February 22, 2010 / 4:05 PM / 8 years ago

UPDATE 1-Distressed loans in CMBS may top $60 bln this year

(Adds details, background)

By Al Yoon

NEW YORK, Feb 22 (Reuters) - The amount of distressed loans in commercial mortgage-backed securities may more than double to at least $60 billion by year-end, creating a logjam that could hinder the U.S. economic recovery, Credit Suisse said on Monday.

The rise in troubled loans in the $700 billion CMBS market accelerated to $2.7 billion a month last quarter, compared with about $1.4 billion a month in the first three months of 2009, Credit Suisse analysts said in a report.

A buildup of loans either 90 days delinquent, in foreclosure or bank-owned is overwhelming companies charged with fixing mortgages that are souring due to the economic malaise or as investors hold back on credit, the report said. Loans delinquent at least two months have increased more than ten-fold since the end of 2008, to 5 percent, it said.

Given current capacities of “special servicers,” it would take 5.5 years to resolve just the current $28.8 billion in loans, the analysts said. This means a substantially longer recovery period than in past crises, they added.

“The transfer of distressed loans into the hands of stronger operators to create value at the property level where in turn they contribute to local economies is a vital step in any recovery,” the analysts wrote.

The analysts, led by Gail Lee, produced the report after clients inquired about timing for investing in distressed loans or properties, or CMBS.

These investors have cash ready to deploy but have so far made little available, believing that opportunities would only improve, according to several at a recent industry conference. Properties are still mired with debt, especially as their values have fallen 40 percent from 2007, they said.

U.S. Congressmen Paul Kanjorski and Ken Calvert last week urged regulators, including the Federal Deposit Insurance Corp, for a coordinated response to restore stability to the commercial real estate sector. However, the lawmakers said the industry does not need a bailout.

Government support via lending and public-private investment programs has been behind a rally in the securities over the past year. The yield premium on AAA-rated CMBS has declined to 4.6 percentage points over their interest rate benchmark, compared with about 12 points in March, according to JPMorgan Chase & Co.

The programs and demand for high-quality assets have resulted in just a handful of new CMBS, which provided the lion’s share of new funds during the real estate boom. (Editing by Dan Grebler)

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