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CRE Finance World, Summer 2014

(1) Loans with a loan status 30+ days delinquency and nonperforming matured balloon. (2) Loans with a workout strategy of foreclosure3 or real estate owned (REO). Under this common definition, 5.9% of outstanding North American CMBS is currently delinquent. Excluded from this metric is an additional 1.5% of the universe that is currently assigned a workout strategy4 by the special servicer. The rest of this commentary explores the rationale of this exclusion. Chart 1 Current North American CMBS Delinquency (Source: DBRS CMBS Advisor and CMBS.com) Definition of Terms • Loss frequency: Loans that have experienced a loss and are no longer outstanding. • Significant loss: Any loss greater than 2% of the issuance trust balance. • Small loss: A loss less than 2%, usually reflective of special servicing fees. • Final workout strategy: The workout strategy at the time the loan was paid out and at the time the final loss was applied to the loan. • Maximum delinquent status: The most severe delinquency in the life of a loan. CRE Finance World Summer 2014 44 Rationalization of Delinquent Status Inclusions The common practice to include all loans with delinquent payments worse than 30+ days and nonperforming matured balloon loans is justified by the empirical data5. The chart below depicts all paid down CMBS loans that were at one time transferred to special servicing, and/or otherwise experienced heightened delinquency. The y-axis represents their loss frequency, and the x-axis represents the maximum delinquent status experienced in their lifetimes. Loans with 90+ days delinquency, nonperforming matured balloon loans and loans with 60+ days delinquency should be included in a delinquent flag based solely on their elevated loss frequency. Chart 2 Significant Loss Frequency and Loan Status (Source: DBRS CMBS Advisor and CMBS.com) Furthermore, the typical migration among delinquent statuses serves as justification for the inclusion of the 30-59 days delinquent status. Although 30-59 days delinquent has a low loss frequency, its elevated frequency of migration to 60+ days delinquent serves as reason enough to include it in the statistic. In the case of performing matured balloon, the 53% probability of migrating to nonperforming matured balloon may seem to suggest that it should also be included; however, looking at the migration probability in tandem with the frequency of loss suggests that there is only a 9% loss frequency for those loans that may migrate, and thus performing matured balloon loans are justifiably excluded from commonly quoted delinquency statistics. Delinquency Reporting in CMBS


CRE Finance World, Summer 2014
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