UPDATE: Morningstar buys Realpoint for $52M

NEW: Morningstar, the Chicago investment-rating firm, says it's paying $52 million ($42M cash, $10M stock) for Realpoint LLC, the Horsham commercial real estate loan-review agency created by Robert Dobilas and his colleagues and spun off by ailing GMAC LLC in 2007.

Griffin Financial Group LLC, King of Prussia, represented Realpoint in the sale, as it did in the GMAC deal that created Realpoint, Griffin managing director John A. Lee told me. Dobilas and more than 40 staffers will keep their jobs.

Pension funds, mutual funds, hedge funds and other investors paid Realpoint $12 million last year for its tire-kicking knowledge of 60,000 office, factory, hotel and apartment loans that have been sold as mortgage-backed securities, worth $742 billion on paper, and falling each week in the real world.

EARLIER: Falling how fast? "Things are going to get worse before they get better," says Frank Innaurato, managing director of analytics at Realpoint. Delinquency was less than 1 percent through February 2008. Rose to 1.5% in February 2009, and it's going straight up.. Innaurato now expects default rates for commercial mortgage-backed securities, by July 1, to reach "between six and seven percent, if not as high as eight or nine percent." Losses could go as high as 10-12 percent by year's end in the "worst-case scenario."

To predict total losses, Innaurato tracks the rate at which loans are being transferred to "special servicing units" for salvage (bankers call it "workout"); "the continuing increase in delinquencies, month over month; the increase at which borrowers request debt relief"; and trends in property cash flow expectations.

"In a lot of cases there's an annual reaching out to the lender" in hopes of shaving mortgage payments. It may be in the lender's interest to collect less, instead of nothing. "But if there isn't that kind of two-way street communication, the servicer is left with no choice to foreclosure. How long will they hold on?" And even if junior lenders are willing to water down the loan terms, senior lenders (who have the least to lose) may want their money now, forcing the whole property into foreclosure.

It's not just that those numbers are getting worse. It's also that "many properties, struggling from poor performance, have not gotten yet to that breaking point." Owners are still subsidizing the mortages, even though rents don't cover their debt. "Based on loan and property data, combined with performance declines for 2009 and going into 2010, we're going to see more and more of these borrowers reach a tipping point, from where it's not economically viable going forward."

Innaurato says banks are reluctant to fund new properties when so many old ones are financially shaky. "It's not going to resolve itself in the next year or two."

"I see it getting incrementally worse for awhile," adds Innaurato's colleague Ken Chang. "Commercial real estate is really dependent on increased demand; we're not going to see that until employment gets better." That's affecting, not just offices, factory and warehouse sites, but even apartment buildings, where national rents are down "substantially."

"On the retail front, I've had some discussions whether we have felt the full effect of bankruptcies, consolidations and closures. There are still a large amount of retailers who have published below-average sales per store figures, and have warned closings may occur in 2010." Mall owners "may have trouble retenanting... It all depends on where the economy is heading."

When jobs climb back, apartment values will recover first, then hotels. "But office properties will keep getting worse. A lot of companies ddon't need the space they have. Demand has dropped off a cliff."

And yet... Banks are starting to explore selling new property loans, slowly, at high rates of interest, back into the market, Chang concluded. "In five years, we could be back (from last year's near-zero) to $50 billion a month, which is where the market was in the early 2000s, before the craziness," which peaked in 2007 with $200 billion in what we now know were overvalued commercial mortgage-backed securities sales.