Government scrutiny of the for-profit education industry could intensify default risks on up to $1.88 billion of commercial mortgage bonds backed by properties occupied by Corinthian Colleges, the University of Phoenix, and DeVry, Morningstar Credit Ratings warned Thursday.

The industry is reeling from a series of investigations and settlements that resulted in Corinthian shutting down its entire operation last month under an agreement with the Department of Education. The company allegedly deceived students with false data about graduation rates and job placement rates.

Corinthian was formerly a tenant in collateral backing $82.3 million in CMBS loans. Morningstar projects combined losses of about $3.2 million on of these loans.

Corinthian is not nearly the biggest risk to mortgage bond investors, however. The federal government has since turned its attention to the University of Phoenix and DeVry University over their marketing and recruiting practices. State governments are have exercised their regulatory muscles.

Eleven loans totaling $144.7 million are specially serviced because they are delinquent or in default in April. That represents 7.7% of all loans backed by for-profit colleges. By comparison, only 3.7% loans in the entire CMBS universe in April were specially serviced.

Morningstar forecasts $51.8 million in losses on nine of the loans. It expects $9.6 million of that loss to come from a single, $24.5 million loan on three office buildings which the University of Phoenix, the sole tenant, has vacated, and which have been repossessed. This loan represents 11.3% of the collateral backing a CMBS dubbed CD 2005-CD1. The latest appraised value of the property is $17.9 million; that’s 60.7% less than the original 2005 appraised value of $45.5 million.

In total, the University of Phoenix is a tenant at properties backing $241.6 million of CMBS, closed 115 locations in 2012. The university is the largest for-profit higher education institution in the U.S. and is owned by Apollo Education Group. Enrollment as of February 2016 was 179,600 students, less than half of the 470,800 peak reached in 2010. For year-end 2016, enrollment is expected to decline to the 140,000 student range, according to transcribed January 2016 earnings call comments made by Greg Cappelli, Apollo’s CEO, and Greg Iverson, the company’s CFO.

Apollo Education Group is the sole tenant at its headquarters building, which backs a $91.5 million loan in CGCMT 2015-GC29. Given the drop in performance for the University of Phoenix, the appraiser provided both an ”as-is” value as well as a "go dark" value, which assumes the tenant vacates. The as-is appraised value of $183 million results in a 50% loan-to-value ratio (LTV), and the go dark value of $122 million suggests a 75% LTV.

Morningstar projects the biggest loss on the $32 million Gateway Chula Vista II loan, where San Joaquin Valley College, a for-profit junior college, is the second-largest tenant. Morningstar projects a loss of $16.5 million, though this has more to do with the property’s history of low rents and tenants leaving than the college itself. The building was foreclosed on in 2013.

Near-term lease expirations throw further uncertainty over loans with for-profit education exposure. Tenants in collateral backing more than 13.8% of the loans, or $259.1 million, have leases that expire through 2017. The bulk of this exposure, $174.5 million, is concentrated in three tenants: the University of Phoenix, DeVry, and Strayer University. Of the master-serviced loans, the $23.8 million Osprey Portfolio loan has the greatest default risk because the University of Phoenix’s lease expires in July 2017, four months after the loan’s maturity date.

In addition, the University of Phoenix had a January 2016 lease expiration at the University of Phoenix Building, which backs a $7 million specially serviced loan. According to loopnet.com, an online database of listings for commercial properties, the tenant reduced its space to 34% from 98%. Although Morningstar doesn’t project a loss, its analysis suggests that the loan represents over 95% of the property’s value. That could make the loan difficult to refinance.

DeVry, a tenant backing $166 million of CMBS, has leases expiring in October 2016 at properties securing two loans, although neither loan matures before 2022. In April 2015, DeVry, which saw undergraduate enrollment from 2010 to 2015 plunge more than 50% to 34,524 students, announced it was closing 14 campuses in 11 cities. The university has 59 campuses remaining. In January 2016, the FTC accused DeVry of deceiving consumers with false postgraduate employment rate claims.

Strayer Education ($122.6 million in CMBS), whose programs have not failed any of the government’s recently implemented regulations, is a tenant in six properties with leases expiring through December 2017. The greatest risk lies with the $5.6 million specially serviced Strayer University loan because the school’s lease on 71% of the Ashburn, Virginia, property expires the month before the loan’s January 2018 maturity. Strayer's enrollment is far from the 2010 peak, sinking to 43,000 for fall 2015 from 60,700 in fall 2010. The company operates 78 campuses across the country, following the closure of 20 campuses in 2013.

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