U.S. Real Estate Delinquencies Top 10% for First Time, Morgan Stanley Says, By Sarah Mulholland , Bloomberg.com


Delinquencies on commercial mortgages packaged and sold as bonds surpassed 10 percent for the first time last month, according to Morgan Stanley.

Payments more than 30 days late jumped 26 basis points to 10.15 percent in April, Morgan Stanley analysts said in a report yesterday. While the pace of increase has slowed since the middle of last year, that’s partly because delinquencies are being offset as troubled loans are resolved. The rate of borrowers missing payments for the first time has been constant for the past four months, the analysts wrote.

“The bottom line is that loan performance is not yet exhibiting significant improvement,” according to the analysts led by Richard Parkus in New York. “Many market participants have come to believe that credit deterioration is more or less over, and were caught off guard by April’s rise.”

Delinquency rates for loans bundled into securities during the bubble years, when property values peaked amid lax underwriting, have reached 10.37 percent for 2006 deals and 13.26 percent for those in 2007, according to Morgan Stanley.

Borrowers with maturing debt taken out during the boom are still struggling to retire loans, according to the report. About 63 percent of commercial mortgages in bonds scheduled to mature in April paid off on time. That rate dropped to 33 percent for loans taken out from 2005 through 2008, the analysts said.

Sales of commercial-mortgage backed securities are rising after plummeting to $3.4 billion in 2009 from a record $234 billion in 2007, according to data compiled by Bloomberg. Wall Streethas sold $8.6 billion of the debt in 2011, compared with $11.5 billion in all of last year, the data show. Sales may reach $35 billion this year, according to Standard and Poor’s.

Property Values Down

New bond offerings provide financing to borrowers with maturing loans. Still, property values are down 44.6 percent from October 2007, according to Moody’s Investors Service, making it difficult for property owners to come up with the difference when repaying the debt.

Loans originated after 2005 had weaker loan characteristics,” Parkus said in a telephone interview. “On top of that, they were done at the peak of the cycle so they didn’t benefit from any price appreciation prior to the crisis.”

To contact the reporter on this story: Sarah Mulholland in New York atsmulholland3@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

The Foreclosure Mess MBS Hate Triangle Emerges: Junior Versus Senior Bondholders Versus Servicers, by Tyler Durden, Zerohedge.com


The WSJ has an article that does a great job of qualifying the impact of what the foreclosure halt will do to the traditional cash waterfall priority schedule inherent in every MBS deal. To wit: junior bondholders will rejoice as they will receive payments for the duration of the halt/moratorium (these would and should cease upon an act of foreclosure), while senior bondholders will suffer, as the deficiency money will come out of the total “reserve” in the pooling and servicing agreement set up by the servicers. As for the servicers themselves, they should be “reimbursed by funds in the trust for all costs related to litigation and extra processing of foreclosures, provided they follow standard industry practices.” In other words, it will now become “every man, sorry, banker for themselves” as each party attempts to preserve as much capital as possible given the new development: juniors will push for an indefinite foreclosure halt, seniors will seek an immediate resumption of the status quo, while the servicers stand to get stuck with billion dollar legal and deficiency fees if it is found that “standard industry practices” were not followed. Alas, it would appears that the servicers have by far the weakest case, and the impact to the banks, whose sloppy standards brought this whole situation on, will be in the tens if not billions of dollars. Oh, and suddenly both junior and senior classes will be embroiled in very vicious, painful, and extended litigation with the servicers. Lots of litigation.

More from the WSJ on the conflict between juniors and seniors:

When houses that have been packaged into a mortgage bond are liquidated at a foreclosure sale—the very end of the foreclosure process—the holders of the junior, or riskiest debt, would be the first investors to take losses. But if a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream.

The latest events thus set up an odd circumstance where junior bondholders—typically at the bottom of the credit structure—could actually end up better off than they expected. Senior bondholders, typically at the top, could end up worse off.

Not surprisingly, senior debt holders want banks to foreclose faster to reduce expenses. Junior bondholders are generally happy to stretch things out. What is more, it isn’t entirely clear how the costs of re-processing tens of thousands of mortgages will be allocated. Those costs could be “significant” said Andrew Sandler, a Washington, D.C., attorney who represents mortgage companies.

“This is sort of an extraordinary situation,” said Debashish Chatterjee, a vice president for Moody’s Investors Service who covers structured finance. By delaying foreclosures, “it means the subordinate bondholders don’t get written down for a much longer period of time, and they keep getting payments.”

This, however, ignores the class that will impacted the most by all this: servicers.

Typically, mortgage servicers enter into contracts called pooling and servicing agreements with bondholders that spell out the servicers’ obligations to manage the loans in the best interests of the investors. These agreements provide that the servicers be reimbursed by funds in the trust for all costs related to litigation and extra processing of foreclosures, provided they follow standard industry practices.

Servicing companies hope the reviews will be quick. At GMAC Mortgage, a unit of Ally Financial Inc., the vast majority of these affidavits will be resolved in the coming weeks and before the end of the year,” a spokeswoman for the company said. A spokesman for J.P. Morgan Chase & Co. said the company’s review process is expected to take “a few weeks.”

But the problems could be magnified if the reviews uncover a lack of proper documentation or other substantive problems rather than simple procedural errors. The furor over servicer practices is also likely to trigger additional legal challenges from borrowers facing foreclosure and more judicial scrutiny, which could further slow the process and increase foreclosure costs.

And the explanation for why one day soon the XLF will open limit down, as soon as Wall Street sellside research gets their cranium out of their gluteus:

“It’s very hard to see how the servicers can avoid reimbursing the trusts for losses caused by taking short cuts,” said David J. Grais, an attorney in New York who represents investors. Investors could press trustees to investigate servicer conduct, sue the servicers to recoup damages or replace a servicer, he said.

As we said: lots of litigation… playa.

And since Wall Street continues to refuse to touch this topic with a ten foot pole (here is the bottom line for those who may not have been paying attention: huge hits to bank EPS) Zero Hedge is in the process of quantifying just how many billions of dollars each day, week and month of halted foreclosures will bring to the juniors, and how many more billions servicers will be on the hook for unless they manage to convince each of the hundreds of judges in thousands of upcoming lawsuits that all the mortgage fraud (for lack of a better word) was “standard industry practice.”