As CMBS Delinquencies Hit All Time Record, Wall Street Looks For Greater Fools

Tyler Durden's picture

After we read earlier that according to CRE experts TREPP, CMBS delinquencies have hit an all time record, we were confident that somehow Wall Street would do everything in its power to offload as much toxic crap from its books (and if inventory was missing, it would do its darnedest to create some) as possible, and start selling the most worthless piece of paper imaginable (see Howard Davidowitz). Sure enough, not much searching confirmed just that: per Bloomberg "Deutsche Bank AG, UBS AG and JPMorgan Chase & Co. are preparing the year’s first bond sales tied to commercial property loans, according to people familiar with the transactions. Deutsche Bank and UBS are teaming up to issue as much as
$2.5 billion in commercial mortgage-backed securities linked to
loans on office buildings, shopping malls and hotels in what
would be the largest offering of its kind since the market froze
in June 2008, according to a person familiar with the deal.
JPMorgan plans to sell $1.5 billion in similar debt, a person
familiar with that sale said." And investors, giddy with new costless capital and generous to waste 'other taxpayers' money' will line up in droves and gobble it up (many on margin), looking for a quick flip. Cue in the summer of 2007.

Incidentally, if there really was a recovery, shouldn't landlords be able to demand better pricing terms from their tenants, who are all presumably suddenly flush with case? Oh wait... this is one of those fact things that are so very unpleasant to the lemming brigade. Just BTFW.

More on December's record deterioration in that key secondary real estate market from Housing Wire:

The delinquency rate on commercial mortgage-backed securities reached 9.2% in December, the highest on record, according to analytics firm Trepp.

When the delinquencies dipped in October, analysts began anticipating a continued recovery, but the rate jumped 35 basis points in November and another 27 bps in December. A total of $61.5 billion in commercial mortgages are either more than 30 days delinquent, in foreclosure or REO as of December, up from just over $60 billion the month before.

Trepp Managing Director Manus Clancy said many were speculating that an emergence in new commercial lending and the resolution of many CMBS loans that the commercial real estate crisis had subsided.

But Trepp said new issuances of CMBS from JPMorgan Chase, another from Goldman Sachs and more coming from Bank of America should keep new delinquencies in check in 2011. Still, the market is far from healed.

"The December delinquency rate underscored that there still may be some nasty surprises in store even as the market shows some signs of healing," Clancy added.

And for a more detailed look at the CRE market, we present Realpoint's most recent CMBS report.

Other concerns / dynamics within the CMBS deals we continue to monitor which may affect the overall delinquency rate due to current credit market conditions for the remainder of 2010 include:

