Thursday, January 8, 2009

Oh my....3% delinquincies by year end

That's what we are seeing in an article in today's Journal captioned "Commercial Property Loses Shelter." Yes, you heard it here: DB tells us that CMBS deals that are 30 days or more past due is up to...gasp...1.2%. And,"[t]he delinquency rate will likely hit 3% by the end of 2009, its highest point in more than a decade." Furthermore:

According to research firm Foresight Analytics, soured commercial mortgages on banks' books jumped to 2.2% as of the third quarter of last year, from 1.5% at the end of 2007. The research firm estimates that the rate could rise to 2.6% in the fourth quarter of 2008.

But then let's jump down a paragraph or two:

Prices of securities tied to commercial mortgages have fallen sharply in recent months to the point that prices reflect a downturn even greater than the early 1990s, when default rates exceeded 30%.
Yes, 30%. You read that right. Is there any logical step to get from 3% to 30%? Maybe. Perhaps we will have a CRE perfect storm because debt is coming due. But it could also be overreaction, meaning there is a market out there for these investments. I'm just a lawyer, so I will let others decide what is right and watch how this plays out.

As long as the story uses the words, "loses shelter," that reminds me of a conversation I had the other day with a friend. He mentioned that he knew investors who had non-recourse debt but who used 1031 exchange money to buy into deals. These investors had the unenviable position of being upside-down in properties and a huge tax liability to boot on top of it if they walked away from the deals. I wondered aloud whether those investors should have the chance to get some relief. There are good arguments on both sides, but I think some method of relief for these people might be a good idea lest they be hit with the double whammy of equity loss plus taxes.