Many commercial real estate market participants have lamented that banks, conduit loan special servicers and the like haven't aggressively looked to resolve distressed property-secured loans. This tendency toward the "extend and pretend" approach, as opposed to strict enforcement of contractual obligations, has for the most part been the case with small-balance transactions as well as larger-cap mortgages.
Yet, given the activity over the past couple months - along with dispositions scheduled in coming weeks - one might make the case that loan liquidation is intensifying after something of a year-long plateau. And the small-balance sector is smack in the middle of the burgeoning action.
On top of record dispositions of conduit loans in March, and April's FDIC small-balance loan securitization, mid-May is scheduled for what's being billed as the biggest ever auction of commercial notes and foreclosed properties. Indeed, assorted industry statistics seem to suggest creditors are accelerating the soured-debt sell-off.
According to figures from research firm Delta Associates, the amount of outstanding distressed commercial real estate debt has for the most part remained stable for more than a year now. As newly distressed loans replace an average of about $650 million in monthly dispositions, the total outstanding has remained in roughly the $175 billion to $190 billion range (it's currently at about $180 billion).
But workouts and liquidations jumped to an average closer to $750 million during this year's first two months, Delta reports. And then a record sum of conduit loan liquidations was posted in March - with some $1.5 billion in securitized commercial mortgages alone getting sold off, according to Realpoint.
Delta calculates that conduit loans over the past year have represented roughly one-third of outstanding distressed commercial mortgages, i.e., the securitized total has remained in the $60 to $62 billion range since last June. Hence if special servicers continue stepping up like they did in March - and banks and other lenders get busier as well - disposition volume over coming months would make last year's activity look downright sluggish.
However, it seems unlikely a surge would last indefinitely. While there are surely a lot of uncertain loan maturities looming ahead, delinquency rates appear to be leveling off and even declining a bit. And fewer banks are failing.
In fact, Delta's CEO Greg Leisch expects resolutions to proceed in a gradual, stable fashion rather than through any massive simultaneous disposition efforts.
As for prices that distressed conduit loans are fetching, it appears non-performing small-balance loans are often trading at half or less of unpaid balance. And it's worth noting, and perhaps predictable, that properties in secondary and tertiary markets clearly tend to fare worse than counterparts in primary markets.
Realpoint notes that 43 of the 148 conduit loans liquidated in March generated losses of 2 percent or less. But the average loss for the other 105 (with an average unpaid balance of $6.1 million) was nearly 60 percent - indicating an average price paid of roughly $3.7 million.
It's also worth noting that the FDIC just packaged up $394.3 million (combined unpaid balance) of performing small-balance commercial and multi-family mortgages into CMBS. The agency is guaranteeing repayment on $315.4 million in senior certificates representing 80 percent of the issue, paying 1.84 percent.
With bond-buyers once again demonstrating appetites for these securities, the agency was able to secure gross issuance proceeds of $353.2 million in disposing of loans averaging $1 million apiece that it had inherited from 13 seized banks. Wells Fargo underwrote the offering, and LNR Property Corp. purchased the 20 percent subordinate tranches. Additional such issues are expected.
May has plenty of liquidation activity scheduled as well - including a lot of small-balance notes.
Big conduit loan special servicer LNR Partners aims to auction off 65 Vegas area assets, with combined unpaid balances of about $1 billion, via a combination online and open-cry platform over three days in mid-May. Two of the 50-some loans being auctioned have combined balances of well over $100 million, and seven others have balances of at least $20 million.
But starting bids for nearly 40 of the notes are at $5 million and below. And among the 10-ish REO properties being marketed through the auction, starting bids are all at $3.5 million or lower - and several are in six-digit territory.
A week before the LNR event, Auction.com (which is working with LNR on some of the $1 billion sale) is also offering online 67 commercial development sites across the country, along with 17 existing commercial structures. Only three have starting bids over $125,000.
About the same time Auction.com, on behalf of special servicer C-III Asset Management, is also offering online 16 non-performing notes with combined unpaid balances of $65 million, secured by all manner of small-cap commercial properties. A dozen have balances of $4.1 million or less.
Interestingly, recent loan delinquency rate trends may augur improved prices and better times ahead.
Trepp LLC estimates that the overall commercial mortgage delinquency rate actually declined about 10 basis points during the first quarter, ending at 5.3 percent. Likewise commercial and industrial loans to businesses made progress, with the delinquency rate falling 20 basis points to 2.9 percent.