Apartment Finance Today

Upfront

Hits & Misses

APARTMENT FINANCE TODAY • May/June 2009

BY Jerry ascierto

CMBS Defaults to Soar

Defaults on commercial mortgage- backed securities (CMBS) will triple this year to an all-time high, according to reports by Fitch and Standard and Poor’s.

CMBS defaults will reach 3 percent by year-end—the highest default ratio in the history of the market—and double the previous high of 1.5 percent set in 2003, according to Fitch. Standard & Poor’s sets the bar even higher, saying it could even reach 3.5 percent by year-end.

About 40 percent of all CMBS defaults are multifamily loans, according to Fitch. The majority of multifamily defaults are occurring on smaller, older properties by small-company borrowers.

While many multifamily REITs tapped the CMBS market in its heyday, “the loans that are in default at the moment are not necessarily those borrowers,” says Susan Merrick, a managing director at Fitch. “A lot of the multifamily defaults are smaller properties, and the borrowers are generally single-property owners and not as experienced.”

Across the country, defaults of fi xed-rate CMBS loans increased 17 percent in February over January, bringing the default rate of fi xed-rate CMBS to 1.21 percent, according to Erin Staff ord, a senior vice president at DBRS.

“If it keeps going at that rate, it will defi nitely hit 3 percent by the end of the year,” Staff ord says. The default numbers would be even higher if fi guring in loans that were voluntarily transferred to special servicing by borrowers giving an early heads-up to lenders about their inability to pay next month’s coupon.