In a new analysis, Moody’s explains why commercial real estate loans held by banks could be riskier than both mortgage securities backed by CRE or CRE loans made by life insurance companies. It’s all in the timing.
Commercial mortgage backed securities and life insurance CRE loans usually carry a 10-year term. CRE loans made by banks are generally only for five years. Most of the bank CRE loans would have been made during the peak bubble years and are likely to come due before a recovery in the commercial real estate markets. Therein lies the angst about an anticipated tsunami.
With few opportunities available for refinancing the mature loans, the future looks bleak. Take a look at bank exposure in the rankings below or click here for the list of 150 Bank Holding Companies Ranked by Commercial Real Estate Loans.
ResearchRecap provided the following excerpts from Moody’s report. Alternatively, you can purchase the entire analysis for $550 by clicking here.
Given where we are in the economic cycle, it is important to point out that there is a marked difference in performance by loan vintage and term. For example, CMBS loans are typically ten year loans, and the current lower delinquency rates encompass performance of those loans originated as early as 2000. These early vintage loans have seasoned and benefit from cash flow and value appreciation over the years.Click on listing for a larger view of the partial list of bank rankings by commercial real estate:
Thus, CMBS loans originated earlier in the cycle are likely to help offset higher delinquencies from more recent vintage originations. A similar situation exists for life insurance companies as they hold loans with longer maturities. Bank loans tend to have maturities of five years or less. As a result, bank loan portfolios exhibit greater concentration in years representing the peak of the real estate cycle. They lack seasoned loans on their books to offset the higher delinquency rates expected from this time period.
Bank loans have an additional burden over CMBS at refinance due to their shorter remaining term. The economic downturn is just beginning to have a negative impact on real estate loan performance. As a lagging sector, real estate delinquencies are expected to rise over the next two years. For a bank loan with less than five years remaining, the potential to refinance in a more robust economic period is lower than for a comparable CMBS or life insurance company loan, with more than five years remaining.
A higher level of refinance risk for bank loans should contribute to higher delinquency rates over time.