  • Balloon default risk remains an issue from highly seasoned CMBS transactions as loans are unable to payoff as scheduled. In many cases, collateral properties that have otherwise generated adequate / stable cash flow results are not able to refinance their balloon payment at maturity, mostly due to a lack of available refinance sources. In some cases little or no amortization has taken place due to interest-only payment structures, while collateral values have also declined. Large floating rate loan refinance and balloon default risk continues to grow, as many of such large loans are secured by un-stabilized or transitional properties reaching final maturity extensions (if they have not done so already), or fail to meet debt service or cash flow covenants necessary to exercise in-place extension options.
  • Depressed commercial real estate values and diminished equity in collateral properties continue to prompt more struggling borrowers with marginal collateral performance to claim imminent default and ask for debt relief. The aggressive pro-forma underwriting on loans originated from 2005 through 2008 vintage transactions, comingled with extinguished debt service / interest reserves required at-issuance, has led to an increasing number of loans with an inability to meet debt service requirements from in-place cash flow. This is especially evident with the  partial-term interest-only loans that will begin to amortize or those that have recently converted.
  • The Federal Reserve recently reported in its Beige Book results for October and November 2010 that conditions in the commercial real estate sector remained subdued and reports have suggested that rental rates continued to decline for most commercial property types. Several Districts reported flat demand and high vacancy rates, which translated into limited  nonresidential construction activity. A few Districts noted some weakening in nonresidential activity, while others indicated some modest improvement in commercial real estate. Reports noted that most new projects fell generally into the infrastructure category, and contacts expressed some optimism about the near-term outlook in their Districts, but contacts in several other Districts expressed a more cautious outlook.
  • Construction was expected to remain weak. Office, industrial and retail rental markets remained weak, although there were a few reports of slight increases in leasing activity. Commercial property sales were low overall, but investment demand for distressed commercial properties remained strong. Sales and construction are expected to remain subdued through year-end 2010 as tighter credit standards for buyers and small builders, along with general economic uncertainty, were stalling activity.
  • Increased interest for vacant retail space and pent-up demand may fuel a recovery for the sector. The Fed previously reported that retail spending was flat to moderately positive in most Districts as back-to-school spending boosted sales. Retailers said consumers are slowly regaining confidence, but remain price-conscious and were largely limiting purchases to necessities and nondiscretionary items. Looking ahead, retailers in several Districts expected modest sales growth through year-end (including the impact of “pop-up” retailers occupying temporary space).
  • Despite some signs of recent optimism, a cautious outlook for the hotel sector remains as many sizeable hotel loans from 2005-2008 vintage pools have had to significantly lower rates to maintain an acceptable level of occupancy across the country and in some cases have experienced severely distressed net cash flow performance as a result. Our expectations are that more of these loans may be asking for debt relief in the near future and may ultimately continued improvement in travel and tourist activity. A growth in business travel and convention activity was noted while occupancy for popular tourist destinations rose during the reporting period and was above year-ago levels.
  • Multifamily statistics have also shown that decreased concessions and a rise in rents in some markets may ultimately lead to improved cash flow performance, if supply remains limited.
  • In many office markets, rents could potentially reset with hopes of growth as we enter 2011. Demand for commercial and industrial loans remained weak as businesses continued to postpone capital spending plans because of economic and public policy uncertainties. According to the Fed, merger and acquisition lending has picked up in a few Districts while lending remained subdued and loan standards were still tight.
  • On the other hand, special servicers will play a key role in the level of delinquency reached in the next 12-24 months as large loan modifications, lender financing (through discounted assumptions and modifications prior to foreclosure), maturity extensions and approved forbearance have the potential to slow down or mitigate delinquency growth and delay losses. In addition, while vacancies across most if not all property types are near historic highs, optimism has recently surfaced regarding asking rents and vacancy across distressed loans. Liquidations on smaller balance loans, however, may continue based upon volume and time constraints, etc. Money that has been on the sideline for some time as well as foreign investment funds have slowly begun to show signs of re-entering the commercial real estate markets to take advantage longer term equity plays on inherent collateral value.
  • Regarding new issuance, as the market continues to grow in 2011, some delinquency growth we have experienced in the trailing 12-months may be offset by any new issuance’s speed to market. As liquidations of severely distressed defaulted loans picked up speed in the latter half of 2009 into 2010, and modifications or forbearance at the loan level continue to be discussed between borrowers and special servicers, there may be a delinquency “leveling-off” period through year-end 2010 or early 2011.

Full report link.


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Logans_Run's picture

It almost sounds like a blessing, "BTFD"

pamriallc's picture

JPM (and others) simply have *CLIENTS* who are now refinancing existing debt.  Not a crime.  Rates are very---- very good right now.  Shawn A. Mesaros, Pamria, LLC

Logans_Run's picture

Similar to "joy, joy, joy" from Repo Man

Salinger's picture

If you are not watching the House swearing in it is great  -- Pelosi is giving her farewell speech and I suspect she has structured it to make Boehner cry  as she sings the praises of his upbringing etc

Boilermaker's picture

He'll do as bad as she did.  I won't say worse because you can't give a grade below an F.  It'll be a continuation of the same BS.

