What a Bunch of Delinquents

The rate of commercial mortgage delinquencies ballooned more than 25% in the first quarter of 2010.

New numbers from the Mortgage Bankers Association reveal the commercial real estate problem has not gone away…it’s just being swept under the rug. Still, this is hard to ignore: 5.7% of loans contained in commercial mortgage-backed securities were at least 30 days in arrears during Q4 2009. And the number exploded to over 7.2% in Q1 2010. That’s the blue line in this chart…

Yes, a year earlier, the figure was still under 2%. And that red line? Those are loans more than 90 days overdue that sit in the portfolios of banks and thrifts. After 90 days, you might as well consider it defaulted. And that rate has doubled in the space of a year.

“Economic growth, specifically in areas of jobs and consumer spending, will be key to stabilizing the commercial property and mortgage markets going forward,” reads a statement from the Mortgage Bankers Association that accompanied this data. The news we relayed yesterday about jobless claims rising and leading economic indicators flattening? That won’t help.

“We face an epidemic of negative equity in commercial real estate,” says our stock market vigilante Dan Amoss. “Most commercial properties purchased with high leverage during the bubble – if they haven’t yet been foreclosed on – now carry debt-to-asset ratios of well over 100%. In other words, the investors are underwater, like a homeowner with negative equity.

“Just like underwater homeowners, these investors have little incentive to properly maintain properties. In turn, those properties shed many tenants as leases roll off, which accelerates a liquidity crisis. If lenders don’t foreclose early on, and just roll over loans to insolvent borrowers, the ultimate loan charge-offs – when foreclosure becomes unavoidable – will be even larger.

“This negative equity epidemic is bad news for companies that cater to ‘cubicle’ style offices, including office furniture makers. Thanks to the commercial real estate bubble, there’s no shortage of cubicles and office furniture. I wouldn’t want to own any business that relied on sales into the commercial real estate market – especially not at the lofty valuations Mr. Market now charges.”

Major US stock indexes opened mixed this morning. It’s shaping up to be a third day of indecisive action. Volatility, meanwhile, is taking a breather… The VIX has slipped below 25 for the first time since early May.

Remember how Pimco was cutting its positions in US Treasuries at the start of the year? Never mind. Holdings of government-related debt in the firm’s flagship Total Return Fund grew from 36% of assets in April to 51% in May.

“The US is the least dirty shirt.” Bill Gross told Bloomberg Radio recently. “The world is full of dirty shirts in terms of excessive debt, and the United States is one of those countries, but it still remains the reserve currency and still remains the flight-to-quality haven.”

Not a bad trade. The yield on a 10-year Treasury note fell steadily in May, from 3.7% to 3.3%. This morning, it’s even lower, at 3.21%.

The dollar index has barely budged in the last 24 hours, sitting near 85.7 as we write. The euro is holding up at $1.237 as the IMF makes approving noises about Spanish austerity measures.

By Ian Mathias

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