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CRE Finance World, Summer 2013

Overall, the cumulative lifetime default rate (by loan balance) for cohorts with at least ten years of history ranged from 0.24% for 2000 originations to 31.7% for 1986 originations. The average lifetime cumulative default rate (by loan balance) for cohorts with at least ten years of seasoning was 12.7%, down from 19.6% in the previous study. In this update, the time profile of defaults will be familiar to readers with knowledge of the previous studies result — but it is entirely based on the older history, as the new performance data includes few defaults and they are not clustered in years 3-5. Exhibit 5 Lifetime Default Rates by Origination Cohort (by Loan Count) Exhibit 6 Lifetime Default Rates by Origination Cohort (by Principal Balance) Timing Of Defaults In the 2005 study, there was largely one major recession to compare to, the stress period between the late 1980s and early 1990s. In that analysis there was variation in the time profile by cohort, often related to where the cohort was relative to the real estate recession5. The addition of new data clearly did not have the same impact as the previous one. The time profile of defaults, presented in exhibits 7 and 8. The all-history time profile is consistent with previous studies. While the shape similar, the level is lower CRE Finance World Summer 2013 44 because the default rate in the updated data is much lower relative to the default rate produced in the previous study. For example the default rate in year five was 1.84% by loan amount before adding the new data, but now it has fallen to 1.23%. On the other side, the post-2000 cohorts had much different pattern although the peak of default timing seemed to be similar. The extremely low level (less than 0.2%), which looked more like idiosyncratic events, during this new period did not reflect the severe crisis that the CMBS world suffered. Exhibit 7 Average Timing of Defaults (1972–2011) — Loan Amount Exhibit 8 Average Timing of Defaults For Post-2000 Cohort — Loan Amount One thing in common with both studies is the lack of balloon defaults. Clearly balloon defaults are a risk for commercial mortgages and have been a reality for CMBS loans. It is expected that refinance default rates are not high in this data. Generally, in the historical data, mortgage rates and cap rates have been lower at balloon maturity than they were at loan origination. Because of this, refinance difficulty at maturity only comes from economic stresses or poor property performance instead of from interest rate increases. This is shown in Exhibit 9. Commercial Mortgage Defaults: From 1972 to 2011


CRE Finance World, Summer 2013
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