Moody’s Investors Service released two reports this morning on CMBS loan delinquencies. The first one analyzes the drivers of delinquency in the sector.
The report provides some notable points. One of them is that delinquency by vintage poses a relatively smooth progression, with older deals usually having higher delinquencies. But the 2000 vintage is sort of an anomaly, showing higher-than-expected delinquencies. And in this instance, the hotel sector is not the sole reason for the under-performance but all major property types are responsible.
The underperformance of the 2000 vintage is proof the real estate cycle still counts. This year saw the lowest vacancy rates and the highest rents for all major property types, with loans underwritten in 2000 often facing comparatively harder market environments if owner/borrowers had to replace tenants. The report noted that Moody’s use of sustainable cash flows in studying the underlying collateral lessens the impact of the credit cycle.
In the second report, the rating agency looked at the link between loan level credit migration and delinquency.
Moody’s found that delinquent loans manifest considerable movement between different phases of delinquency, from 30 to either 60 or 90 plus loans past due and finally into foreclosure or real estate owned (REO). However, the report said a loan that is 90 plus days past due will not necessarily deteriorate further, as only about 30% of the loans classified a year ago moved into foreclosure or became REO in over a year
About 30% of loans that were 90 plus day past due decayed to foreclosure/REO in a year. This is less compared to the occurrence of repeat offenders. Roughly 40% of loans that were 90 plus past due a year ago cured, totally or in part, then returned to that phase of stress. The rating agency said that results from the last year might not be replicated in the immediate future for many reasons, such as a reversal of direction in interest rates and weaker property markets.
Both studies were based on 42,888 CMBS loans, totaling $284.7 billion.