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CRE Finance World, Summer 2012

The Quake Is Over, but the Aftershocks Are Darn Persistent Figure 4 is the primary reason for the relative stickiness of our projected Delinquency Severity Still Rising loss levels over the last 12 quarterly forecasts. These loans face CMBS Delinquency and Delinquency Severity Index two primary issues. First, since they were written at aggressive debt coverage levels immediately preceding a downturn in NOI, simply making the monthly mortgage payment is a challenge for many loans. In addition, we estimate that the refinancing gap9 will persist for approximately half the CMBS universe — even several years into the future.10 For example, in 2012, peak vintage11 refinance shortfall risk is approximately 20% higher than the overall CMBS universe and approximately 50% higher than for previously modified loans. Figure 6 Refinancing Remains a Significant Issue 2012 CMBS Maturing Loans Refinancing Gap Exposure Sources: PPR; Trepp Figure 5 Borderline CMBS Loans Delinquent and At Risk Performing CMBS Loans Sources: PPR; Trepp Note: Underwriting standards at refinance vary based upon economic outlook. The size of the 2012 refinance shortfall12 is projected to be approximately 20% across the CMBS universe and 25% for peak vintages. It is interesting to note that only 7% of 2011 modifications involved principal write-offs (these averaged approximately 40%), suggesting that servicers are not aggressively forgiving principal, consistent with hope notes and other strategies designed to recoup upside in the event of better property value recoveries. We expect Sources: PPR; Trepp a rolling wave of extended maturities, in addition to scheduled maturities, through 2017 that are likely to resemble profiles of the While the combination of regulator/servicer actions and economic 2012 maturities in levels of refinanceability and refinance gap. recovery staved off potential losses to reasonably underwritten loans with periodic cash flow or temporary valuation issues, there All in all, prognosticated loss levels should decline modestly as is still a hefty balance of loans that were aggressively underwritten recovery takes hold and interest rates stay at near-record-low or that were originated at or near peak market valuations.8 Our levels. However, there will be some carnage — to be expected research and analysis suggests that a significant portion of these when a bubble bursts. Possible downside risks (upticks in rates, peak vintage loans will have to “pay the piper” at some point, which weaker recovery, elevated EU problems) probably outweigh upside CRE Finance World Summer 2012 52


CRE Finance World, Summer 2012
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