Loan Recoveries Keep Pace as Volume Rises

NEW YORK CITY-It’s quality as well as quantity when it comes to recovery rates on loan defaults, Real Capital Analytics says in a new report. Despite the fact that special servicers are liquidating bad loans at much greater volume these days, recovery rates have held the line, averaging 65% in the fourth quarter of 2010 compared to 64% in Q3.

“Improving credit conditions and pricing metrics in the commercial real estate market in general have resulted in recovery rates that are significantly higher than during previous downturns—and as compared to expectations during the depths of the most recent crisis,” Sam Chandan, global chief economist and EVP at RCA, tells GlobeSt.com. He adds that the rising tide lifting all boats is also supporting “a remarkable number of full recoveries,” including 23% of all acquisition/refinance loans in the sample analyzed by RCA.

In line with pricing and liquidity trends, full recoveries have been dominated by loans backed by office assets in major markets including New York, Los Angeles, Chicago and San Francisco, but RCA says they’ve also included “some well-positioned hotel and apartment assets” in these markets. That’s in line with RCA’s finding that recovery rates are higher among major metro areas: 69% in Q4 ’10 compared to 61% for loans in secondary and tertiary markets.

Additionally, RCA says the overall result masks some pretty wide variances in recovery rates among different types of loans as well as classes of lenders. CMBS loans have improved from an average of 58% in 2009 to 66% by the end of Q4, while recovery rates on development loans declined during the same period from 61% to 57%, “higher than historic norms but still observably weaker than for other financing,” Chandan says. Land acquisition loans in particular come in at the low end of the spectrum with a 52% recovery rate, RCA says in its report.

Among lenders, insurance companies have fared best with 82% recovery of their loans. That goes hand in hand with their conservative lending policies, RCA says, as insurers have also enjoyed lower default rates among their legacy loans. Domestic banks, on the other hand, have seen their recovery rates diminish to 63%, driven largely by their exposure to development loans.

Chandan observes that lenders were able to liquidate “a significantly larger volume of loans” during the most recent quarter. Of the $56.7 billion in liquidations recorded since the beginning of ‘09, 36% occurred in Q4 ’10, Chandan says.

That trend has persisted into this year. Trepp reported earlier this month that for liquidated US fixed-rate loans, January’s dollar amount was the highest in the 13 months since the CMBS information provider has been compiling this number. “The special servicers have been liquidating at a rate of about $960 million per month over that time, so the $1.51 billion in liquidation this month represents a 58% increase over the average,” according to Trepp.

The losses on those loans were almost $583 million, representing an average loss severity of 38.5%, Trepp says. That loss severity value is below the average of 44.3% over the last 13 months, says Trepp in its January loss analysis.