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NEW YORK CITY-Special servicers have been able to handle more CMBS loan resolutions each year since 2009, and Fitch Ratings expects that trend to continue throughout 2012. At the same time, loss severities appear to be on the wane after hitting a high water mark of 45%, the ratings agency said in its annual US CMBS Loss Study issued earlier this week.
Throughout 2011, loss severities actually declined in most major property types, aside from hotels, where severities rose to 55.4%, coming in second behind retail with 56.4%. Looking ahead, Fitch has a wary eye on office, currently the only CMBS asset type that it’s assigned a negative outlook. "Office loans and properties along with tertiary markets are Fitch’s chief concerns with respect to loss severities in 2012,” says senior director Adam Fox in a release.
It’s increased volume driving the trend toward stabilization in loss severities. The number of resolved Fitch-rated CMBS loans climbed nearly 14% in ’11, for 1,620 loans totaling $19.6 billion, including 951 mostly smaller-balance loans disposed of with losses. In the prior year, it was 1,427 loans totaling $19.4 billion. Going in the opposite direction are loan modifications granted by special servicers: 244 Fitch-rated loans representing $6.1 billion modified last year, compared with 343 loans representing $10.8 billion in 2010.
The average timeframe for loan disposition in ‘11 increased by nearly five months to 20.3 months, compared with 15.4 months the year prior, according to Fitch. This is due to special servicers taking advantage of stabilizing market conditions to dispose of the growing numbers of defaulted loans accumulated.
“A clear example of improving market conditions is the increase in REO liquidations in 2011, as special servicers took advantage of stabilizing property values,” according to the Fitch report. “REO liquidations accounted for almost 40% of dispositions,” compared with 30% in ’10. There were 341 such liquidations last year, compared with only 200 the year before.
Conversely, special servicers are making less use of discounted pay-offs and note sale dispositions declined slightly. Loans sold at foreclosure saw the biggest year-over-year percentage increase of all forms of disposition, nearly tripling from 19 loans in ’10 to 51 in ’11.
Although both loss severities and general market conditions are stabilizing, there are signs that the troubles for legacy CMBS aren’t coming to an end. Trepp reported earlier this week that the delinquency rate is on the rise again, climbing 12 basis points to 9.8% in April, although for a smaller month-to-month increase than the 31-bps rise seen between February and March. It’s the second highest on record, according to Trepp, with the peak reached last July at 9.88%. If defeased loans were taken out of the equation, the delinquency rate for April would have been 10.26%.
A pickup in special servicer activity in April put 24 bps of downward pressure on the delinquency rate for the month, says Trepp, while newly delinquent loans accounted for 64 bps of upward pressure. The locally based CMBS information provider says so-called “performing balloons”—loans that are past their balloon date but current in their interest rate—represent a category to watch. The category accounts for 1.16% of loans in Trepp’s database, up from 0.31% in January of last year.
(Visit the Distressed Assets page on GlobeSt.com.)
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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.
