Early estimates put CMBS exposure to Irma in tens of billions
Commercial mortgage servicers are taking steps to assess damage, payment delays and insurance disbursements brought on by Hurricane Irma, which made landfall in the Florida Keys early Sunday as a Category 4 storm and weakened as it and moved up the west coast, as well as for Hurricane Harvey, which submerged large parts of Houston two weeks ago.
The process of contacting borrowers in the affected areas is expected to take weeks. In the meantime, the only way to determine potential CMBS exposure is by scouring databases for securitized loans in counties that the Federal Emergency Management Agency has declared disaster areas – something that has yet to take place in Florida.
Two credit rating agencies, Morningstar Credit Ratings and S&P Global Ratings, have nevertheless released some preliminary estimates for Irma’s impact.
Morningstar thinks that $38.94 billion of CMBS loans in Florida could be impacted; it sees another $19.38 billion of exposure in Georgia, $5.16 billion in Alabama, and $5.03 billion in South Carolina.
S&P-rated collateral exposure to Hurricane Irma in Florida is much smaller, at $11.2 billion; the rating agencies did not publish estimates for other states in the storm’s path.
Estimates for the impact of Hurricane Harvey also vary widely. Morningstar believes that 1,529 properties backing $19.40 billion of securitized loans may be at “elevated risk” because of flooding.
Fitch thinks that damage from Hurricane Harvey potentially affects some $10.4 billion of loans in CMBS that it rates.
S&P identified 288 loans totaling $5.2 billion backing deals it rates. Notably, two of the loans, one on the Greenway Plaza and the other on the Houston Galleria, serve as sole collateral for single-borrower deals.
That doesn’t mean there will be tens of billions of dollars of losses, however. Not all of the properties in the hurricane’s paths will be damaged, and much of the damage will be covered by insurance. Business interruption insurance should also allow borrowers to make payments on properties that are temporarily is uninhabitable or unusable.
“You don’t necessarily see waves of default because properties are not in service,” said Edward Dittmer, senior vice president, CMBS analytics, at Morningstar.
Nevertheless, there could be a short-term rise in delinquencies, particularly for properties that are approaching maturity and must be refinanced. (CMBS loans generally have terms of 10 years and amortize very little; the bulk of the principal is due in a final “balloon” payment.)
“There are going to be loans maturing in the next month or so that may not be able to pay off,” Dittmer said. “The borrowers were working with a lender, but as a result of the damage, they are not able to close right away. These are going to be termed maturity defaults. However, there’s an understanding that these situations … require lenders to be patient. Ultimately, if the property is operating, and there’s no lasting fallout, [financing] will go ahead and the old loan will be paid off.”
Fitch noted that the servicers it has spoken with generally plan to waive late fees and default interest for borrowers in the affected area who are unable to make timely September mortgage payments. In a report published Monday, it noted that this may in some instances extend into October and be evaluated by each servicer on a case-by-case basis.
Delinquencies have generally been trending higher over the past year as more borrowers who took out loans just before the financial crisis had trouble refinancing at maturity. However, the percentage of loans behind on payments declined in August, to 3.59% in August from 3.6% in July, according to Fitch.