According to the latest Trepp Payoff Report, the percentage of loans paying off on their balloon date registered 59.5 percent in May. This was more than five points below the April reading of 64.6 percent. The May reading was the second lowest of the year, but was above the 12-month moving average of 55.3 percent. The 12-month average sums the averages of each month and divides by 12, there was no balance weighting across the months. By loan count (as opposed to balance), 69.1 percent of loans paid off. The 12-month rolling average by loan count is now 61.8 percent.
It might be tempting to attribute May's decrease to increasing Treasury yields and widening CMBS spreads, but that would be off base. Most of the spike in the 10-year Treasury rate and surge in CMBS spreads took place over the last two weeks, which is too recent to impact the May numbers. If we are going to see a slow down in refinancings as a result of the current conditions, we would expect to see it begin in July or August at the earliest (assuming rates and spreads don't reverse course between now and then).
It is important to note that this statistic was developed for the purpose of honing extension scenario assumptions. The analysis looks only at loans that have gotten all the way to their balloon date without having prepaid or defeased. If a loan paid off or defeased in the months prior to maturity (one month, five months, fifty months--it doesn't matter), it is not part of the percentages above. The table only contains data on loans that survive to their balloon date.
Again, since so much attention was and is being paid to the extension trade, we were aiming for a measure of what percentage of loans would fail to payoff. Hopefully the data above will allow investors to refine their expected extension scenarios--particularly for IOs and first pay bonds. With regard to our methodology, we exclude a whole host of loans from the analysis.
The pool counts only fixed rate, U.S. conduit loans (no floaters). All defeased loans are excluded. All ARD loans (anticipated repayment date) are also excluded, as the borrower is permitted to extend these loans for many years without triggering a default. Any loan that is delinquent going into the month that it is slated to payoff in is not included in the results. With regard to the last point, Trepp wanted to measure only the loans that were "clean" going into the balloon month so that we could isolate the percentage of loans that were extending due to an inability to obtain refinancing rather than ongoing cash flow issues.
