Collateralized loan obligations (CLOs) offer easier terms for apartment building buyers, but their shorter terms and floating interest rates may be creating problems.
NEW YORK – Defaults are rising for collateralized loan obligations (CLOs), which are mortgages packaged into bonds and sold to investors.
These types of mortgages helped fuel rising housing costs across Sunbelt states, facilitating the purchase of buildings where new property owners saw opportunities to raise rents.
Their use is increasing. In 2021, rental apartments accounted for two-thirds of the CLOs issued; in 2022, they accounted for 81%, according to real estate data firm Trepp.
Mortgages associated with CLOs are appealing because property owners can put down less equity and take on more debt than they need to with bank mortgages. CLOs also have shorter terms and floating interest rates that make it easier for owners to sell or refinance their buildings after a few years.
However, the loans also have a downside: They’re more vulnerable to sudden changes in borrowing rates. As a result, many landlords no longer earn enough money to pay them back.
“The market has really changed for these people,” says Selina Parelskin, chief executive of Beacon Default Management, a company that helps lenders foreclose. Nearly $88 billion in securitized mortgages are at risk of default, and 42% of them are backed by apartment buildings, Trepp estimates. CLOs make up the majority of these at-risk apartment loans.
Defaults remain rare but have become more common since last year. About 1.4% of commercial real estate CLOs were delinquent as of April 30, according to data company CRED iQ, up from 0.4% last July.
Source: Wall Street Journal (05/09/23) Putzier, Konrad; Parker, Will
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