StychoKiller's picture

Welcome to GRIDLOCK, USA!  Population:  us!  :>(

ghostfaceinvestah's picture

CRE is dead as online shopping will take off - no one in their right mind will want to go out to shop and brave the angry hoards - i barely enter a store anymore - the natives are already getting mean, just wait until their fiscal situation continues to deteriorate - who needs that shit.

Tyler Durden's picture

You are absolutely right. But didn't the ADP report just announce a 270,000 increase in service jobs, "the largest monthly increase in the history of the report"? Or is that 270,000 all in HFT-related jobs?

ColonelCooper's picture

Most of these jobs are in the internet sex industry.

ghostfaceinvestah's picture

cnbc of all place actually has a good article on those adp jobs, one guess is that a lot of employers keep employees on the roles through year end even though they laid them off, and adp doesn't pick up on that.

this is pure anecdote, but i do know quite a few people who were laid off in the past month, just random people i know through the gym, fellow parents i meet through the kids, etc, but it doesn't seem to me that the job situation is improving at all.

$4 gas was barely tolerable at 5% U3, at double that, this situation is going to get ugly.  people are already starting to lose it.

StychoKiller's picture

Warm up the squadrons of Piper-Cubs!  There's still plenty of IRS buildings (and other Govt agencies) -- it's a target-rich environment! :>(

Spalding_Smailes's picture

Deals are getting done little by little .... A friend of mine did this deal 2 months ago. Someone was blowtorched but someone got a great deal also .... Strip mall out west.



XXXXXXXXXX----- - Please keep in mind we are under a stict confi on this deal. We just found out that the Special Servicer will engage a broker on this deal Wed of next week. The servicer will carve us out of the broker agreement, however, we would prefer if this deal doesn't go to market. We have it U/W at  a modified loan assumption amount of $3mm. The original loan amount was $6.5mm.. Is it possible for you to show it to your guys in confidence? We are showing it to two other people at this point. Don't show it to him yet. Let's talk first think in the morning. I need to talk to -xxxxxx- and -xxxxxxx- before you talk to anyone about it. We will not have much time to put in an LOI, so we will need to approach people who are familar with the -xxxxxx- market. The SS will be looking for a decent net worth..let's say $10mm, with $1mm liquid as well as being able to demonstrate local management experience. Let's talk in morning.


Summary and pro forma attached.

 Assumptions in the P/F

  • $15.00 / sf NNN pro forma for vacant space
  • 18% vacancy factor
  • 4% management fee


  • 25% 5-year IRR
  • 40%+ cash-on-cash


ColonelCooper's picture

Your friend must have balls like grapefruits or is actually Harry Wanger himself.  Every stripmall in America is either already dead or dying a slow painful death.

Spalding_Smailes's picture

The buyer wanted the broker in on the deal for 10%. The smart money is not buying unless the guys doing the leg work also put cash on the line .They do months of research before they move in. 


This strip mall is located near two large retirement communities & has a large anchor store. Most of the deals 30-40 cents on the dollar. 

SheepDog-One's picture

All the strip malls out here in the west I see are maybe a tattoo parlor and a payday loan advance place. Its bullshit.

StychoKiller's picture

Cash4Gold!  Exchange those PM's for worthless linen rag-paper -- what's not to like?

A Man without Qualities's picture

But going shopping is the only reason why 25% of Americans ever leave their house...

Quinvarius's picture

I hope my pension plan buys a bunch of that crap.  I will bribe the manager as much as the banks do to make sure I am exposed!

apberusdisvet's picture

So naturally, office and retail REITs will go to the moon, after Ben does a back door bailout.  Buy REITs, bitchez; flush your sanlty for good.

Boilermaker's picture

They've already soared into orbit.  They've outperformed the broader market by a country mile for weeks on end now.

ghostfaceinvestah's picture

sorry glitch in the matrix

bunkermeatheadprogeny's picture

Speaking of fools, I briefly thought about switching from FAZ to FAS yesterday - lost a bundle this morn and got drunk. Chart indicated a breakout. Gonna flip my silver dollar and stick with it from now on.

