Delinquency Rate Rises for Mortgages

Commercial Borrowers Fall Behind By PRABHA NATARAJAN More than 6% of commercial-mortgage borrowers in the U.S. have fallen behind in their payments, a sign of potential troubles ahead as nearly $40 billion of commercial-mortgage-backed bonds come due this year. The percentage of loans 30 days or more delinquent rose to 6.07% in December from 5.65% a month earlier, according to data provider Trepp LLC, a commercial-mortgage data provider. That is the highest delinquency rate since the advent of commercial-mortgage-backed securities. By year end, delinquency rates on loans for hotels, shopping malls and other commercial properties could rise to between 9% and 14%, according to Jefferies & Co. analysts, as high unemployment levels and a depressed housing market inhibit consumer spending. As retailers, hoteliers, restaurateurs and other businesses find it difficult to keep up with their rent payments or to meet rent increases written into their leases, their landlords will find it just as hard to keep up with their mortgages. "As cash flow declines materialize ... loans that are current will face pressure," said Aaron Bryson, an analyst with Barclays Capital. The outlook isn't as grim as it was in the late 1980s and early 1990s, the last big implosion of this market, but it would be the first deep slump for investors who bought securities based on pools of commercial-property loans. There have been three new commercial-mortgage-backed securities deals in the past couple of months, including a $400 million deal from Goldman Sachs Group Inc. and Developers Diversified Realty Corp., a $500 million issuance from J.P. Morgan-Inland Western Real Estate Trust Inc. and a $460 million deal from Bank of America and Fortress Investment Group LLC. While these deals—the first in 18 months—indicate the market is mending, they don't signal complete recovery yet, analysts say. Less than $20 billion of new commercial-mortgage-backed bonds are expected this year, according to Barclays Capital research. This compares to more than $230 billion in issuance in 2007, based on Barclays research. Since twice that amount is maturing this year, restructurings, modifications and extensions may well define 2010, Mr. Bryson said. That is where the flexibility of the commercial-mortgage-backed securities markets comes into play. "There is a fair amount of discretion that borrowers and lenders have," said Alan Todd, head of CMBS research at J.P. Morgan Chase. "In this environment, in many instances the best outcomes will result from cooperative behavior between borrowers and lenders, which allows them to avert mutually assured destruction." General Growth Properties' ability to extend more than $9 billion of loans while in bankruptcy-court protection suggests there is hope for the rest of the industry. If the aggressively underwritten loans on General Growth's malls could be extended, others can too, said Lisa Pendergast, managing director of mortgage and asset-backed group at Jefferies & Co. While some folks tar this as a "pretend and extend" strategy, others see some value in this, saying it protects investors from taking immediate losses, allowing them to take write-downs when the economy is improved and prices aren't at the bottom. "The hope is that the severity of loss will be less because the economy will be stronger," Mr. Todd said.