U.S. CMBS defaults rising, losses approaching all time highs

Perfect Conditions Justifying the Meteoric

Launch of REITS

Oct 25 (Reuters)
By Karen Brettell

Defaults by U.S. commercial mortgage debt that is bundled in securitizations are likely to climb at least until 2011, while losses from the deals are approaching an all-time high, Standard and Poor's said on Monday.

Issuers defaulted on 1200 loans in the first half of this year and if the current pace continues defaults could eclipse 2009's total of 2,138 defaults, S and P said.

S and P conducted a study of more than 69,000 commercial mortgage loans that were originated for securitizations between 1993 and 2008 and found that more than half of the defaults occurred in the 18 months between January 2009 and June 2010.

Meanwhile losses from the defaulted deals have been steadily rising since 2008 and are approaching a record high, S and P said.

The loss severity rate increased in the first half of 2010 to 43.58 percent from 41.57 percent for loans resolved with a loss in 2009, and from 18.49 percent in 2008.

Defaults are likely to continue to climb until at least 2011 as the effects of the recent recession continue, S and P said.

"It took two years for the number of annual loan defaults to peak after the 2001 recession ended, and if the recent recession's impact on loan performance follows suit, annual loan defaults would not crest until 2011," the rating agency said.

"Given the severity and length of the recent recession, coupled with historically high vacancy rates and unemployment, Standard and Poor's believes the lag may be even more pronounced this time around -- and could push the annual loan default peak out even further," it said.