Bloomberg News

Commercial Mortgage Repeat Defaults Poised to Increase, RBS Says

June 11, 2012

Commercial mortgage defaults are poised to keep rising as loan modifications fail to prevent borrowers from running into trouble again amid collapsed real- estate values, according to Royal Bank of Scotland Group Plc.

“The re-default rate is going to be significantly higher than many market participants think,” Richard Hill, a debt strategist at the bank, said in an interview today at the Commercial Real Estate Finance Council’s convention in Washington. “For some of these loans that were modified in the past three years, the rubber is finally meeting the road.”

Borrowers are struggling to pay off debt with property prices down 34.5 percent from 2007 peaks and U.S. economic growth stalling. More than $30 billion of loans on everything from skyscrapers to strip malls are being handled by a so-called special servicer, according to data compiled by Bloomberg. The companies negotiate with delinquent landlords on behalf of bondholders and decide whether to modify a loan or foreclose.

The delinquency rate on commercial mortgages bundled into bonds rose to a record 10.5 percent in May, in part because of a missed payment on a $297 million loan tied to apartment complexes in Texas and Maryland, according to RBS.

The debt was modified in January 2010 after Standard Portfolios Asset Management Co. bought the buildings out of bankruptcy, according to RBS. The maturity date was pushed out five years to 2016, and the interest rate was cut from 6.068 percent to 3.78 percent, with increases in the rate over six years. The borrower has submitted a proposal for another modification, RBS said.

Overleveraged Properties

“Special servicers are going to have to carefully consider negotiating with a borrower a second time around,” Hill said. “These properties were overleveraged and not performing nearly as well as anticipated. A modification is not going to change the performance” in many instances, he said.

About $48 billion in commercial mortgages packaged into bonds have been modified since 2008, RBS data show. The lender estimates as much as 50 percent of those loans will default again.

More than 9 percent of these mortgages are already behind on payments, Citigroup Inc. analysts said in a June 1 report. Re-defaults may rise as extended mortgages reach their new maturity dates, with $6.9 billion of the debt coming due through 2013, according to the New York-based analysts led by Jeffrey Berenbaum.

U.S. commercial-property price gains slowed in the past three months as concern over Europe’s debt crisis reduced available financing for real-estate transactions, according to a May 24 report from Moody’s Investors Service. Valuations are 34.5 percent below the 2007 peak, CoStar Group Inc. said in a note this month.

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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