Commercial Property Losses Mount as Loan Servicers Triage Real Estate Debt

Monthly losses on commercial property debt bundled into bonds have doubled since April as loan specialists gave up trying to restructure smaller mortgages, Deutsche Bank AG data show.

Average losses on loans packaged into U.S. commercial mortgage-backed securities totaled $501 million in August compared with $245 million in April, according to Harris Trifon, a Deutsche Bank analyst in New York who based the estimate on a three-month average. In August 2009, the number was $41 million.

“It’s the beginning of a trend,” Trifon said in a telephone interview. “Given the sheer volume of loans in special servicing, there are going to be many loans that are liquidated.”

Special servicers in charge of resolving troubled mortgages on office buildings, malls, hotels and other income-generating properties are ramping up liquidations as the pipeline of bad debt balloons. An estimated $92 billion of loans were in special servicing as of June 30, 25 percent more than at the end of 2009, according to a report by Fitch Ratings. The number may climb to $110 billion, or 15 percent of outstanding debt packaged into securities, by Jan. 1, Fitch said.

Late payments are climbing as the nation’s 9.6 percent unemployment rate saps demand for office space and leaves households less willing or able to spend money on shopping or travel.

60 Days Overdue

The delinquency rate for commercial mortgages packaged into bonds climbed to 8.1 percent in August from 7.89 percent in July, Moody’s Investors said in a report today. More than $51.5 billion in such loans were at least 60 days late on payments compared with $22 billion a year ago, Moody’s said.

“Delinquency rate increases have moderated over the past three months, but the overall rate itself is expected to continue rising over the near term,” Moody’s Managing Director Nick Levidy said in the report.

Losses on bonds tied to commercial mortgages are only realized after the property or loan is sold, or when a borrower buys the debt out of the bond pool at a discount. The pick-up in liquidations has been concentrated so far in loans of less than $20 million, said Adam Fox, an analyst at New York-based Fitch.

“It is easier to sell smaller loans in this environment,” he said.

Question of Manpower

Special servicers may be choosing to resolve smaller loans quickly to free up manpower for larger high-profile projects, Trifon said. Selling notes in bulk is likely to become more popular as servicers seek more efficient means of clearing bad debt, he said.

Mission Capital Advisors, a New York-based advisory firm, is marketing a $207 million portfolio of non-performing loans for special servicer CWCapital Asset Management, a unit of CW Financial responsible for $144 billion of mortgage-related securities, according to Will Sledge, a managing director at Mission Capital.

The offering includes 20 notes ranging from $1 million to $41 million, Sledge said. The average size in such sales is around $5 million, he said.

The pace of loan sales is rising as financing becomes more available, said Michael Van Konynenburg, president of New York- based real estate investment firm Eastdil Secured LLC.

“There is a growing number of lenders willing to finance the purchase of portfolios of non-performing loans,” Van Konynenburg said. “This allows buyers to be more aggressive on price as they don’t need to use 100 percent equity.”

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net

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