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Commercial-Mortgage Late Payments Increase to Record in July

Late payments on commercial mortgages bundled and sold as bonds rose the most in more than 12 months, adding to concern that the market is deteriorating three years after the financial crisis choked off funding to borrowers.

Delinquencies on the debt jumped 51 basis points in July to a record 9.88 percent, according to real estate data provider Trepp LLC. The increase follows two months of declines, the New York-based firm said today in a statement. The jump is partly because of how loan servicers report mortgages that are in foreclosure, Trepp said.

“Much of the positive momentum that had been surrounding the CMBS market recently has now all but vanished in the past few weeks,” according to the statement from Trepp.

Borrowers are falling behind on payments as a revival in new debt sales stumbles after investors pushed back on deal terms. Wall Street banks sold $3 billion in commercial mortgage- backed securities last month at the highest yields since issuance resumed in November 2009 and Standard & Poor’s exacerbated market turmoil by withdrawing rankings last week on new deals.

S&P’s decision forced Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C), to scuttle a $1.5 billion deal after it was placed with investors.

Wall Street lenders may incur ”hundreds of millions of dollars” in losses as prices on commercial-mortgage bonds tumble, Barry Sternlicht, the chief executive officer of Starwood Capital Group LLC, said on a conference call with investors today for Starwood Property Trust, a unit of the firm. The company used a “wild hedge” that prevented Starwood from losing “a lot of money,” he said.

Ratcheting Back

“Most of our peers in this business did not have hedges like this in place to our knowledge,” Sternlicht said.

Starwood Property Trust, based in Greenwich, Connecticut, underwrote loans accounting for about 8.3 percent of the $1.5 billion pool from Goldman and Citigroup. It’s ratcheting back underwriting commercial mortgages to be packaged for sale as bonds amid the turmoil, Sternlicht said on the call.

JPMorgan Chase & Co. reduced its forecast for sales of the bonds to between $30 billion and $35 billion, the New York-based lender said in a July 22 report. It had projected in November as much as $45 billion in new offerings for this year.

More than $22 billion of commercial-mortgage bonds have been sold this year, compared with $11.5 billion in all of 2010, according to data compiled by Bloomberg. Sales plummeted in 2008 from a record $234 billion in 2007, according to data compiled by Bloomberg.

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

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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