Duffminster's picture

In another typical example of orchestrated "Management Of Perception Economics" the establishment media focuses on the questionable ADP and challenger job numbers ignoring the substantial deviation with the ISM Employment Index and these terribe CMBS numbers and continuing poor housing prices along with the simmering inventory questions.  

The decline in the ISM employment index indicates that the strong ADP employment number has substantial statistical distortions and should be considered cautiously as many other factors such as falling real estate prices indicate the economy is not really recovering even under massive fiscal and monetary stimulus.

<Here is another brief article commenting on the subject


"...Trepp, LLC, the leading provider of CMBS and commercial mortgage information, analytics and technology to the global securities and investment management industry, released today its December 2010 Delinquency Report. This month’s report contains a special section on the Major CMBS Events of 2010 as well as Delinquency Rate and Triple A Spread charts covering the past 10 years (full report available at

The U.S. CMBS delinquency rate rose again in December with the percentage of loans 30 or more days delinquent, in foreclosure or REO climbing 27 basis points to 9.20%, the highest in history for U.S. commercial real estate loans in CMBS. The value of delinquent loans now exceeds $61.5 billion.

The decline in the delinquency rate in October 2010 now appears to have been a blip, as the rate has since increased by 62 basis points. December’s 27 basis point jump comes despite the fact that new issues continued to make their way into the calculation and servicers continued to resolve troubled loans. ..."

Personally, I think its much worse than that.  


ghostfaceinvestah's picture

just wait until borders goes tits up, and barnes and noble after that.

goldmiddelfinger's picture

Just discovered that my local Crown Books has closed. Tears.

EscapeKey's picture

That should be REALLY good for Borders' stock price.

furieus's picture

Shut up and buy the fucking dip.... err top.

hedgeless_horseman's picture

It was rather more of a shock to Winston when he discovered from some chance remark that she did not remember that four years ago, investors were to buy the fucking top. It was true that she regarded the whole recovery as a sham: but apparently she had not even noticed that the trading strategy had changed. 'I thought we'd always bought the fucking dip,' she said vaguely. It frightened him a little. The invention of the Federal Reserve's markets group dated from long before her birth, but the switchover in the telescreen's investor strategies had happened only two years ago, well after she was grown up. He argued with her about it for perhaps a quarter of an hour. In the end he succeeded in forcing her memory back until she did dimly recall that at one time buy the fucking top, not buy the fucking dip had been the CNBC telescreen's directive. But the issue still struck her as unimportant. 'Who cares?' she said impatiently. 'It's always one bloody investment strategy after another, and one knows the market is all rigged anyway.'

Trimmed Hedge's picture

Maybe the more Tyler posts, the better odds that gold will go up?


Did I mention that gold is down again today?



Yeah, that's right... buy those dips....

tmosley's picture

Says the losing loser who does nothing but lose money and croon when the best performing asset class of the last ten years has a couple of down days.

Soooo many trolls.

Mr Lennon Hendrix's picture

O/T but the House has a Boehner as Speaker.

SheepDog-One's picture

As opposed to the loonie old cunt!

goldmiddelfinger's picture

Florida is awash with zombie strip malls and 80% vacant condos, many half finished and weed grown. Looks like balde runner or something but then again that's how it looked in the mid 1970s

sheep92's picture

Does anyone notice that the long end of the bond market is cratering?

A Man without Qualities's picture

I think the bond market has just woken to the fact that the "Tea Party" movement was actually an illusion - the new Congress has zero intention of cutting spending, but they are going to lower taxes.  Fooled again! 

SheepDog-One's picture

My God, what kind of lunatic would buy any of this toxic garbage?

Duffminster's picture

Uncle Ben and the SquidFace Club?

SheepDog-One's picture

Thats the only ones buyin da theyre in self preservation mode.

Hephasteus's picture

No they are just hoping people don't notice the inflation that will come from making them pay for it. They are 1x into it and people notice it and they need to 4x to 5x to get back to corrupted enough to solider on.

Duffminster's picture

Uncle Ben and the SquidFace Club?