Time To Take The Fed's Warning Seriously: CMBS Has "Greatest Ever Monthly Delinquency Increase"

Tyler Durden's picture

With three UK-based property funds, among them Standard Life, Aviva and M&G, all "freezing" assets in the past 2 days and suspending redemptions over fears of a swoon in UK housing prices, spreading panic shockwaves around the globe that the Brexit dominoes have come home to roost (to mix and match metaphors), it may not be a bad time time to jump across the Atlantic and look at US real-estate and in particular, commercial properties. As CMBS specialist Trepp wrote today in its weekly TreppWire commentary, the "Trepp CMBS delinquency rate moved noticeably higher in June, as the rate was pushed up by loans that reached their maturity date but were not paid off." It was the fourth straight month that the rate has crept higher following two large decreases in January and February. The delinquency rate for US commercial real estate loans in CMBS is now 4.60%, an increase of 25 basis points from April. 

This is in line with recent warnings from the Fed which just two weeks ago cautioned not only about another stock bubble when on June 21 it said that "forward price-to-earnings ratios for equities have increased to a level well above their median of the past three decades" but again warned that commercial real estate remains the most troubled sector: "valuation pressures have remained notable in the commercial real estate sector, to which some small banks have substantial exposures." This includes not just bricks and mortar malls, which are losing bankrupt retail tenants by the hour, but also the collapse in the shale sector.  It also includes a sudden spike in vacant office space.

Over the weekend, the Fed's warning was validated not just by Trepp, but also by Morgan Stanley, whose Richard Hill looked at the latest CMBS 2.0 remittance reports and observed that in June, "delinquent loans rose by $142MM, including a potential reps breach." As Hill puts it, "this delinquency increase was the greatest ever." The silver lining: so too was the decline in specially serviced and watchlist loans, as near insolvent loans rolled off to delinquent status.

Here is the key highlight from MS' summary of newly delinquent loans:

15 loans totaling $221MM became newly delinquent in June. In total, 71 loans with a balance of $760.6MM were delinquent in June, resulting in a delinquency rate of 32bp. The $142MM month-over-month increase in the volume of delinquent loans was the greatest ever - it eclipses the $116MM increase in March 2016 and compares to an average monthly increase of $40.7MM.

Some other observations on the state of CMBS 2.0:

  • Specially serviced: There were four loans totaling $43.3MM that were newly transferred to 'specially serviced' this month, but the volume of loans declined by the most ever to $1B, resulting in a specially serviced rate of 42bp. There are currently 13 loans totaling $206MM that are delinquent but not specially serviced, including the largest loan to become newly delinquent this month. Looking forward, we expect the two CMBS 2.0 loans totaling $293MM to be imminently transferred to special servicing, given their exposure to JQ Hammons Hotels, which filed for bankruptcy on Sunday.
  • Watchlist: 206 loans totaling $2B were added to the watchlist in June, but the volume of loans declined to $17.5B, resulting in a watchlist rate of 7.37%. The month-over-month decline in balance of specially serviced loans was the greatest ever and compares to a 12-month average increase of $580MM. However, the outstanding balance remains higher than what was observed in February 2016.
  • Appraisal reductions: 21 loans totaling $161MM realized Apprisal Reduction Amounts (ARA) this month. 10 of these loans totaling $62.1M were first-time appraisal reductions while 11 totaling $99.3M were updated appraisals. Seven of the ten loans with first-time ARAs are secured by properties located in 'oil boom' regions.
  • Prepayments: 29 loans totaling $456MM paid off in June and, in total, 424 loans with a balance of $9.2B have now been paid off. The largest pay-off this month was the $85MM loan secured by the Keystone Marquee Office Portfolio (DBUBS 2011-LC2A) at its maturity date.
  • Defeasance: 22 loans with a balance of $345.5MM were defeased in June. In total, 291 loans with a balance of $5.8B have now been defeased, of which 213 loans totaling $3.4B remain outstanding. The largest loan to defease this month was the $1655MM loan secured by One South Wacker Drive (WFRBS 2013-C11 WFRBS 2013-C12), which is scheduled to mature on 1/1/2018

So is it time to start worrying about US commercial real estate? Well, with massive retail and shale bankruptcies, vacant malls around the nation, and rapidly evacuating offices, absolutely. Only in this day and age worrying means buying as much risk assets as one can afford, because the worse things are the greater the likelihood of an imminent bailout: of even a 1% correction in stocks by central banks. Case in point: frontrunning.


And while we have been joking for the past 7 years that algos will push the S&P to +? in case World War III breaks out (on 1 offerless contract), this is looking increasingly more likely with every passing day. And now that Hillary is assured of being the next president, it just may happen in the not too distant future.

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Aristotle of Greece's picture
Aristotle of Greece (not verified) Jul 5, 2016 8:55 PM

Take the Fed seriously? It's a private corporation fixing things for their owners and buddies.

USofAzzDownWeGo's picture

Yet IYR, the CRE etf continues to hit new all time highs. It holds bubble stocks/companies like SPG. 

BeanusCountus's picture

Agreed. But this is one I watch. Troubling to say the least. Nothing in and of itself on a monthly basis but this trend is not your friend. How bout we keep an eye on this, history shows it's usually a canary in the coal mine.

sun tzu's picture

It takes time for the body to realize the head has been cut off. RE crashed in 2006 and Bear Stearns in 2007. The stock market didn't crash until 2008

rich1657's picture
Every man for himself, and Devil take the hindmost.
max2205's picture

Just like all those bankrupted oil and gas ponzis   it's all good money

SandiaMan's picture

What does it matter.Stop obeying bring it down!

