Trepp research shows CMBS Delinquency Rate Surges for the Third Month; Nears
All-Time High.
That was for June.
July Delinquency Rates by Property Type
For July, Trepp reported CMBS Delinquency Rate Sees Biggest Drop in More Than Four Years but even with the decline, delinquencies are near record levels.
The notable change in the overall delinquency rate was the result of having more than $8 billion in loans “cured” – which means the loan was delinquent in June but reverted to “current” or grace/beyond grace period status in July.
As we reported in TreppWire in mid-July, some of the improvements came via loan modifications such as a maturity extension. Additional benefit came via reserve relief, whereby borrowers were permitted to use reserves to keep the loan current. (This was confirmed by special servicer or watchlist comments in July.)
The above paragraphs show that it is not clear how much of the alleged improvement is due to extend-and-pretend maneuvers vs. real improvement.
How Long Will Hotels Stay Empty?
That is the key issue.
Trepp discussed that question on June 18.
The report is now a bit out of date, but the observations are still worth a look.
At the beginning of this year, one of the biggest headlines in the hotel sector was a measly growth in revenue per available room (RevPAR) in 2019. According to STR, the hotel industry recorded a 0.9% increase in RevPAR in 2019 – the lowest annual increase since 2009. At the time, STR had predicted that in 2020, overall RevPAR will only grow by 0.5% as an increase in supply would outpace growth in demand.
Little did we know that any forecast – no matter how conservative – would not be applicable in the next few months. With the sudden COVID-19 outbreak spreading at a rapid pace, the hotel and tourism industries across the world faced a devastating halt.
STR’s US hotel performance data has shown week-over-week increases in occupancy recently. From above 60% in late-February, the occupancy dropped sharply to only a third at 22% in early-April. It has since inched up slowly every week, coming in at 41.7% for the week ending June 13th. Going forward, CBRE expects that the hotel demand will return to pre-crisis levels in the third quarter of 2022. In this context, roughly $16.9 billion and $14.7 billion worth of hotel CMBS loans are set to mature in 2020 and 2021 respectively according to Trepp data. Over half of the balance of these maturing loans is backed by full-service hotels.
Expect Some Hiccups
The answer in June was the third quarter in 2022.
Trepp comments “Given the expected timeline of recovery and a significantly lower forecasted demand, especially for high-end luxury hotels, the hotel industry is likely to face some hiccups in the next two years.”
What About Loan Quality?
A University of Austin report by John M. Griffin and Alex Priest show Property Income is Significantly Overstated.
The report is 74 pages long but shows considerable issues.
Many borrowers are now struggling because of coronavirus, though study finds income often fell short of underwritten amount before the pandemic
The WSJ discussed the setup in Commercial Properties’ Ability to Repay Mortgages Was Overstated.
Actual net income trails underwritten net income by 5% or more in 28% of the loans, according to the study of nearly 40,000 loans by two finance academics at the University of Texas at Austin.
The study shows risks in the $1.4 trillion market for commercial mortgage-backed securities, or CMBS, where loans on malls, apartment buildings, hotels and the like get packaged into bonds bought by investors, often with guarantees from the government. The findings suggest that loans sold to investors before the pandemic frequently featured overstated income and could have more trouble staying current in case of a downturn.
The findings corroborate a complaint received last year by the Securities and Exchange Commission stating that commercial mortgage loans frequently feature inflated financials. They also come at a sensitive time for the commercial-mortgage-backed securities industry, which has been seeking a lifeline since the spring, when the Federal Reserve left out swaths of the market from its $2.3 trillion economic-rescue package.
Income was overstated by more than 5% in more than 40% of loans originated by UBS, Starwood Property Trust and Goldman Sachs Inc., the study said. Loans from these originators were among those most likely to be on a watch list, Mr. Griffin found.
“This is a direct function of the aggressive underwriting,” Mr. Griffin said. He disclosed in his paper that he owns a fraud-consulting firm, Integra FEC LLC, which could benefit if the government or investors acted against the bond issuers.
Share of Loans Identified with Inflated Values
Bailout Coming?
Of course! You knew that, didn’t you?
A bill in Congress would create a funding vehicle to help CMBS borrowers make their mortgage payments.
