Fitch: Slowing Trend in CMBS Defeasance
Commercial mortgage-backed securities defeasance volume soared during late 2021 and into January, but that trend could be ending, said Fitch Ratings, New York.
“Borrowers continued to defease loans and locked in financing at still-low interest rates,” Fitch said in a non-rating action commentary, Slowdown in U.S. CMBS Defeasance Expected in 2022. “However, we expect the trend to slow considerably in 2022 as anticipated interest rate rises by the Federal Reserve take effect.”
New defeasance volume within 2010 and later vintages conduit and Freddie Mac universe soared to $15.3 billion (980 loans) last year. Of that total, $10.5 billion occurred in the second half of the year and $4.1 billion happened in December alone. Defeasance volume totaled $9.9 billion (751 loans) in 2020.
The CMBS loans that defeased in 2021 ($6.61 billion, or 43% of total defeasance) had an average coupon of 4.87 percent, well above the weighted-average coupon of 3.48 percent for 2021 Fitch-rated conduit transactions, the report said. The Freddie Mac loans that defeased in 2021 ($7.73 billion, or 51 percent of total defeasance) had an average coupon of 4.12 percent, exceeding the weighted-average coupon of 3 percent on 2021 Fitch-rated Freddie Mac transactions.
Fitch noted multifamily loans have dominated overall defeasance activity since 2019 and said they represented 62 percent of total defeasance volume last year. “In addition to low interest rates, the elevated volume in multifamily can be attributed to cash flow growth translating into value appreciation,” the report said.
Defeasance of loans secured by student housing properties increased to $418 million (34 loans) last year from $186 million (16 loans) in 2020.
Office loans made up 17 percent of last year’s defeasance volume, with large concentrations in the New York/New Jersey, Boston, California, Texas and Atlanta, Fitch reported.
January’s defeasance volume was very strong at $3.0 billion (195 loans), Fitch said, including seven regional mall/outlet mall loans ($698 million) sponsored by Simon and 91 multifamily loans ($1.3 billion).
Kroll Bond Rating Agency, New York, released its latest CMBS Trend Watch on Wednesday looking at Freddie Mac K-Series defeasance, which reached a new high in 2021, while supplemental debt originations hit a multiyear low. “After a pause in 2020, borrowers once again gravitated toward defeasance in 2021,” the report said, noting a 67 percent jump to its highest level ($12.1 billion) in the last 13 years while supplemental debt fell 28 percent to $1.2 billion.
In a separate Fitch report, Recent U.S. RMBS MH Transactions, the ratings agency assigned new ratings to portfolios backed by manufactured housing loans. The firm maintained its ratings on three residential mortgage-backed securities manufactured housing transactions, Towd Point Mortgage Trust 2019-MH1, Towd Point Mortgage Trust 2020-MH1 and Cascade MH Asset Trust 2021-MH1.
On Feb. 25, Fitch affirmed all 68 classes across these three transactions, all backed by 100 percent manufactured housing loans. For the Towd Point transactions sponsored by FirstKey Mortgage LLC, all non-‘AAAsf’ classes have a positive outlook, the report said. It noted the FirstKey manufactured housing loans are seasoned, while manufactured housing loans in Cascade’s pool are newly originated. manufactured housing loans typically have weaker borrower credit profiles and lower recoveries than site-built homes, the report said.
