Servicers are liquidating soured commercial property loans bundled into bonds at an “anemic” pace as large mortgages delay the process, creating uncertainty as to the size of losses, according to Credit Suisse Group AG.
Of nearly 4,900 troubled loans, 86 totaling $494 million were liquidated last month, Credit Suisse analysts Serif Ustun and Sylvain Jousseaume in New York wrote in a July 23 report. More than 80 percent of those loans were less than $10 million and the largest had only $27 million in balance, the analysts said.
Roughly 50 loans with balances greater than $50 million have been with special servicers, firms that handle troubled loans packaged in bonds, for at least one year, the report said. Debt is transferred to a special servicer if a borrower misses payments or requests a modification to ease potential problems. Some loans have been with special servicers for more than two years, according to the report.
“Large loans take more time because they are more complicated,” Ustun said in a telephone interview. “The pace of monthly loan liquidations was still anemic,” compared with the overall group, he said.
So-called loss severities on liquidated loans contained in commercial-mortgage bonds for June averaged 58 percent, compared with 65 percent for 2009, according to data from Zurich-based Credit Suisse. That compares with average loss severities of 36 percent in previous years, the report said.
‘Rule of Thumb’
One of the few large loans that have been liquidated since 2008, an $87 million mortgage on the West Oaks Mall in Houston, suffered a loss of 98 percent when it was disposed of in late 2009, the report said.
“There is no easy rule of thumb” to predict losses on large and complex debt, Ustun said. “For larger loans, it can be 20 percent or it can be 100 percent. It really depends on the specifics.”
The average size of a problem loan that’s been liquidated is $5 million, compared with an average of $15 million for loans that have been modified, the report said. Of loans that were restructured, 41 percent were extended for an average of 22 months.
“The major uncertainty for us currently is whether these loans have been truly ‘worked out’ to survive the continuing softness in the economy and the dearth of financing for smaller-size loans versus large institutional ‘mega’ loans,” the analysts said.