U.S. CMBS delinquencies rose two basis points in July, ending the month at 0.43%, as reported by the Fitch Ratings Loan Delinquency Index.
"We see substantial differentiation in the performance of small balance pools, compared to that of traditional CMBS pools," said Susan Merrick, Fitch managing director and U.S. CMBS group head. "For instance, Fitchs year-to-date upgrade-to-downgrade ratio of 2.5-to-1 for traditional CMBS was driven to 1.5-to-1 when small balance transactions were factored in."
According to the report, small balance loans are in pools that usually have loans from $150,000 to $15 million. Fitch said that although small balance deals make up less than one percent of all loans in the Fitch-rated universe, they comprise 10.8% of all delinquencies. Of all small balance loans tracked in the Index, 5.42% are now delinquent. This is versus a delinquency rate of .38% for all traditional commercial loans rated by the rating agency.
As Fitch noted before, a high concentration of delinquencies within the index (15.4%) corresponds to deals issued in 1998, many of which contain a large portion of loans with 10-year terms. Of all loans within the 1998 vintage, 3.9% are delinquent. In July, roughly 10% of all delinquent loans deemed as nonperforming matured.
The 2006 vintage has the highest dollar balance of loan delinquencies within the Index, Fitch said, at $599.6 million (24.9%). But, that vintage is still performing as expected, with an individual loan delinquency index of .35% recorded for 2006 deals. Similarly, delinquencies from deals issued in 2007 comprise 12.5% of all delinquencies in the Index, partly a result of that years record issuance. Of all loans issued in 2007 deals, 0.19% are delinquent.
Having small balance loans contributes nine basis points to the individual loan delinquency index corresponding to the 2006 vintage, according to Fitch. The rating agency said that the removal of all small balance loans issued that year would bring the vintages loan delinquency rate to .26% from .35%. Making a similar adjustment to the 2007 vintage would bring that years individual loan delinquency index four basis points less to 0.15%.
Notable differences in origination, collateral, and performance are seen across small balance deals, Fitch said. But, some generalizations can be made. Loans are usually made to individual borrowers or small businesses that have less commercial real estate experience than is typical of most traditional CMBS borrowers. Small balance underwriting usually utilizes FICO scores as a measure of creditworthiness of the borrower, compared with CMBS underwriting, which relies more heavily on property cash flow as support for the debt service.
Many small balance loans are backed by older properties with deferred maintenance and few if any structural reserves, the rating agency said. Out of the 478 transactions in the index, 16 are small balance transactions issued between 1999 and 2007 totaling roughly $4.8 billion.
The seasoned delinquency index, which omits deals with less than one year of seasoning, increased by a basis point to end the month at .48%. Six transactions equivalent to $22.0 billion became newly seasoned. Currently there are four delinquent loans totaling $62.7 million corresponding to the newly seasoned deal, according to Fitch.