More than half of commercial mortgages bundled and sold as bonds have been unable to pay off maturing debt this year even as the availability of financing increases, according to Bank of America Corp.
Between 50 percent and 60 percent of loans on skyscrapers, hotels, shopping malls and apartment complexes failed to refinance within a few months of their maturity date this year, Bank of America Merrill Lynch analysts said in a report. That compares with 15 percent to 20 percent in 2008, according to the analysts led by Roger Lehman in New York. About $11 billion in loans, or one-third of the 2010 total, had hit their expected maturity dates through late May.
The amount of capital available to commercial property owners has improved dramatically over the past year, though it still falls short, according to the report. “The level of financing is not where it was, or even where it needs to be for a full commercial real estate market recovery,” the analysts said.
If borrowers cannot refinance or pay off their loans, they either default or persuade lenders to extend their maturities.
The biggest factor in whether a loan is able to pay off when it comes due is which year it was taken out, as loans written prior to the boom are more conservative. About 64 percent of loans originated in 2004 paid off, compared with 33 percent of those originated in 2005, the analysts said.
Some of the poorest-performing loans are those that delay principal payments through part of the term, the report said. Just 31 percent of so-called period interest-only loans paid off at maturity, compared with 38 percent of loans that amortized from the start, and 39 percent of loans that made no principal payments until maturity, according to the report.
The period interest-only loans are “less well underwritten, with higher leverage,” the analysts said. “The very short amortization period does little to reduce that leverage.”
A large number of loans with five-year terms taken out as property values soared and underwriting standards plummeted will come due during the next two years. More than $60 billion of the debt matures in 2011 and $80 billion in 2012, according to Bank of America.
Top-rated debt sold in 2007 yields 2.2 percentage points more relative to benchmark rates than similar bonds sold in 2005, reflecting the view that loans taken out as sales of commercial-mortgage-backed securities peaked are riskier, according to Credit Suisse Group AG data.
A record $251.1 billion of bonds tied to commercial mortgages were sold in 2007 after $223.3 billion in 2006, according to data compiled by Bloomberg. Sales of the debt halted in 2008 as the credit crisis sapped demand, choking off funds to borrowers. Even with government aid, only $3.04 billion of the debt was issued last year. About $1.67 billion has been issued in 2010.
Banks have been slow to write new loans to package for sale as many borrowers struggle to pay off their existing mortgages with property prices down 41 percent from the October 2007 highs, according to Moody’s Investors Service.
Late payments on commercial real estate loans packaged into securities are at a record 7.5 percent, according to Moody’s, and may reach 11 percent by yearend.