Loans that were 30 days delinquent missed the following month's payment more than 80% of the time in 4Q'08, thereby triggering a loan default. This represents a sharp increase from the roll rate of the prior three quarters. Approximately 25% of 30-day delinquencies remained uncured in the 1Q'08, rising to 40% in 2Q'08 and 50% in 3Q'08.
"The majority of loans that were 30-days delinquent in the first three quarters of the year were brought current prior to the next payment date," said Managing Director Susan Merrick. "The fourth quarter of the year presented a new roll rate trend, as most loans that were 30-days delinquent advanced to a 60-day delinquency status."
Up until July 2008, 30-day delinquencies were not considered a meaningful predictor of defaults. The majority of 30-day delinquencies were due to chronic late paying borrowers, or errors in account set ups for newly originated loans. In addition, borrowers were more apt to carry a property through short term stresses to avoid defaulting and incurring special servicing fees following two consecutive missed payments.
"In the current economic recession, borrowers are less inclined to come out of pocket for a property not covering debt service if the perceived value of the equity in the property has declined substantially," said Managing Director Eric Rothfeld. As deteriorating real estate fundamentals have resulted in declining rents and increased vacancies, Fitch expects more properties to fall behind in debt service payments. Payment shortfalls will occur for longer periods of time. "Borrowers are more uncertain about their ability to lease vacant space or ultimately refinance their maturing debt in an illiquid market," added Rothfeld.
