Delinquencies Show Monthly Decline, Finally

NEW YORK CITY-Although the two ratings agencies differed on exactly how long it’s been since CMBS delinquencies have gone down instead of up, Fitch Ratings and Trepp both said last week that delinquencies had indeed declined during October. Both cited the resolution of the $4.1-billion Extended Stay America loan as a major factor in the drop, with Fitch noting that the Extended Stay action cut hotel delinquencies by about one-third.

Trepp cited a 47-basis point decline to 8.58% in October, which it said was the first month-to-month decline of CMBS delinquencies since the summer of 2009. That leaves $58.3 billion worth of CMBS loans that are at least 30 days past due, according to Trepp.

For its part, Fitch reported an even steeper drop in its delinquency index, noting an 88-bps drop to 7.78%. According to Fitch, it’s the first such decline in the index since January 2008.

One reason for the disparity is differences in the two agencies’ yardsticks. Trepp’s report covers all loans that are at least 30 days past due, while Fitch’s index focuses on those that are 60 or more days overdue or in foreclosure.

The Fitch index includes 2,951 loans totaling $33.5 billion, out of the agency's rated universe of approximately 38,000 loans comprising $430.7 billion. In a commentary on its monthly delinquency report, Trepp also zeroed in on loans within the Trepp-rated universe that are seriously delinquent, and there the figure is closer to Fitch’s: 7.96%, a 35-bps decline from the month before.

Fitch attributed the 88-bps monthly decline to the resolution of just seven loans totaling $5.2 billion. With the Extended Stay portfolio as the largest of those seven loans by far, and just $304 million of hospitality CMBS becoming newly delinquent last month, the delinquency rate for securitized hotel loans declined from 21.31% in September to 14.14% in October.

"Whereas hotel-backed loans saw the most rapid performance deterioration, now the opposite is true," Mary MacNeill, managing director with Fitch, says in a statement. "Hotel loans are now well positioned to recover quickly when business and consumer spending resume and the economic recovery gains traction."

Indeed, hotel is no longer the most delinquent sector in Fitch’s index, thanks to the Extended Stay resolution. That dubious distinction now goes to multifamily, which ticked upward slightly to 14.57%. Retail also increased month-to-month from 6.1% to 6.25%, while industrial’s rise was an even smaller four-bps increase to 5.83%. Office ticked downward from 5.48% to 5.38.%

MacNeill’s counterpart at Trepp, Manus Clancy, says in a release, “We have been saying for months that loan refinancings, note sales and liquidations would be putting downward pressure on the delinquency rate, and this is precisely what happened in October.” Noting that the Extended Stay resolution accounted for a 59-bps drop by itself, Clancy adds, “We anticipate that once the Stuyvesant Town loan is resolved, there will be another 40 bps worth of delinquencies removed in one fell swoop.”

However, it may not be time yet to break out the party hats and noisemakers. Trepp noted that if the Extended Stay portfolio were taken out of the equation, October’s delinquency rate would have increased by 12 bps.