CMBS Defeasance Volume Rebounds

Commercial mortgage-backed securities defeasance volume rebounded last year after a two-year decline, reported Moody’s Investors Service, New York.

Defeasance activity totaled $17.8 billion across 1,195 conduit/agency loans last year.

“The increased defeasance activity is a result of several factors, including strong liquidity in the commercial real estate debt markets, stable real estate fundamentals and borrowers’ ability to capitalize on refinance opportunities ahead of potentially rising interest rates,” Moody’s annual Defeasance Report said. The ratings firm studied data from defeasance firms AST Defeasance, Chatham Financial, Defeasance Holding Co., Northmarq Capital, Waterstone Defeasance and Wells Fargo Mortgaging Servicing.

Defeased loans had longer terms to maturity last year than in prior years, the report said. Loans with four years or more to maturity represented 40 percent of defeasance by balance, up significantly from 31 percent in 2017, Moody’s reported.

By vintage, 2013 vintage loans represented the largest share of 2018 defeasance, the report said. Loans issued between 2012 and 2014 made up 65 percent of last year’s defeasance activity.

Last year’s defeasance volume was 46 percent above 2017’s $12.2 billion figure and 4 percent higher than 2016’s $17.2 billion. Moody’s noted recent total defeasance figures remain well below pre-crisis levels, which reached $32.4 billion in 2007 and $25.9 billion in 2006. It credited ample liquidity in commercial real estate debt and equity markets from both conduit and non-conduit lenders, stable CRE fundamentals and borrowers’ interest in locking in low interest rates as key refinancing and defeasance drivers last year.

“Multifamily defeasance continued to dominate volume,” the report said. The multifamily sector accounted for 65 percent of defeased conduit/agency loans by balance and 67 percent by loan count last year. Agency loans made up 74 percent of the loan balance and 66 percent of loan count of multifamily defeasance.

The average size of defeased loans shrank, Moody’s said. The average balance of a defeased loan fell from $15.5 million in 2017 to $14.9 million in 2018.

“Defeasance remains an important factor in CMBS credit quality because substituting Aaa-rated U.S. government securities for real estate collateral of lower credit quality dramatically reduces the risk of default and loss,” Moody’s said.