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CMBS delinquency rates continue to drop--for now.

Thirty-day-plus delinquencies in commercial real estate loans in commercial mortgage-backed securities fell 26 basis points to 9.51 percent in November, according to Trepp LLC, New York. Only August's 36-point drop was bigger. But Trepp warned that higher delinquency rates could be on the horizon.

Trepp expects the delinquency rate to increase as 2007-vintage loans--originated under the weakest underwriting standards--start reaching their five-year balloon maturities. This will add to the stress that is being put on the delinquency rate by the slowdown in CMBS issuance.

"It's quite possible that this will represent the best reading for a while," said Trepp Senior Managing Director Manus Clancy. "Even if the 2007 vintage is only 'as bad' as the 2006 vintage has been, the [delinquency] rate could easily go up 75 basis points. So, for now, further improvements in the delinquency rate could be elusive."

Nearly $15.5 billion of 2007-vintage loans will come due in 2oi2; with the majority reaching their balloon dates within the next six months. For perspective, one year ago the CMBS market was looking at S13.7 billion in 2006-vintage five-year balloon loans reaching maturity. Of that, $9.9 billion remains, meaning only 29 percent was retired in some form. Of the $9.9 billion, nearly 60 percent is already with the special servicer.

Trepp reported retail remained the best-performing property type; its 30-plus-day delinquency rate tightened 9 basis points to 7.52 percent in November. Office delinquency dropped 19 basis points to 8.76 percent and the industrial delinquency rate jumped 61 basis points to 12.20 percent, nearing lodging's delinquency rate of 12.28 percent. Multifamily's delinquency rate dipped 55 basis points but remained the worst-performing property type with a rate of 16.18 percent.

Credit-rating firm Morningstar Inc., Chicago, also has concerns about the coming year. It reports that after decreasing for several months midyear 2011, CMBS delinquent unpaid balance increased again over September and October.

The 90-plus-day delinquent, foreclosure and REO categories all increased in aggregate by $939 million in October, Morningstar said. The two most distressed categories, foreclosure and REO, increased to $28.99 billion from $27.7 billion in September. These two categories remain up by $6.4 billion (28 percent) in the past year.

Morningstar cited a large number of loans that are current but may default in coming months since they may not be able to secure adequate take-out financing at balloon maturity.

"A denial of borrower requests for loan modifications or debt restructuring by the special servicers, or a decision by borrowers to surrender the collateral, is a legitimate concern heading into 2012," Morningstar's CMBS Monthly Delinquency Report said.

Based on this concern and despite the recent liquidation activity experienced over the trailing 12 months, the delinquent unpaid balance for CMBS still has the potential to grow higher than 9 percent in 2012, Morningstar warned.
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Title Annotation:Commercial
Comment:CMBS delinquency rates continue to drop--for now.(Commercial)
Publication:Mortgage Banking
Date:Jan 1, 2012
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