Window of Opportunity to Keep Delinquencies Low

September 3, 2008

By Poonkulali Thangavelu – National Real Estate Investor

The volume of commercial mortgage loans due for refinancing in 2008 has not placed a strain on the market’s limited capacity so far, but as the volume rises beginning later this year, delinquencies are likely to go up. As of mid-July, more than $7 billion in CMBS loans will be eligible for refinancing in 16 to 18 months.

During a Reis second-quarter capital markets briefing teleconference on August 27, Sam Chandan, the New York-based research firm’s chief economist, noted that as more of these mortgages come due for refinancing, more delinquencies are likely unless credit markets ease or additional sources of credit are identified.

“In an adverse feedback loop involving perceptions of risk and credit extension, credit will then tighten further and asset prices will decline in the face of distressed sales. In selected markets, particularly in those where competition among lending sources resulted in aggressive underwriting, negative asset bubbles may emerge,” Chandan said.

Delinquencies and defaults on commercial property are now transitioning from those tied to property-related idiosyncrasies to more “systematic causal drivers” related to the assumptions built into the structure of the debt.

The assumptions are based not so much on property cash flow or appraisal value as much as they are based on expectations made at the point of origination about credit market conditions at the point of loan maturity and the “amenability of lenders” to refinance maturing debt at terms similar to the original financing, according to Chandan.


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