Strom's picture

Something to think about - these are mostly loans that reached their maturity. They were making the monthly payment, but couldn't refinance. They are likely full of 10 year loans, which would have been mid-2006 vintage, when CMBS was at its peak craziness last cycle.

That speaks to the craziness of the valuations last cycle. They can pay the mortgage, but can't refinance a 10 year old loan at a time when the refinancing market is actually pretty good, a decade later.

sun tzu's picture

You can always refi. At what price?

Right-on Left-off's picture

You can always refi. At what price?

Not true.  Present valuation and/or future valuation may not support a new mortgage that refi's the old.  Then too, the monthly payments may not be forthcoming with current rent/lease rates.  Who would want to refi a commercial business going nowhere, one that has been closed down for many months and many more months to come.

MontgomeryScott's picture

If you take our introductory offer NOW, you can have a zero-interest 'balance transfer' window of up to 90 days. After that, the usual interest rate of 22.99% applies (plus LIBOR).  See the fine print for more details. The usual fees apply for late payments and stuff like that. If you reside in Cyprus or Greece (or hold a Commercial Mortgage), certain other restrictions apply as well (see our offer for further details).

CITI. We're EVERYWHERE you don't WANT US to be. What's in YOUR wallet?



Did we mention that we also offer 'payday loans'? You like to refer to them as 'Bridge Loans'.

zjxn06's picture

"You can always refi. At what price?"

Negative interest rates. We'll pay you to take out the loans and print banana bucks to pay you.

Works every time.

Redart's picture

AUD CAD and NZD are getting some support now.
Buy the S&p gap tomorrow, wait for the up thrust and dump it, then wait. Meanwhile buy some IBKR

MontgomeryScott's picture

I own some CAD and NZD physical silver. No Aussie stuff, though (I lived there for 3 years, and back in '69 the sewage workers union pulled a 'wildcat strike' and dumped raw sewage in to Sydney harbor while I was swimming in The Fairlight area. NOT Snickers bars, I can assure you).

WHY does it sound 'sexual'; your advice? 'Buy the GAP, and wait for the UP THRUST, and then DUMP IT'? What are you going to wait for; that you don't get her PREGNANT?

MBS's were ALL THE RAGE in the run-up to the so-called '2008 housing crisis'. THEN, the DELINQUENCIES started to pile up... NOW, it's the Commercial Mortgage-Backed Securities...

I won't come in your mouth. I won't get you pregnant. (After the Divorce:) The check's in the mail.

'Derivitaves' traders are kind of funny, in a strange way.

I thought this site was named 'Zero Hedge' (and for a DAMNED GOOD REASON).

Well, anyway: Good luck with your day-trades tomorrow.

My phys.slv. holdings went up by 20% since the first of June 2016; as steady as a good woman on a Saturday evening.

"I have an ominous foreboding of impending disaster" (to quote 'Bob And Ray Throw A Stereo Spectacular'). 'Whatever Lola wants (Lola gets)'. It's an old album, released by the Radio Corporation of America (RCA), back in the mid-1960's. They were working on introducing the 'new' 'stereophonic' recording album (back when 'high fidelity' was an A.M. tube-driven monophonic radio in the dash of your car, and 'transistors' were just becoming available for mass consumption).

How SHORT our memories are!

Hank Paulson sweating bullets on the floor of Congress was one of MY PERSONAL favorites! SERIOUSLY, I saw his face live on CNN, and I thought he was going to have a real-life HEART ATTACK.


Redart's picture

Markets are completely off balance. When they meet this, its time to make money. I could short ITUB, but I prefer to buy the next JPM dip. Ibkr in at a premium, the list of off balanced stocks is huge. Micron MU is another one to buy, etc. sorry about the thrust and the dump eh

loveguru's picture

Can someone explain what's the meaning of this? Is Japan purposefully setting these rates very low so as to repel investors from purchasing the YEN? 

Since, a higher value for yen would hit exports and cause deflation in a stagnant economy. Please correct me if I am wrong in understanding this.

mendigo's picture

Maybe you will get a better answer:

Japan does not set the price/rates, the price is a result of market forces - demand. High price implies high demand implies low yield. There is high demand because investors are trying to put the money somewhere safe even while central bank has been creating "artificial" demand - buying the same paper in effort to 1) suppress rates and 2) drive investors away and into other investments.

BoNeSxxx's picture

Hillary assured of becoming the next President? Where is that coming from?

Okienomics's picture

Implying that the only potential roadblock was an objective and fair FBI & DOJ.  Roadblock removed.

WillyGroper's picture

it's deja vu all over again.

yogibear's picture

The system is broken. The only thing to fix it is a giant reset.

Catullus's picture

Doesn't look like much. There was more prepaid than newly delinquent. I guess that distills the available stock of bonds of a certain vintage to shit.

. . . _ _ _ . . .'s picture

"Delinquency, hunh, *snort* *gag* yeah, delinquency... get them off the street already..."


Iconoclast421's picture

Chump change. The Fed only buys in blocks of $10 billion. So it is only a problem until the delinquent debt reaches that threshold!