards, and lack of financing available for CRE deals, many floating rate loans can’t be refinanced or sold for the outstanding loan balance at maturity.

Maturity. There are four loans in the group which are five years or older (i.e. originated before 2005). All of these loans have matured. There are not many old loans in the table because many older loans were successfully refinanced during the boom years. The remainder were underwritten conservatively enough that they have been able to make their payments, but in the current environment they can’t be refinanced or sold without a loss.

Vintage. The vast majority of the loans in the table are fixed rate loans underwritten in 2005-2007, at the peak of the market and when underwriting standards were weak. With the decline in fundamentals these loans are having trouble making their payments, and can’t be refinanced or sold.

It may be possible to work out the first two groups with term extensions. The only hope for the last group would be a drastic reduction in the interest rate (for example, switching to a floating structure).