Defaults on CRE Bank loans reach a record level of 5 years


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The default rate on commercial mortgage loans from banks is at its highest level since 2015.

The overall default rate on CRE bank loans reached 0.59% at the end of the second quarter, up 65% from the previous quarter, according to a report from Trepp. Although the figure is well below the peak of 9% at the height of the financial crisis, the rise could indicate an imminent “wave of foreclosures” in the coming year.

Trepp used its Anonymized Loan Level Repository data feed, which covers $ 146 billion in outstanding loans on participating banks’ balance sheets, to shed light on this more opaque area of ​​CRE finance.

The default rate on bank loans is much lower than that of commercial mortgage-backed securities, which peaked at 10.32% in late June before falling to just over 9% in August. As more relationship-oriented lenders, banks have shown themselves to be much more willing to provide relief to borrowers in these uncertain times, compared to the special departments responsible for CMBS trusts.

At the same time, the sectoral distribution of bank credit distress parallels the CMBS situation, with retail being the hardest hit, followed by hotels. Office and industrial assets held up well.

The default rate of small CRE bank loans is also significantly higher than that of large loans, according to the report, which “supports the narrative that small businesses are more directly affected by the economic shutdown linked to the pandemic.” But there is an interesting wrinkle in this data.

Among CRE bank loans maturing in the next five quarters, loans of $ 25 million and over represent a disproportionate amount of the outstanding loan balance. Meanwhile, for loans with longer maturities, these large loans represent 0% of the overdue balance.

“While the data is not able to determine the borrower’s intention or motivations, it clearly shows that a significant number of borrowers with large balance loans have made the decision to stop carrying out loans. payments before an expected default when they are unable to refinance or extend their current loan, ”Trepp analysts write.

Larger, more sophisticated borrowers are less likely to be constrained by recourse or collateral on their loans, which makes “strategic default” a more rational decision – and which “is likely to result in a large number of foreclosures and new ones. REO on Bank Balance Sheets ”as these loans mature, the report concludes.

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