Wednesday, January 6, 2010

Commercial Mortgage Defaults BLAST OFF!

Job losses, empty stores(Circuit City, Linens & Things, empty offices) and overall economy wide problems are starting to trickle up into the commercial mortgage market at a rapid pace.
For the first time since the industry began forming commercial mortgage-backed securities (CMBS), delinquencies reached above 6%, according to a report from Trepp, which studies commercial real estate trends.
For the month of December, 6.07% of CMBS loans fell behind by 30 days or more, up from 5.65% in November and a far climb from 1.21% in December 2008. That’s a 500% increase in one year, according to the report. 
In a recent speech at the Economic Forecast Forum in Raleigh, North Carolina this week, Elizabeth Duke, a governor of the board of the Federal Reserve Systemprovided some reasons for the sharp decline in performance.
“Hit hard by the loss of businesses and employment, a good deal of retail, office, and industrial space is standing vacant. In addition, many businesses have cut expenses by renegotiating existing leases,” Duke said.
She added that reduced cash flows and investors requiring higher rates of returns lead to lower valuations and losses after sales.
“As a result, credit conditions in this market are particularly strained. Commercial mortgage delinquency rates have soared,” Duke said.
 According to Trepp, the total CMBS market in the US in 2009 stood at $724.5bn
source Trepp

The 6% commercial default rate is great compared to the 12% default rate in jumbo mortgage land reported earler this week. Above all, don't get too worked up over this, the US Government, Banks and the Federal Reserve have a number of buttons to push to fix this situation. The best available option per inside Wall St sources: