Delinquent Property Loans Rise in June: Moody's

Delinquent U.S. commercial real estate loans rose in June, as property owners struggled with falling prices and tight credit conditions, according to a report from Moody's Investors Service released Monday.

Homes in Las Vegas
Homes in Las Vegas

The percentage of outstanding property loans, including those that are in arrears at least 60 days and in foreclosure, was 0.45 percent, up 0.01 percentage point from May and up 0.21 point from a year ago, the bond rating service said.

More problem loans will likely deter investors to put money into this sector.

"Given the depth of negative sentiment in credit markets generally, investors may be waiting to see some evidence that the worst is over for commercial real estate," Moody's analysts wrote in the report. "Until that time, most investors appear content to sit on the sidelines."

Late payments on commercial mortgages, while rising, are much less dire than those on single-family home loans, which are running at a record high amid the unprecedented housing slump.

The historical average delinquency rate on loans that support commercial real estate securities is 0.61 percent over the past 10 years, Moody's said.

Loan delinquencies in the health-care and apartment sectors have suffered more than other major property types during the current real estate downturn.

Delinquencies in apartment loans stood at 1.37 percent in June from a low of 0.51 percent in August 2007, while those on health-care properties jumped to nearly 8 percent in June mainly due to a 10-year-old loan worth $112 million that is over 90 days past due, Moody's said.

Meanwhile, prices on commercial properties fell 3.5 percent in May for three straight months, according to Moody's.

Issuance Dries Up

Before the real estate slump, Wall Street investment banks have rivaled banks and insurers as the premier source for real estate financing. Wall Street's conduit vehicles fund the loans and bundle them to create bonds.

In the boom days, Wall Street sold more than $200 billion in commercial mortgage-backed bonds annually, together with billions of dollars in residential mortgage-backed securities.

Since the housing bust and multibillion-dollar write-downs among investment banks, CMBS issuance has plummeted. In the first half of 2008, just over $12 billion in CMBS were sold -- 91 percent less than the issuance during the same span last year. It was the lowest since the first six months of 1996, according to Moody's.

The CMBS industry will recover from its current woes, perhaps as early as the second half of 2008. It will evolve into "a simpler, scaled-down form," Moody's said.

"It will be a long time, if ever, before the industry sees issuance volume in excess of $200 billion again," Moody's analysts wrote in the report.