Page 47

CRE Finance World, Summer 2013

A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 45 Exhibit 9 ACLI Fixed Rate Mortgage Rate Changes In the exhibit, bars with a value less than zero are maturing into an interest rate environment that is lower than when the mortgage was originated. When the bar is above the axis, its means the current mortgage rate is higher than it was at origination. Because rates have been declining for decades it is not surprising that there has been little balloon default behavior. However, there was some rates stress for 5-year loans maturing in 2008-2011, at the same time as the recession. This is consistent with some of the higher maturity defaults in CMBS collateral at that time. In our data we only identified just a hint of balloon default behavior in the 1998 cohort since its default rate was up in the 10th year, higher than years 6–9. This was driven more by economic stress than rates stress. Liquidations and Recoveries The loss severity on liquidated loans in the previous study was about 31%. However, we do not have enough direct information to update this number. Based on the recent experience in the CMBS space, liquidated loans had about 40–50% loss severity6, which was higher than the loss severity in the previous study. This is mainly due to the collapse in the real estate values. The severity calculation generally includes foregone interest and expenses, as well as lost principal. As in previous studies, we identify the default as 90+ delinquencies. Clearly, not all defaulting loans would liquidate. We found the similar distribution among the liquidation, recovery and restructuring as illustrated in exhibit 9/10?. About half of the loans entering default for the first time went to liquidation directly. About 25% of the loans were restructured, while the rest became current again. Of the loans becoming current, about 62% were eventually restructured, and another 30% defaulted again. Hence, we estimate that about 54% of loans entering default are eventually liquidated, 38% are restructured, 6% become delinquent again, and only 2% fully recover. Exhibit 10 Liquidated, Restructured and Recovered Loans Impacts of Defaults on Current Bond Structures In applying the results from our study to the conduit-based CMBS collateral, we should be careful to note the differences between life insurance company and conduit originations. The performance contrast between them during the recent recession clearly reflected the differences in underwriting and credit standards in addition to the possible variations in loan features. In the 2005 Esaki study, the average cohort with at least 10 years of seasoning lost about 4.9% of its original balance through defaults — that number dropped in this update to just 3.1% based on our analysis. We assume a severity on liquidated loans is 40% as observed in the recent CMBS market, and restructured loans have half of the severity of liquidated loans. Since the average conduit/fusion transaction today, with enhanced underwriting and credit standard, is being recently issued with BBB subordination levels of about 6-7%, most investment-grade CMBS are protected against the average loss of origination cohorts of the last 40 years. Commercial Mortgage Defaults: From 1972 to 2011


CRE Finance World, Summer 2013
To see the actual publication please follow the link above