Moody's on Thursday put 7,942 tranches of subprime RMBS on review for possible downgrade. The securities were originally valued at a total of $680 billion, but Moody's projects the losses for the RMBS at anywhere from 12% to 14% in the case of the '05 bonds to 33% to 37% on those issued in '07. In a statement, the agency cites "continued deterioration in home prices, rising loss severities on liquidated loans, persistent elevated default rates and progressively diminishing prepayment rates throughout the sector."
Although the actions taken by Moody's on the securities will vary, "it is likely that the vast majority of mezzanine and subordinate certificates currently rated B or above would be downgraded to ratings of Caa or below, particularly for bonds issued in 2006 and 2007," according to the agency. "Given the level of losses currently being projected, a majority of senior certificates will likely be downgraded below investment grade."
Earlier this week, Fitch expressed concern that changes to New York State's rent regulations could adversely affect several New York City-based large multifamily loans backing CMBS and result in downgrades. The state Senate is considering legislation to enact the changes; the Assembly approved a bill earlier this month.
At issue, according to Fitch, is a bill that would slow the pace of deregulation of New York City apartments by raising the minimum rent and tenant income thresholds. "Passage of this legislation would make it far more difficult for property owners in question to achieve their business plans," Eric Rothfeld, Fitch's managing director, says in a release. "The increased threshold could delay conversion of stabilized units to market rents for approximately eight years, hindering the ability for borrowers to remain current on debt service."
At present, New York City landlords cannot increase rental rates on rent stabilized units more than approximately 4% per year until they reach $2,000 per month and the tenant's annual income exceeds $175,000 for two consecutive years. The rent trigger would increase to $2,700 and the income trigger would go up to $250,000 under pending legislation.
Eight loans of more than $70 million on New York City multifamily properties were included in Fitch-rated '06 and '07 CMBS transactions. Fitch has identified three loans across seven transactions that would present greater downgrade risk if new legislation passes: a $3-billion loan on Stuyvesant Town/Peter Cooper Village; the Belnord, a full-block luxury apartment building at 225 W. 86th St., which secures a $375-million loan included in JP Morgan 2007LDP9; and the Parkoff Eastside Portfolio, a $170-million loan in Morgan Stanley 2007-HQ12 that's secured by a six-building portfolio.
Each of these loans is secured by a property with more than 65% rent stabilized units. At current rents, each of these properties covers current debt service payments at less than 0.80x, with a number of units approaching the $2,000 per month rental trigger. Fitch says new rent regulations "would reduce the likelihood that the properties will generate sufficient cash flow to cover debt service throughout the loan term."
According to Fitch, properties with stabilized units currently rented at less than $1,000 per month are at lesser risk. They include CMBS loans secured by Riverton Apartments in Harlem and Savoy Park in the Bronx, which achieve higher rents through natural attrition, renovation of apartments and capital improvements. The Sheffield at 322 W. 57th St., the three-building Independence Plaza in Tribeca and 301 W. 53rd St., also securing loans in CMBS transactions, have small exposure to rent stabilized units, Fitch says. Therefore, new laws "will be unlikely to impact ownership's ability to complete their respective business plans."
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
