How We Model CRE Losses To assess potential loss rates, we examined historical losses based on data from the Federal Reserve, the American Council of Life Insurers (ACLI), and several ratings agencies. We also reviewed historical commercial real estate pricing data based on the Moody’s Commercial Property Price Index (CPPI) and the MIT Transaction-Base Index (TBI). Historical Delinquencies The data show historical commercial delinquencies of 4.2% and commercial charge-offs of 0.7% for the Federal Reserve data and delinquency rates of 1.5% and loans in process of foreclosure of 0.63% for ACLI. We estimate a maximum delinquency rate of 12.1% in 1991 for the Federal Reserve data and delinquency rate of 8-9% in 2009-2010 during the financial crisis. However, commercial charge-offs reached an all-time high of 3.05% in 2009. For the ACLI data, we estimate commercial delinquencies reached a max of 7.5% while foreclosures reached a max of 3.5% in the 1992- 1993 commercial real estate crash and remained modest during the financial crisis (less than 1%). Exhibits 3 through 6 below summarize historical delinquency rates and charge-offs based on data from the Federal Reserve and ACLI. Exhibit 3 Historical Commercial Delinquencies — Federal Reserve Source: Federal Reserve; KBW Research. Exhibit 4 Historical Commercial Charge-Offs — Federal Reserve Source: Federal Reserve; KBW Research. CRE Finance World Winter 2015 32 Exhibit 5 Historical Commercial Delinquencies (incl. loans in foreclosure) — ACLI Source: ACLI; KBW Research. Exhibit 6 Historical Commercial Loans in-Process of Foreclosure — ACLI Source: ACLI; KBW Research. Historical Loss Severities (Principal Losses Incurred) Next we reviewed historical principal losses on loans that defaulted. Based on the ACLI data, we estimate loss rates of 10.8-29.4% from 1994-2012 and an average of 20.6%. Additionally, Moody’s data on multi-year cumulative loss rates for CMBS 1993-2006 vintage loans shows seven-year loss rates of 0.7% for the Ba tranche, 7.3% for the B tranche, and 25% for the Caa for the tranche. The loss rates increase from 0.15% to 0.7% in years 3-7 for Ba, 0.25% to 7.3% in years 2 through 7 for B, and 2.9% to 25% in years 3 to 7 for Caa. We would consider the credit risk that the major commercial mortgage REITs are taking with average LTVs of 65% to be similar to the BBB-/Baa2 tranches so far on an average portfolio basis. Additionally, S&P data on CMBS loss severities range from 25-50%. Modeling CRE Losses for Commercial Mortgage REITs
CREFW-Winter Edition
To see the actual publication please follow the link above