US faces huge commercial mortgage-backed securities delinquencies

US faces huge commercial mortgage-backed securities delinquencies
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US faces huge commercial mortgage-backed securities delinquencies, raising the total delinquent group to $17.2 billion to date.

Data showed that commercial mortgage-backed securities delinquencies reported their biggest one-month surge since Fitch Ratings started tracking the metric nearly 16 years ago.

The delinquency rate increased to 3.59% in June from 1.46% in May. New delinquencies are worth $10.8 billion in June.

The results are considered not surprising, but the figures remain significant with the massive economic damage brought by the coronavirus pandemic.

Fitch analysts predict that the coronavirus pandemic will lead to a delinquency rate between 8.25% and 8.75% by the end of the third quarter of 2020.


“Delinquencies are concerning because they could have a negative impact to property valuations which could ultimately result in losses to the CMBS investors,” said Melissa Che, Fitch’s senior director, CMBS.

Many CMBS investors are huge, institutional investors, like banks, mutual funds, pension funds, insurance companies.

Patterns show that shorter-term, 30-day delinquencies are turning into 60-day delinquencies at a much faster rate. This may continue throughout the summer.

Other sectors

Meanwhile, some sectors are having more difficulties than others. According to Fitch, here are the delinquency rates for each sector:

  • Hotel: 11.49% (from 2% in May)
  • Retail: 7.86% (from 3.82%)
  • Mixed use: 4.17% (from 0.95%)
  • Office: 1.92% (from 1.39%)
  • Industrial: 0.67% (from 0.28%)
  • Multifamily: 0.59% (from 0.41%)

Of the total 30-day delinquencies, hotel and retail loans accounted for 49% ($7.7 billion) and 34% ($5.4 billion). The numbers may exceed Great Recession peaks if they all roll to 60 days delinquent.

When commercial loans are struggling, they are sent to special servicing for forbearance or repayment plans. In fact, from March to May, 439 commercial mortgage-backed securities loans, or $21 billion, were transferred to special servicing, versus 674 loans, or $9 billion, for all of 2019, according to Fitch.

In the two months before the pandemic started, just 34 CMBS loans went into special servicing.

“The borrower can work with the servicer to modify the loan, but if the borrower is too far underwater on the loan, they could hand the keys back,” Che said.

Residential real estate

In residential real estate, mortgage applications increased by 18% as homebuyers return to the market.

Based on the Mortgage Bankers Association’s seasonally adjusted index, mortgage demand to buy a house soared by 5% for the week and were 18% higher than a year ago.

Mortgage applications were down 35% annually as the coronavirus outbreak was taking place six weeks ago.

“The pent-up demand from homebuyers returning to the market continues to support a recovery from the weekly declines observed earlier this spring,” said Joel Kan, an MBA economist.

“However, there are still many households affected by the widespread job losses and current economic downturn. High unemployment and low housing supply may restrain a more meaningful rebound in purchase applications in the coming months.”

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of up to $510,400 fell from 3.42% to 3.37%. Points, including the origination fee, for loans with a 20% down payment dropped from 0.33 to 0.30.

The impact of another new low for interest rates on homeowners to save a little cash was not that huge. Mortgage applications to refinance a house loan declined by 9% for the week. However, they were still 137% higher than a year ago. Interest rates were 86 basis points higher then. That pertained to the seventh straight week of falls in refinance activity.

“After reaching a peak of 76% earlier this year, refinances now account for less than 60% of activity, and the index is now at its lowest level since February 21,” Kan said.