Please consider New Legislation Would Aid Cash-Strapped Commercial-Property Owners
The bill would set up a government-backed funding vehicle that businesses could tap to stay current on their mortgages. It is meant in particular to help those who borrowed in the $550 billion market for mortgages that are packaged into bonds and sold to Wall Street.
“The numbers are getting more dire, and the projections are getting more stern,” said Rep. Van Taylor (R., Texas), who is sponsoring the bill alongside Rep. Al Lawson (D., Fla.)
Get the Fed Involved?
Hey why not?
No stone can possibly be left unturned when it comes to bailouts at taxpayer expense.
Rep. Taylor led a bipartisan group of more than 100 lawmakers who last month signed a letter asking the Federal Reserve and the Treasury Department to come up with a solution for the CMBS issues.
Why?
To protect Goldman Sachs and the rest of the originators from fraud clawbacks due to inflated valuations as mentioned by John M. Griffin.
This has nothing at all to do with jobs as suggested by Rep. Van Taylor (R., Texas) and Rep. Al Lawson (D., Fla.).
Government-Backed?
No!
Whenever you see that term, it’s important to understand the true meaning.
Government-Backed = Taxpayer-Backed.
God’s Work
Taxpayers, not the government, take the risk.
We need to do this to protect “God’s Work” by Goldman Sachs and others.
Mish
This is all paving the way to a authoritarian socialist take over. The government is bankrupting itself, which will create a national emergency in which an enormous bail in of taxpayer assets will be required to restore solvency. A deal will be offered which will include a “New Constitution” in which your rights and sovereignty will be traded for allowing you to keep a fraction of what you own…..
Whatever happened to the free market economy? Why do we keep bailing out stockholders, bond holders and CEOs because of their bad decisions? One more example of enriching the “haves” using the “have nots” hard earned tax dollars. Sad where this country is headed. Why do we even need bankruptcy laws when the well connected are handed bailouts. The GOP is up in arms over proposed increases in unemployment but is quite happy to dole out tax payer money to the “haves”.
Several corporations became more powerful than the government, and that was that.
Well put!
Meanwhile gold and silver got slammed hard, so confidence in Central Bankers must be recovering right, Mish?
Gold and silver went parabolic. This is nothing more than a healthy shakeout of weak hands. Gold will likely test the 1800 level before resuming its upward march. The central bankers have lost control and are now winging it with MMT.
People think a vaccine is going to fix the economy. It won’t… the bubbles are bursting, and massive societal change is happening. The housing riots will make the recent troubles look tame.
WHY on god’s green earth would the taxpayer get stuck with bailing out these billionaire owned companies when they can BORROW at almost free money?
Because we live in an undifferentiated, totalitarian, progressive, financialized dystopia without even a single redeeming quality whatsoever. As in, literally not one.
America really would be be better of ran if by ISIS now. Bombings, beheadings and chemical warfare directed at civilians, probably aren’t all that wonderful either; but compared to what we are stuck with, it would be positively refreshing. It’s better to die on one’s feet, after all, than to live on one’s knees.
I think it is great that we are going to help corporate hotel owners instead of giving the poors some money to buy food.
If you feed the poors, they’ll just poop in front of all the fancy buildings they’re too poor to be inside.
CMBS is famous for extend and pretend. I suspect posturing. Lenders don’t want the property back.
I’m an idiot for shorting commercial real estate. I forgot things aren’t allowed to fail anymore.
Extend and pretend will come back to bite us.
Extend and pretend is so ‘aughts. This is “RAMMING SPEED, MR. SULU!!!!!!”
The trumps will get their socialist handout, or there will be trumpletantrums!
Probably. But I wouldn’t say a done deal.
House normally in summer recess now. They will stay in DC till some sort of stimulus passed. Will this be included? Maybe. Anyways, House in session in September and off in October to campaign. Will Representatives want to run risk voting for a bailout for “the rich” right before election? If they hide this in another bill they might get away with it.
It’s obviously just coincidence, but have you noticed how many Goldman Sachs alumni end up running things in government?
Only proposed. We can only hope not passed. The Democrats might oppose if it appears it would help DJT’s holdings.
Sounds like an open invitation for the Trump organization to dip into the cookie jar.