Tuesday, November 18, 2008

Report: Two Major Commercial Mortgages Near Default

by Bill McBride on 11/18/2008 05:07:00 PM

From Bloomberg: Westin, Promenade Commercial Mortgages Near Default (hat tip Ted)

The $209 million Westin Portfolio loan and the $125 million loan for Promenade Shops at Dos Lagos ... of loans bundled into bonds are about to default on their debt, according to Credit Suisse Group AG.
...
The Westin loan is backed by two hotels located in Tucson, Arizona, and Hilton Head, South Carolina. ... The Promenade Shops are located in Corona, California, one of the regions hardest hit by the worst housing crisis since the Great Depression.
Not really a surprise - possible defaults on mortgages for a shopping center near ground zero of the housing bust, and for hotels with the rapidly declining occupancy rates.

UPDATE: Deutsche Bank analysts Richard Parkus and Jing An commented on these two deals today in a research note (hat tip Marc):
"The delinquencies of the two large loans have caught many by surprise. ... Delinquencies in loans of such limited seasoning are extremely unusual, particularly for very large loans."
The analysts note that these were "pro forma" loans, and were based on significantly higher operating income in the future. Pro forma loans were the "stated income" loans for commercial properties!
"Pro forma underwriting was a common phenomenon from late 2006 through 2007 and these two loans validate our concerns regarding the practice."
With falling office rents, rising vacancies rates for offices and malls - falling occupancy rates for hotels - these pro forma deals will collapse once the borrowers run through the interest rate reserves.