Interesting Times

Feb. 17 (Bloomberg) -- Delinquencies on commercial mortgages bundled and sold as bonds may triple by late 2009 as large real estate loans default, according to Standard & Poor’s.

Late payments on commercial mortgages reached 1.10 percent during the fourth quarter of 2008, and have been climbing since the low of 0.27 percent in March 2007, S&P said in a statement today. The commercial real estate market is in the early stages of a correction, and delinquencies may reach 3.5 percent this year, the New York-based ratings company said.

“In light of higher delinquencies and our expectation for an increasing number of large loan defaults,” ratings cuts of multiple grades will increase in 2009, S&P said. At the end of last year, $6.86 billion in commercial mortgage-backed securities were delinquent, compared with the previous peak of $3.98 billion in December 2003, the ratings firm said.

Owners of hotels, shopping centers and office buildings are increasingly falling behind on mortgage payments as the recession crimps business growth and rents fall. Loans secured by larger properties that were written assuming rental growth have been unable to meet targets, leading to increased defaults.

“High profile loans secured by larger properties, which were often not stabilized at transaction issuance, have begun to default,” Susan Merrick, managing director and head of the U.S. commercial mortgage-backed securities group at Fitch Ratings in New York, wrote in a separate report today.