Total CMBS Delinquencies Up 4% in August

A: The story continues and commercial losses are one of the five or so concerns associated with another possible future wave to the banking system. The other concerns are prime mbs, jumbo, private equity financed LBOs, helocs, and credit cards. We can go further and discuss the re-default rate on loan modifications and the wave of recasts (not resets) set to hit the alt-a/option arm universe. The one good thing is that banks have raised a ton of money and the fed continues to rig the environment for bank recapitalization in an attempt to earn their way to a healthier balance sheet. Marks on whole loan books that do not have to be marked to market and a future FASB change regarding off-balance sheet assets may weigh on banks balance sheets for years. Everyone knows bids for legacy whole loans are no where near the carried marks. I still think the banks have some cushion looking ahead, but whether the market decides to peak further out and price in possible future concerns is a whole different story. This is why you must keep an eye on credit for another disruption similar to 2007. Should troubled banks run into liquidity or operational issues, any cushion built up could be very short lived and the dramatic improvement in credit could change on a dime.

Via Housingwire.com, "Trepp Says CMBS Turns 4% Delinquent in August":

Overall delinquencies on commercial mortgage-backed securities (CMBS) surpassed 4% by the end of August, as multifamily and lodging — or hotel — sectors remain weak.

The percentage of commercial loans 30 or more days delinquent rose 32bps to 4.03% at the end of August, according to Trepp’s September CMBS performance report.

The commercial mortgage market is seeing delinquencies climb even on a loan-level basis. A handful of names continues to make waves in the space as delinquencies rise or the threat of delinquency nears.

Trepp noted Lembi, Babcock & Brown, Bethany and Trilogy Apts all contributed to higher multifamily delinquencies. If the Stuy Town loan becomes delinquent, the multifamily rate could approach 10%.

Here is the breakdown of the report:

Multi-Family Delinquencies up to 6.8%,
Lodging Loan Delinquencies up to 6.15%
Retail Delinquencies up to 4.21%
Office Loan Delinquencies up to 2.27%
Industrial Loan Delinquencies up to 2.89%

Its funny how the markets work. At some times they ignore data like rising delinquencies and deeper delinquencies into higher quality debt classes. Then at other times, like today, news like this serves as a reminder against complacency and how quickly things may change.

Structurally we still have problems to deal with - it's not as if the consumer is strong and jobs are being created. Stimulus will only last for so long and that is not without its unintended consequences later on; I guess we will deal with that later. You may find a few quarters of stimulus induced growth and less worse trends in housing and autos, but at the end of the day the destruction in wealth in the stock market + housing market + credit markets + shadow banking system will have longer lasting effects. Solving a debt problem with bailouts and more debt is not without its consequences. And we are yet to see the endgame of this story.

Less bearish is the best I can be right now, as I don't see another Lehman happening. Doesn't mean a shock can't occur here or overseas; just that I think we experienced the hardest of the shocks already. Once we are cleansed of the above noted concerns and the defaults seem to be approaching their peak, losses are written down, marks are where they should be, debts restructured and re-organize business models to this new world, we can talk about longer term sustainable growth that sees job creation, and not job destruction. The deleveraging process may last for years folks, so just be prepared for unexpected waves every now & then (read Rolfe Winkler's piece on America's Japanese Banks discussing what the loans may be really worth).

In the end, banks need financially sound consumers & businesses to lend to! For now, lets not keep our heads in the sand like many did in late 2007 and early 2008!